Good day, ladies and gentlemen, and welcome to the Q1 twenty ten Armstrong World Industries Incorporated Earnings Conference Call. At this time, all participants are in a listen only mode. We I would now like to turn the call over to Beth Riley, Vice President, Investor Relations, Communications and Diversity. Please proceed, ma'am.
Thank you. 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 Tom Mangus, our CFO and Frank Leddy, the CEO of our worldwide floor businesses. Hopefully, you've seen our press release this morning and both the release and the presentation Tom will reference during the 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 K filed Friday. We undertake no obligation to update any forward looking statements. In addition, our discussion of operating performance will include non GAAP financial measures within the meaning of Both are available on our website.
With that, I will turn the call over Both are available on our website. With that, I will turn the call over to Tom.
Thanks, Beth. Good afternoon, everybody, and thanks for participating in today's call. Before reviewing the quarter and our updated outlook, I would like to address a few questions that I know must be top of mind. First, our search for a new Chief Executive Officer is progressing well. A search committee of several Armstrong directors led by our Chairman of the Board, Mr.
Jim O'Connor, is conducting the search on behalf of the Board. Heidrick and Struggles have been retained to facilitate the recruitment process. Interest in the position is very high and the committee has cast the net wide interviewing a number of extremely well qualified candidates to date. As you can imagine, the changing board composition as reflected in the slate of five new directors standing for election in July has added an extra step in the process. Based on the current plan, the Board has indicated they hope to announce a new CEO by early summer.
In the meantime, the management team has worked aggressively to drive the business forward with speed and agility. We have begun an effort to renew and focus our strategies, working closely with the board to ensure we are aligned in our priorities. While we are still working through the full scope of the strategies, you will not be surprised by their focus on our core businesses, building products and floors and on getting our cost structures even more competitive through lean manufacturing process improvement and an SG and A to prepare for the eventual upturn in the markets. First, let me describe our efforts in a little more detail to reduce costs by applying lien. During the first quarter, Armstrong completed four proof of concept pilots to determine the potential opportunities associated with a lean transformation.
The pilots have resulted in significant improvements in safety, quality, delivery and cost. In one hundred days, we have been able to implement significant productivity improvements ranging from setup, downtime and energy reductions while improving yield and on time delivery performance. Our focus on lead time reduction is not only driving productivity, but is also improving our working capital associated with work in process and finished goods inventory. At the heart of the lean transformation is tapping into the creativity and knowledge of all our associates, which is accelerating our rate of improvement. As a result of these successful pilots, we have launched a global lean transformation focused initially at our manufacturing supply chain operations with a vision to roll this out enterprise wide.
Through the aggressive adoption of lean practices in manufacturing and purchasing and in SG and A through projects to standardize, simplify and eliminate unnecessary activities and spending, we are seeking to remove at least $150,000,000 of cost by 2013. In the interest of managing expectations, progress toward this goal will be reflected in future guidance as appropriate, but may not be discretely reported. Please be aware that the attainment of this or other any goal is subject to internal and external risk factors and potential headwinds like inflation as mentioned in our 10 ks and 10 Qs. Next, we hope to accelerate our core business growth domestically and importantly internationally. You see the seeds of this in our progress in emerging markets this quarter where we have maintained our investment through the global economic downturn.
Sales to Asian and Latin American markets represent less than 10% of our sales today. We would like to grow this share significantly by 2013. To support this goal, we have secured the Board's approval to build a new vinyl flooring plant in China to support our growing business there. We expect to begin construction in late twenty ten for an opening in 2012 to support this critically important market for us. We expect to invest $40,000,000 to $45,000,000 in capital to build this with spending beginning in 2010 and lasting to 2012.
That said, we do not intend to get too far ahead of ourselves in new markets until we can demonstrate the ability to win and be profitable in the markets we are already in. To that end, we will be focusing on improving the structural European flooring business where we continue to make progress, though not as fast as we would like. In Q1 twenty ten, we cut our losses in half from $15,000,000 to $7,500,000 versus Q1 two thousand and nine on sales that were 7% lower. Still, we continue to bleed in Europe and are on a path to find value creating ways to stay competitive in the market with margins that at minimum return the cost of capital and we want to get there faster. Similarly, we intend to improve margins on our Cabinets business through further manufacturing and SG and A savings as we have now fully consolidated manufacturing to one plant and have established a more efficient selling strategy to drive growth with our target customers.
Despite operating losses, this business has been and continues to be cash positive despite sales being down roughly 40% since 02/2007. Eventually, we will want to more proactively consider acquisitions in our core segments internationally and domestically as well as near adjacencies. In the near term, however, we have plenty to do to improve our own current core businesses and are not looking to make a big acquisition. That said, we would not necessarily walk past a great opportunity even if the timing was not perfect. Unfortunately, we have no control over when assets come up for sale as you well know.
Of course, a new CEO will want to put his or her imprint on our strategy and we intend to use the next couple of months to refine our plans and continue to solicit board input. But I am confident, as is the board, we are heading in the right direction. Let me talk about our balance sheet. As with many companies, Armstrong adopted a conservative approach to cash management during the financial crisis in 02/2009. As such, we currently have an extremely conservative balance sheet with cash exceeding debt.
We recognize that this is not an ideal long term capital structure, but for recognize that this is not an ideal long term capital structure, but for several reasons, we are comfortable with the structure for the immediate future. We have large capital projects in the coming years such as our previously announced mineral wool plant in West Virginia and now the new vinyl plant in China. Our end markets are still weak and majority of our credit agreement will become current in Q4 of this year. We have begun discussions with the Board on various refinancing alternatives and plan to address these maturities in 2010. Longer term, we will balance corporate needs and returning cash to shareholders.
Barring any strategic actions, we intend to manage Armstrong's balance sheet in a conservative fashion and are comfortable at our current credit ratings for the near term. This implies maintaining long term leverage at less than three times EBITDA. We believe that given the nature of our industry having ready access to capital is reasonable and prudent. Moving now to the quarter. I'll be referring to the slides available on our website starting with Slide two as Beth has already covered Slide one.
Our first quarter results show that our strategies to reduce cost, invest to grow in emerging markets and preserve cash in what is still a very difficult market for building materials are working. Armstrong's core markets continue to decline in the first quarter versus Q1 two thousand and nine, though the rate of decline seems to be abating somewhat. As a result, sales in the first quarter were $670,000,000 or down 4% versus a year ago at a constant exchange rate. With the effects of foreign exchange included, sales were down only 1%. Despite that, the company delivered 27,000,000 in adjusted operating income exceeding year ago $24,000,000 through significant manufacturing and overhead cost reductions.
We are establishing the right cost platform that will enable us to reach strong earnings and sales growth once our markets begin to turn favorable. Operating income margin grew three sixty basis points versus a year ago and essentially held flat versus Q4 two thousand and nine. Adjusted earnings per share grew to $0.24 versus a loss of $0.01 in Q1 a year ago. Against free cash flow, we used $30,000,000 of cash, which was $15,000,000 better than Q1 last year. As you know, the first quarter typically is our heaviest cash consuming quarter as we begin to rebuild inventories from the winter lows in anticipation of the spring construction season.
As a result of this cash performance, our cash on hand balance exceeds outstanding debt by $59,000,000 Slide three explains how you get from our adjusted operating income of $27,000,000 to a net as reported loss of $19,000,000 The biggest driver is the executive severance related to the departure of our CEO announced in February for $11,000,000 And we took charges related to closing our St. Gallen, Switzerland metal sealing facility and discontinuing our airplane operations totaling close to $4,000,000 These charges were offset by a gain on property sales also associated with the Saint Gallen closure. Finally, we took a $22,000,000 non cash tax charge due to The U. S. Healthcare reform bill had previously announced this in an eight ks filing on April 6.
Had previously announced this in an eight K filing on April 6. Moving to slide four. This provides our sales and adjusted operating income by segment. As you can see, resilient flooring, building products and cabinets experienced declines between 113% reflecting the continuing underlying market weakness. Wood flooring actually managed to grow sales versus year ago by 2% gains.
This is the first quarter of growth for Wood Flooring since Q2 two thousand and six. These results in Wood, which is nearly 100% residential in nature, show that the residential markets are starting to bottom out, led by remodeling activity. In addition, we believe there was some wood volume pulled forward into March due to the 4% to 6% price increase that was effective April 1. Our 2010 outlook includes resilient share growth from product introductions we mentioned last year, Alterna large format tile and floating planks. A primary focus of our strategy and a key contributor to our relative success through this down turn is that we are the design and innovation leader in all our major businesses and have a robust new product development pipeline.
Commercial building activity continues to decline, though at a slightly less rapid pace than we feared. We are seeing the early signs of recovery in innovation activity for commercial ceilings and grid coming out of the Northeast Metro Areas, including New York, New Jersey and Boston, Boston where we have our highest share. In addition, countries like Canada, Russia, Mexico, Brazil and The Middle East are showing sizable growth off the depressed base periods versus a year ago driven by improving consumption and share gains as we improve distribution. In ceilings, we launched a high end product with unique capabilities around washability and clean room applications targeted for the Healthcare segment in the February. This product's acceptance has exceeded our expectations and is being specified in a number of projects.
Adjusted operating income improved versus a year ago in all segments signifying our cost control efforts are working and are broad based. This is the first time all operating segments concurrently grew adjusted operating income since Q2 two thousand and six. Slide five shows the building blocks from Q1 two thousand and nine's adjusted operating income to our current results. As you can see, manufacturing cost improvements and SG and A reductions were the primary drivers of improved profitability, contributing $31,000,000 combined. Input costs are favorable by $8,000,000 largely driven by energy deflation and inventory valuations, which reflect favorable material pricing from 02/2009 and lower inventory levels.
Though this was fully offset by lower pricing as we were forced by competition to give back some price over the last nine months. Volume declines lowered profitability by $10,000,000
Finally, our Worthington and
Armstrong joint venture or WAV JV enjoyed stronger profitability contributing $4,000,000 As we described in our last call and as we began to see toward the end of this quarter, the trend on commodity and energy cost is turning from a period of deflation to now a period of inflation. Sequentially, we saw $27,000,000 of year over year benefits from raw materials and energy inflation in Q4 two thousand and nine. This dropped to only $8,000,000 of year over year improvement in Q1 twenty ten. Our current expectation is that the total material and energy inflation will be a drag on operating income between $25,000,000 to $35,000,000 for the full year. We are looking for additional ways to take pricing to recover this.
As we mentioned earlier, in Americas Floors, we announced pricing of 4% to 6% in wood and in Resilient effective April 1. We were able to implement the wood price increase, but the competitive reaction Resilient caused us to delay the increase and we have now announced a
new 6% increase effective June 1 on Resilient. So far,
most of our major effective June 1 on Resilient. So far, most of our major competitors have announced similar increases, but these are not fully sold through. On Ceiling Tiles, the 5% increase we took in February also seems to be holding, though our effective yield will likely be less. On grid, we are taking a 10% price increase in The Americas in May and 6% to 9% increases in Europe through the spring to recover margins from rapidly rising steel prices. We continue to look for ways to drive improved productivity through additional plant closings and idlings.
As mentioned before, during the first quarter of twenty ten, we announced a shutdown of finished goods production at wood plants in Oneida and Center and we announced the closure of the Saint Gallen, Switzerland metal ceilings facility. We will continue to look for ways to drive improved costs both in manufacturing and SG and A as the year progresses. Since the beginning of 02/2009, we have closed and or idled six plants yielding going annual savings of over $40,000,000
That
said, where we see opportunities, we are investing in new plants. Examples of this include the Mineral Wolf plant where we are looking to secure a strategically important raw material in a high energy efficient lower cost way and the new vinyl plant in China. Slide six shows our results against free cash flow for the quarter. As mentioned before, we used $30,000,000 in free cash flow compared to using $45,000,000 in the prior year. Working capital and reduced capital expenditures drove the improvement.
Inventory days outstanding at the March were 72 versus 86 at the March 2009. Some of this improvement was driven by unsustainably low inventories on lumber as supplies were tight due to poor weather conditions to cut wood and sawmill availability. We will give back some of these gains in the second quarter as lumber inventories return to more normal levels and as lumber costs rise. Receivable days stand at 36, down from thirty nine days in March 2009. Negative cash earnings performance of $7,000,000 mostly reflects the CEO severance costs and lower depreciation and amortization than a year ago as we fully depreciated some of the Fresh Start three year assets.
Now turning to guidance, which starts on Slide seven. Given our sales performance in Q1, we are modestly raising our sales range from the previous range of $2,650,000,000 to $2,850,000,000 to our current estimate of $2,700,000,000 to $2,900,000,000 This reflects our assumption that the commercial markets in The U. S. Will decline slightly less significantly than we expected at the beginning of the year. We continue to project housing starts in The U.
S. Between 1,250,000 units. We expect residential remodeling now to grow 2% versus decline of the activity by 4% in our previous estimate. This slightly better sales outlook combined with our progress and new plans on SG and A and lean manufacturing allows us to raise our adjusted operating income estimate to $150,000,000 to $175,000,000 This will take our adjusted earnings per share to a range of 1.35 to $1.6 compared to our previous guidance of $1.2 to $1.5 Essentially, we are raising our range reflecting the Q1 results and our savings plans. We continue to experience extreme volatility in the markets and our wide range reflects that.
Our free cash flow follows the earnings improvement with a range of $50,000,000 to $75,000,000 Slide eight provides the more detailed assumptions going into our earnings guidance. We have noted where we have updated an assumption versus our previous call. Fundamentally, we are continuing to see more raw material pressures, particularly on lumber and petroleum based inputs as suppliers continue to take price increases on materials like PVC and plasticizers. This range excludes any pricing to recover these costs, which of course we will strive to do. Our planned pricing actions to date should offset roughly 40% of this inflation with more pricing needed in the back half.
Strength in the WAVE results from Q1 has us more optimistic on their potential for the year, especially as they seem able to price recover the steel price increases, which was more in doubt before. On our quarterly phasing guidance, we expect to be basically flat on adjusted operating income in Q2 and Q4 and down on Q3 versus 02/2009 as commodity cost pressure intensifies and we anniversary benefits from some of the bigger plant closings from last year. Essentially, we saw the greatest benefit from material cost deflation in the back half of two thousand and nine, while still holding on to some price benefits. In the back half of twenty ten, we will be hit by the significant inflation and only partially able to recover with price on a similar sales basis. For capital spending, we are starting to show a range here versus a single point target.
We have built in some increase to capital spending at the high point to reflect that we will begin construction of the new vinyl flooring plant in China and this will be incremental to our previous plans. Though, we will look for efficiency in our plans. The mineral wool plant in West Virginia was already anticipated in our previous guidance. Finally, we are excluding the restructuring charges for the cost reduction initiatives including the Saint Gallen, Switzerland, metal sealing facility closure and the closure of our airplane operations totaling over $5,000,000 Since it was a favorite question in the last call, we have included Slide nine, which is a simple reconciliation of our adjusted operating income to free cash flow. Nothing has materially changed in the reconciliation versus what we said last time, except the starting point on adjusted operating income with our updated guidance.
As I close, I hope that our performance and the strategy details I have shared with you today demonstrate the confidence the Board and our leadership team have and our clear potential to make the next decade one of the best for our shareholders, our employees and our customers in Armstrong's one hundred and fifty year history. We will now be happy to take your questions.
Your first question comes from the line of Timothy Meany with Longbow Research. Please proceed.
Hi, good morning. This is Timothy Meany for David MacGregor. How are you?
Hi, Tim.
Hi. You guys gave some great color on kind of the raw material cost inflation and just curious if you could give us a little more on kind of when in the first quarter that became a headwind for you guys. And I know you remainder of 2010 or if we should be thinking about that more in second quarter, third quarter?
Very good. Let me talk about the general phasing of the inflation and then I'll let Frank speak to what he's seeing in his business directly since both the BBC and the lumber are coming to him. We were favorable in the first quarter on inflation. So all that hurt from material inflation comes in the second through fourth with much more of it in the back half versus Q2. So disproportion in the back half loaded.
Yes. On lumber, we felt the inflation effects in Q1. It will be very significant in Q2 and then actually begin to tail off as you get into the back half of the year. On PVC, it echoes Tom's comments
on the overall, very similar. Lumber is
the one we're feeling the greatest effect in the first half.
Great. I appreciate that. And I guess just as a follow-up in terms of some of the price increases that you guys have discussed. Where do you see kind of the greatest opportunities in terms of your ability to pass through successfully those increases? And kind of what segments or markets do you see the greatest headwinds?
And I guess just kind of finally in terms of the home center channel, how you view that or your opportunities to raise prices relative to the independent dealers? Thank you.
Yes. Just to recap what we've done, we announced beginning of the year a 4% to 6% price increase in hard wood that was effective April 1 across all channels. And given what's going on with lumber, we're aggressively pursuing that in all channels. On the resilient side, we announced initially the beginning of the year and as Tom mentioned got pushed back for competitive reasons. We just announced April 1 for an effective date of June 1.
So very early in the game, but given the pressures we're seeing on raw materials really across the board all channels we're going to push very hard to recover what we can in inflation.
Hi. This is Beth. Just a little bit of follow-up too. In general, we have more pricing power typically in our commercial businesses, which has been reflected in our prior performance. But across the board, we're facing inflation and are seeking to recover that in price.
Great. Thanks for your time.
Thank you.
Your next question comes from the line of Dennis McGill with Zelman and Associates. Please proceed.
Hello, everybody.
Hey, Dennis.
First question was just realizing ceilings was a bit strong this quarter. Can you talk about sort of the mix of volume and price there on a year over year basis? And also maybe touch on the volume side. You had mentioned some pull forward in the Wood Flooring business. Did you see any of that in the ceilings business with the five percent increase announced
there? Could you repeat the first part? We couldn't quite hear the beginning of the question.
Yes. Just if you can maybe provide a little color on volume versus price in the first quarter on a year over year basis. I think you talked about price in total for the company being deflationary, but if you could talk about Saline specifically?
Okay. Well, we're not reporting unit volumes at this point. I mean, volume came in slightly better than we expected, driven by the markets. So we were pleased by that and that's reflected in our current outlook. Volume is still down though on ceilings.
Both price and volume were down modestly for ceilings for the quarter. Okay.
And did you see any pull forward there?
I'm sorry? So there's no pull forward because the price in ceilings was effective in February. So any pull forward would have been realized in January and lapped off with inventory depletion in the second couple of months of the quarter.
In fact, it's more a reflection of what happened in the prior year quarters. And so I think we talked about last quarter, ceilings had a particularly difficult comp because the prior year had had pool head into that quarter. And so we got the offset of that dynamic this quarter versus the prior year.
Okay. And I think you had mentioned for the company non residential or commercial construction, you're modeling to be down 5% to 10% this year. I would guess with ceiling going down 3% organically in the first quarter, that's on the favorable side of that guidance?
Yes. We yes, that would suggest we built a little bit of share in the first quarter.
Okay. On the cost saves, I think you said If I
can make one other point, if I can make one. I mean, the we were particularly strong in the international markets, which contributed to that volume number being what it was. It wasn't that wasn't 3% just in North America. I mean, Russia, Canada, Middle East was all providing favorable growth.
Okay. And the 5% to 10% outlook is just North America?
That's correct.
Okay. On the cost saves, I think you mentioned annualized the actions taken since the beginning of last year's $40,000,000 How much of that is still left to be anniversary in 2010?
We're expecting that we're getting half the benefit in 2010.
And some of that 20% already was realized in the first
quarter? That's correct. You were getting benefits in the first quarter. That's correct.
Okay, great. And then just lastly on the raw material guidance, the 25% to 35%, the majority of that is in resilient and wood?
That's correct.
Okay. All right. Thank you, guys.
Thank you.
Your next question comes from the line of John Baugh with Stifel Nicholas. Please proceed.
Thank you. Good afternoon.
Good afternoon, John.
My first question is on I guess relating to pricing and the guidance. You mentioned you need additional pricing in the second half of the year, but you've got the negative $25,000,000 to $30,000,000 in input costs. So am I right to understand that you'd like to get pricing in the second half, but your assumptions are you won't get any beyond what you've already announced?
No, we have some modest pricing in our guidance that has not yet been announced, but it's not all the pricing we would like to take. So we're probably half pregnant on that one at this point. We're trying to see how the current pricing sell in before we get too ambitious in building into our estimates. So we want more, but it includes some. Okay.
And
I appreciate you don't want
to give out the exact unit numbers for ceilings in The U. S. Versus international. But is it fair to say that you're five to 10 down thinking for ceilings U. S.
You're within that range and the surprise has come on the international and some of these economies recovering faster getting share?
That's correct.
Yes. And then maybe a question for Frank on flooring. Wood specifically. I guess you're seeing the residential side of wood pickup or is that laminate? And then as we get closer to I guess more housing completions precisely that happens, might we see the builder piece kick in and how does that all come out on a revenue
market perspective to continue to gain strength through the second quarter and into the back half. I think it's in the back half we'll start to see the strength due to new construction because obviously the lag between starts and completions and when our products go in. So I think you'll see that get get progressively better as the year goes on. And as Tom mentioned, remodel replace actually has been a little bit better than we thought in the last couple of months and contributed to the first quarter '2 percent growth.
Okay.
And then on European Flooring, I think the loss has been in the $25,000,000 pretax range and I'm a little fuzzy, but the goal was to, I believe, breakeven in 2011. Are you behind on that program based on your first quarter results or on the way there or any color?
John, the way I would describe it is we feel good about the rate of improvement we saw in the first quarter. We're taking a real hard look to see what we can do to be even more aggressive in Europe with restructuring to accelerate some of the improvement opportunities. But what I would tell you is in the first quarter we did about what we expected we would do. Okay.
So you're not necessarily behind. And was that the plan best, the breakeven in 2011 on Europe?
That's correct, John. And so the pathway to that was to cut that ballpark 25.5 this year and so we are on a path to do that.
Okay. And then help us understand how is the new plant Lancaster coming along and the targeted savings there, Frank?
Yes. The Lancaster plant started up in the first quarter. Not any significant beneficial production, John, came out of that plant. So you wouldn't see any financial benefit of that in the first quarter. You'll begin to see some of that in the second quarter, then it really ramps up in the back half.
So in the first quarter, really no beneficial production came out of that plant that would impact the results. It was all startup.
Okay. And you still think you can maybe pick up $10,000,000 annualized from that event?
We do. We think on an annualized basis it's worth in that range, yes.
Okay. And then I was curious, Tom, on the $150,000,000 I think you threw out by 'thirteen. Is that an addition to this $40,000,000 or something that's already been identified? And what I see you got rid of the aircraft and I don't know what else is in there, but any additional granularity on that would be helpful
primary topic in our last board meeting. We're not perfectly clear on how this flows out over the years. We're going after it aggressively. It's probably two thirds manufacturing, purchasing operations related, one third SG and A related. And we do see from these pilots, we've done these pilots and we're seeing the with the implementation, real savings come through.
So it's a matter of how fast can we ramp up the capability on lean across the manufacturing and in the purchasing organization to reap these benefits, how fast can you export those concepts into the SG and A space. And so, certainly, part of the contributors are going to be our improvement plans on cabinets, our improvement plan on European floors will to the SG and A component here. And so we're very excited. We've got some early plans, strong commitment by the management team and being encouraged by the Board to go as fast as possible there. And I'm imagining we're going to need more time to kind of figure out what's the effect in 2011.
Not surprising that was one of their questions as well on how fast we can go. And again, we're not intending to come back and report on this specific as an initiative, this specific goal as an initiative, but ideally you'll be seeing it in the coming guidance. And yes, it's intended to be incremental to the already announced closings and the savings that we put on the books like the 40,000,000 million dollars I talked
about today. Would it be inclusive though of the restructuring in Europe and the move to production in Lancaster or would it be incremental to that
as well? Okay. Again, incremental to the already announced move of the Cushion Vinyl business to Lancaster.
Okay.
Really this is like new plans today forward that we are talking about.
Okay. Super. And is that are these TPGs ideas? Is that who's implementing kind of the lien? Is that where you get into the thoughts from?
Or I've always thought your company was fairly well run and fairly tightly run and the margin suggests that historically. There's a lot of money to find.
Yes. I would say that one, TPG certainly has been helping us understand the capability behind the lean approach. And certainly, we've hired as our operations leader an individual who comes with a terrific lean background and he's the one who's on the management team evangelizing this and offering the savings potential through his personal involvement in these pilots with his team. I mean, this is people doing the work are 99% Armstrong folks who see the opportunity and are making the plans and offering up the goals. Similarly on SG and A, I mean, it's an Armstrong led team.
But yes, of course, TPG and the Board is hungry for more savings. They believe there's more value to be had out of applying these kind of tools based on their experience in other companies and we're excited to apply them here at Armstrong.
Great. Thank you.
Your Your next question comes from the line of Keith Hughes. Please proceed.
Really two questions. Within Building Products, is there any way to provide commentary or can you even tell the difference between renovation and new construction right now, how wide of a gap is there?
Well, in both rates?
Yes, growth declines or however you want to phrase it.
I would say, I mean, new construction is well off our historical mix of business. So I would say typically we're already 60% remodel, 40% new construction. That has skewed much more to remodel in the last quarter and but it's been relatively gone relatively good. Now 70 fivetwenty five remodel versus new construction, if that gives you any color there.
That would imply the remodel business is actually up year over year. Is that fair to say?
No. I don't know that we would quite get there yet, but it's not down. It's not down too badly.
Yes. Just we saw a little bit of strength in the Northeast, which as you know is one of our higher margin regions. I think it would be too early to call it growth. And just a little clarity on the exposure, 70%, seventy five % repair remodel is kind of our domestic exposure. Globally, the business is more sixtyforty, primarily due to the emerging markets being mostly new.
Second question, the headwinds of $25,000,000 to $30,000,000 just to be on commodities, just to be clear, that includes the pricing actions you've already taken and the small future increases that you're contemplating at this point. Is that correct?
It is not a net number. That is a pure inflation component. It does not include our pricing offset plans. Again, I've mentioned before, we think we've got plans in place to offset 40% of that. And we hope to put more on.
Okay. Thank you very much.
Thank you.
Thank you, Keith.
Your next question comes from the line of Robert Kelly with Sidoti. Please proceed.
Good afternoon.
Hi, Robert.
A question on the improvement sequentially in Building Products operating income 1Q versus 4Q. Could you help explain that a little bit?
What are you
profit improvement in 1Q compared to what you did in 4Q in building products?
Yes. I mean, fundamentally, we're yes, we're just we've been closing plants and getting significant cost leverage out of manufacturing.
If you
look at we're up 20 basis points on direct margin, two sixty basis points on manufacturing margin. So it's really a cost story on down volume.
Okay, great. And then as far as the raw material cost pressures you outlined, particularly for Wood Flooring, were you feeling that during 1Q? Or does the narrowing loss you saw year on year, is that all due to the manufacturing improvements?
We did feel it in the first quarter modestly. It will really ramp up in the second quarter. And then as I said earlier, then I think we're going to hit a point where conditions begin to ease in the second half. Part of this is driven by weather conditions that we experienced earlier this year and just a shortage of logging and lumber available. And we think some of that's going to mitigate as we go into second half.
But we did feel some effects in the first quarter. Second quarter will be fairly significant and then you'll see it begin to soften a little bit.
Okay, great. And then just as far as the flooring and building products are concerned, what you started to see maybe March versus February and what you saw in April as far as demand? Did you see your normal seasonal pickup?
If I may start, really we might be accused of being a little conservative on our sales estimate. And the reason is really through February we were on plan with sales. And so we really saw March come in as the positive surprise. And April continues to meet or be slightly ahead of our expectations. So we're feeling that we maybe have come to the bottom and starting to turn.
But we're one month does not make a year and we're nervous about what we see in Europe with the meltdown there and the Mediterranean with what it could do to our demand. So we're just trying to be cautious here. But yes, we feel like March came in better
than we thought it would. And the momentum spilled
into April? Yes. Okay.
Thanks. Your next question comes from the line of Jim Barrett with C. L. King and Associates. Please proceed.
Hi, everyone. Frank, could you take us through the steps in Oneida and Center and then the restarting of wood operations elsewhere. What was the logic with those moves?
Yes, sure. Let me start with Oneida. Oneida was a solid wood manufacturing facility. We've over the last couple of years, I think we've mentioned gotten significant productivity in our plant system. And through that process, we saw the road to take out a facility.
We chose Oneida because of location. Oneida is situated in an area where you have the highest cost lumber. It's difficult drying conditions. And as we got these throughput gains in solids and saw the road to take a plant out, that one made the most sense to take out. On the engineered side of the business, we closed the mill portion of our Center Texas plant.
Center Texas both peels its own veneer as well as converts it into finished flooring. What we closed was the mill in Center Texas. Given again on productivity gains we've gotten in some of our other facilities, we saw a road to reduce the overall footprint on the mill side. At the same time, we did start up because we do see business starting to get incrementally better, our veneer peeling operation in Vicksburg, Mississippi. That just peels veneer.
It doesn't finish flooring. But what it does is the market begins to come back, we can support the growth of the business and the volume by peeling our own veneers, which is lower cost than buying veneers or finished plywood on the open market. So those were the pieces that were done in the first quarter of this year.
And then secondly, can you discuss who your competition is in vinyl flooring in China?
Yes, sure. It's a lot of the same companies that compete we compete with in Europe. JureFloor, Tarkett, LG on a local basis out of Korea, they would be the primary competitive set for vinyl flooring in Asia.
And then my last question. Tom, could you give us a brief primer mineral wool as an input? And what kind of broadly speaking return would you expect to get from that starting that or building that West Virginia plant?
Okay. It is mineral wool is a key ingredient in the mineral wool, pardon me, in the ceiling manufacturing. We source it today. We're looking to in house it largely as a security of supply move, not as a desire to get vertically integrated, but we're finding that our suppliers are increasingly exiting the business. And therefore, in order to control our destiny and drive costs, we've pursued building our own plant.
We expect it to be greater than a 20% rate of return on this investment and really more than just pure cost savings basis is the long term continuity of supply, which we felt was at risk for this ingredient.
Well, thank you both very much.
Thank you very much.
There are no further questions at this time. I would now like to turn the call back over to management.
All right. Thank you again everybody for joining us. Very much appreciate your time as always and I will be available for follow-up calls. Have a good day.
Thank you very much. Thank you.
Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. You may now disconnect. Good day.