Armstrong World Industries - Earnings Call - Q3 2011

Transcript

Speaker 7

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Armstrong World Industries earnings conference call. My name is Derek, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the conference. If at any time you require operator assistance, please press star zero, and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Tom Waters, Vice President of Treasury and Investor Relations. Please proceed.

Speaker 4

Thanks, Derek. 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 Espe, our President and CEO, Tom Mangus, our CFO, Frank Reddy, the CEO of our Worldwide Floor Business, and Vic Grizzle, CEO of our Worldwide Ceiling Business. Hopefully, you have seen our press release this morning, and both the press 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 World Industries, 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 laws. 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 turn the call over to Matt.

Speaker 3

Thanks, Tom. Good afternoon, everyone, and thanks for participating in our call this afternoon. Although end markets in most developed economies continue to present headwinds for us, we delivered solid bottom-line results in the third quarter, reflecting our continued focus on managing the items in our control and achieving greater savings faster than previously planned. End market demand was clearly an area of concern coming out of the second quarter, and while third-quarter sales were disappointing relative to our expectations, there wasn't an abrupt drop in sales or orders. Rather, markets continued to bounce along the bottom as recovery was further delayed. We had anticipated better demand in North American residential markets and improved sales versus last year when the new home buyer tax credit pulled demand in the first half of 2010, but that didn't materialize.

Sales in the third quarter of 2011 of $774 million were up $34 million, or 5% from the same period of 2010, largely driven by changes in foreign exchange rates. Stripping out foreign exchange, sales were up just over $5 million, almost 1%, including the exit of our European residential business. Sales were below the low end of our guidance of $780 million due to the market factors I just mentioned. While we did see some volume improvement in our residentially exposed wood and cabinets businesses, we believe much of it was share gain rather than a rebound in overall demand. Sales in the Americas were up, driven by gains in ceilings, cabinets, and wood. European sales were roughly flat after adjusting for exited businesses, and Pacific Rim sales were down slightly due to declines in Australia, our largest market in the region.

China and India, on the other hand, continue to grow. Globally, volumes are down 2%, but after adjusting for the businesses we exited in Europe, volumes were up slightly. Price was up 2%, matching inflation. Adjusted EBITDA for the third quarter of 2011 was $124 million, up $12 million, or 11% from 2010, and within our guidance range of $115 to $130 million, despite lower sales. Significant improvements continue to come from some of our more challenged businesses. The European flooring business achieved EBITDA of $4.6 million, an improvement of $2.4 million from 2010. I'll speak more about this turnaround in a minute. The cabinets business generated $2.2 million of EBITDA, up from a slight loss in 2010, and finally, our wood flooring business posted EBITDA of over $20 million, an improvement of almost $19 million from last year, despite only $7 million in additional sales.

Year to date, the wood business has seen adjusted EBITDA improve from $8 million in 2010 to $41 million in 2011, despite relatively flat sales. Our cost-out initiatives continue to help drive bottom-line performance. I'm pleased to say that we exceeded our expectations for the past quarter as projects were executed faster than anticipated. We now estimate $100 million in cost savings will occur in 2011. Tom Mangus will talk you through some more specifics and update guidance when he reviews the numbers for the quarter. As I've done on previous calls, I'd like to take a moment to highlight a specific noteworthy product, process, or area of the company that's indicative of the efforts we're undertaking to competitively position Armstrong World Industries around the world. This time, I'd like to focus on our European flooring business.

As we've discussed in the past, this business has been unprofitable and a drain on resources and cash for many years. The difficult but straightforward structural decisions that could have been taken in the past were not, as the company explored complex "magic bullet" solutions. After Frank Reddy was given responsibility for global floor products, he moved swiftly to find a permanent solution to fix this business. We hired an experienced European leader with a background in structurally challenged businesses as the CEO for Floor Products Europe. We exited the residential business and shut and sold the Teeside UK manufacturing facility. We closed the high-cost and logistically challenged plant in Holmsen, Sweden. We aggressively deployed LEAN at the remaining manufacturing sites, and our manufacturing cost base has improved as a result.

LEAN will drive $4 million in savings in 2011 alone, and the business will have a break-even point in 2012, 30% lower than 2010 and 43% lower than the peak sales year of 2007, a year, by the way, we were still losing money. Sales efforts have been focused on regions where we have competitive share positions, primarily Germany, Austria, Switzerland, and the Scandinavian countries, and on products where our offering is competitive: linoleum, commercial sheet, and luxury vinyl tile products. This concentration allowed for a significant reduction in SG&A expense. Further G&A expense reduction is being achieved through LEAN-driven process improvements. Now, despite the emphasis on cost cutting, we've continued to invest in new product development to enable us to win in the market.

Earlier this year, we refreshed one of our key commercial luxury vinyl tile offerings in Europe and launched the completely reworked Scala 100 designer tiles collection, offering extra-large planks and sophisticated cuts in a variety of shapes, patterns, and colors. Armstrong has also developed Scala Wall, which will allow designers to create unified room concepts. All Scala tiles are now available as wall coverings. Some of the actions just described are still ongoing, so the full benefits will not be realized until 2012. That said, significant progress is already apparent. Year to date, the European flooring business has adjusted EBITDA of $3.5 million, up almost $10 million from 2010, with no help from the markets. We've been talking about this business breaking even on an adjusted EBITDA basis in 2011, and we're growing more confident they will, in fact, make money in 2011.

With that, I'll now turn it over to Tom Mangus for the discussion of the financials in our segments.

Speaker 8

Thanks, Matt. Good afternoon, everybody. Happy Halloween, and thanks for participating in today's call. In reviewing our third-quarter results, I'll be referring to the slides available on our website, starting with slide three, key metrics, as Tom Waters has already covered slide one, and slide two is simply an explanation regarding our basis of presentation. Matt mentioned the 11% improvement in EBITDA despite flat sales when excluding foreign exchange. As you would expect, operating income and earnings per share results were also positive by 17% and 5% respectively. Third-quarter free cash flow of $73 million is just behind last year by $6 million. I'll address the drivers of EBITDA and free cash flow changes on upcoming slides. Slide four details the adjustments we make to EBITDA and provides a reconciliation to reported net income.

The most recent quarter was relatively clean, with only minor charges for our previously announced plant closures and SG&A cost-out programs and a modest write-down of the European property. As you will recall, in the third quarter of 2010, we had several charges impacting comparability, including $15 million related to restructuring actions, primarily in European flooring, $20 million of accelerated depreciation, and $7 million of cost reduction expenses related to the Beaver Falls, Montreal Center, and Oneida plant closures. Finally, we benefited from $7 million of customs duty refunds. Interest expense in 2011 versus the prior year was higher due to our recapitalization in the fourth quarter of 2010. Moving to slide five, this provides our sales and adjusted EBITDA by segment. Resilient flooring had a sales decline of 6%, driven by the exit of our residential business and certain products and geographies in Europe.

Otherwise, resilient price and mixed gains offset core volume losses, resulting in essentially flat organic sales. Significant inflation in our resilient flooring business exceeded price gains and cost reductions, driving EBITDA lower. This reflects the oil-based commodity inflation we had anticipated in our prior calls, but we simply have not been able to price fast enough to cover. Our third-quarter pricing actions in the U.S. and Europe should address most of this in the fourth quarter. As Matt mentioned, the wood business had significant EBITDA improvement, driven by higher gross margins and SG&A cost reductions. Volumes were higher, but mix was lower versus 2010 as consumers moved to lower-priced wood products. Building products had a modest sales growth and their usual fall-through ratio. Sales gains came from continued price and mix improvements as volumes were up low single digits in the Americas and down in Western Europe.

Overall, for building products, the benefits of price, mix, contributions from a WAVE joint venture, and cost improvements more than offset inflation. The cabinet segment delivered a second consecutive quarter of positive EBITDA, driven by higher volumes and lower costs. Mix was negative once again as the multifamily channel was the strongest of all the channels in the third quarter, and this is the lowest margin. The corporate segment was down due to the expected decrease of our non-cash pension credit, which we have discussed in the past, partially offset by lower G&A expense. Slide six shows the building blocks from the third quarter of 2010 adjusted EBITDA to our current results. Within price and mix, price gains fully offset inflation at the company level, but mix was negative for us this quarter.

Mix was impacted by customers and consumers moving to more value-oriented products, largely in residential flooring, and by faster growth in the multifamily segment in the cabinets business. Continued SG&A and manufacturing cost reductions totaling $30 million and higher earnings from WAVE drove our year-over-year earnings progress, more than offsetting the market-driven volume headwinds and the lower non-cash pension credit. Manufacturing and SG&A reductions continue to provide earnings progress in the face of soft end markets. As Matt mentioned, we have been able to increase our savings target for 2011 to $100 million, up from our last guidance of $90 million, with all the recent improvements coming in G&A. Obviously, we intend to run through the tape on our cost-fitting goals, especially in this uncertain macro environment, and we will continue to look for ways to deliver more.

We will update you on 2012 and what more we think we can do to extend our $165 million cost-out program when we share our initial thoughts on 2012 guidance in our next call. Turning now to slide seven, you can see our free cash flow for the quarter declined by $6 million versus the prior year. Improved after-tax earnings and working capital performance were offset by increased capital expenditures as we built our three plants in China and the West Virginia mineral wool plant. In addition, we pay higher interest expense driven by our refinancing and made more restructuring-related cash payments than in the prior year. Slides eight, nine, and ten illustrate year-to-date financial results. Year-to-date EBITDA is up 27% with only a 1% increase in sales on a constant FX basis. Of note, on slide nine, you can see that all segments are contributing to EBITDA improvement.

As with the quarter, the decrease in the corporate segment is more than entirely driven by the non-cash pension credit. The bridge on page ten of year-to-date EBITDA change tells a similar story as the third-quarter bridge, with price, mix, and cost savings more than offsetting volume, commodity inflation, and pension credit headwinds. Slide 11 updates our guidance for 2011. As a result of continuing softness in the residentially oriented markets and in Western Europe, we are lowering our sales and adjusted EBITDA guidance for the year. We now anticipate sales to be in the $2.85 billion to $2.9 billion range, up from $2.77 billion in 2010. We expect adjusted EBITDA to be in the range of $380 million to $400 million, compared to $303 million on a comparable basis in 2010.

Our previous EBITDA range was $385 million to $415 million, so we are basically narrowing our range by lowering our top end by $15 million and our bottom end by $5 million. As I mentioned, we are in the midst of our annual operational planning process as we speak and will provide 2012 guidance on our next call. Slide 12 provides the more detailed assumptions going into our earnings guidance and includes specifics on the fourth quarter. Of note, our inflation assumptions are unchanged from last quarter. Given the lower revenue outlook and weaker mix we saw in the third quarter, we are also expecting slightly less gross margin progress on the year than on our last call. The progress versus 2010 will still be 150 to 200 basis points better.

Our capital spending estimate for the year has been reduced due to our efforts to find lower-cost capital solutions to deliver our productivity and investment programs. In addition, some planned fourth quarter spending will slide into the first quarter of 2012. Still, our four plants under construction remain on schedule, with the Millwood, West Virginia, Mineral Fiber plant opening in the first quarter of 2012, the China Homogeneous plant in the second half of 2012, the second China Ceilings plant in the first half of 2013, and the China Heterogeneous plant in the second half of 2013. In closing, we are pleased with our third-quarter earnings, especially in light of still lumpy macroeconomic conditions. We are confident that with the actions we have taken and continue to take on our cost structure, we will be well-positioned to drive disproportionate earnings when the recovery comes.

In the meantime, we will continue to execute with excellence against the things we can control. With that, I will now turn it back to Matt.

Speaker 3

Thanks, Tom. In closing, I want to mention that in October, we successfully concluded labor contract negotiations with our Macon, Georgia, ceiling and our Lancaster, Pennsylvania, floor production unions. For the year, we've concluded four labor contracts as we agreed to terms in Beverly, West Virginia, and Oneida, Tennessee, earlier this year. The Marietta, Pennsylvania, ceiling workers remain locked out. Looking forward, we continue to expect soft markets for the remainder of the year, especially here in North American residential, but we continue to make progress against the targets within our control, creating a competitive cost structure, fixing underperforming businesses, investing in plants and people in growing markets, and building a globally aligned organization. With that, we'll be happy to take any questions.

Speaker 7

At this time, ladies and gentlemen, if you would like to ask a question, you may do so by pressing star one on your phone. If you feel your question has been answered or you would like to withdraw your question, please press star two. Questions will be taken in the order received. Again, please press star one to begin. Also, ladies and gentlemen, please limit yourself to one question and one follow-up question. Our first question is coming from the line of Bob Wettenhall from RBC. Please proceed.

Speaker 2

Hi, good afternoon. Hey, Bob. Thanks for taking the question. Just wanted to touch base. First question, ABI ticked up recently, and I wanted to get your view on commercial repair and remodel demand, whether it's improving or it's stable, or what have you been seeing?

Speaker 3

We saw it tick up. I think we just more recently saw it soften again, but our outlook, you know, the ABI is kind of bouncing up and down a little bit. The answer to your question, though, Bob, is really in terms of outlook and what we're experiencing, no real change in commercial remodel. We haven't seen it soften. We certainly haven't seen it get any stronger.

Speaker 2

Got it. Just as a follow-up, wood flooring put in some very, very strong margin performance this quarter. Can you just provide a little bit more granularity what went into that outperformance and whether that type of margin is sustainable going forward?

Speaker 3

I think I'll let Frank comment on it, but just a quick comment before that. I think Frank and the team have done a phenomenal job driving a more competitive cost structure. We've seen real productivity improvements. I'd also say that this is an organization that is as focused on the channel and the customers as they are on productivity. We refreshed the product line pretty significantly last spring. I think it's evidence of share gains, as we said, not really a more robust market. I'm very proud of the team for the accomplishments that you just pointed out. Frank, additional.

Speaker 4

I think Matt hit the key points. We got tremendous cost productivity from a lot of the restructuring we've done. In spite of lower mix, we did see top line growth in the face of a weak market. You roll all that together, and it gave us a pretty good result and pretty good margin position for the quarter.

Speaker 2

In terms of sustainability of that going forward, given what you've done with the business?

Speaker 4

Yeah, the costs we've taken out are structural, so it's permanent cost out. We would expect to continue to see the kind of margin improvement we've seen year to date.

Speaker 8

One thing I'd say, Bob, on that is certainly the third quarter is a seasonal high for that business. In fact, we delivered a 16% EBITDA margin in the third quarter. You shouldn't just straight line that out. We are going to have the seasonal variability with the nature of the market's demand.

Speaker 7

Your next question is coming from the line of Stephen Kim from Barclays. Please proceed.

Speaker 5

Hey, Stephen.

Speaker 8

Hi, guys. It's actually John filling in for Stephen. I just wanted to get an idea of sales trends throughout the quarter. Could you maybe just take us month by month throughout the quarter, and then how things are looking in October thus far?

Speaker 5

Okay. I would say that we did see July start off a little bit better than we saw September finish. I think July, when we had our last call, we were feeling pretty good about general demand trends, and certainly, the first week of August clicked in, and we did feel a deceleration that carried through September, which is why we missed our sales guidance, really. We thought we'd be better off relative to the prior year's comps. With what we saw in July, it did definitely soften. I would say that October has stabilized. It's not getting worse, particularly in the residential businesses. I think we've seen them stabilize here. I think a lot of it's a reaction to the news. The consumers, builders are all reacting to the external stimulus.

The budget debate, which is really the beginning of the third quarter, some of the other European shocks, I think, have had an impact on consumer and customer sentiment that resulted in those softer demand trends. Certainly, October is stabilized and certainly is factored into our fourth quarter guidance.

Speaker 6

Thanks a lot. It's Stephen Kim, by the way. I just wanted to clarify. You were saying that you were actually seeing more weakness recently on the residential side than the commercial side?

Speaker 5

Yeah, I would say it was relative to our expectations. Both businesses are generating relatively flattish volumes. I mean, our guidance, we assumed we'd do better. We'd be seeing more of a consumer uptick given the weak base period on residential. As we said, volumes in global AVP were essentially flat on the quarter, which is a large driver of overall volume results. On the commercial side on flooring, still relatively flat, plus or minus 2%. I think on the consumer residential-oriented side, again, flat where we thought it would be better.

Speaker 3

We thought, as Steve, this is Matt. You know, as Tom was pointing out, we thought that we'd have a little bit more robust residential performance in the market, second half over second half, you know, third quarter, fourth quarter over the same period last year, just because of the, you know, the tax benefit pull in. To Tom's point, we, you know, we're expecting a little bit of strength there. The market, that strength isn't there. As a result, what we're kind of seeing is instead of a sequential lift, we're seeing sort of flattish.

Speaker 5

Yeah.

Speaker 3

Okay, great. Thanks a lot.

Speaker 5

Overall in the Americas, for our commercial and flooring businesses, we generated positive sales growth. It just wasn't through unit volumes. It was through price and mix. Price and mix on AVP primarily.

Speaker 7

Your next question is coming from the line of Rodney Nathier from KeyBanc Capital Markets. Please proceed.

Speaker 6

Hello, everyone.

Speaker 3

Hey, Rodney.

Speaker 6

Hey, Rodney. My first question is probably for Frank. It appears the European margins in the resilient business are closing the gap with the U.S. Would that be related solely to the restructurings, or would higher commodity inflation in the U.S. or better price and mix realization in Europe also be a factor?

Speaker 4

Yeah, the primary driver, Rodney, is all the structural changes we've made. The price, mix dynamics, or, excuse me, price inflation dynamics, they're pretty similar across regions. The primary driver of the improved margins would be the restructuring and the cost down.

Speaker 6

Thanks. How long typically does it take for pricing to flow through the business to realize the price?

Speaker 4

On commercial, the non-specified work, you'll get within one to two months. Jobs that are being specified that are three to six months out, you have that kind of laggy speed where you see the price come through.

Speaker 6

What's the approximate mix versus the near-term business versus the three to six-month contract?

Speaker 4

It's roughly in the flooring business, 35% short term, 65% long term.

Speaker 6

Thank you. With the CapEx, thanks for providing the update on the capacity expansion programs. How much has been spent so far in terms of CapEx for those four plants that you're building?

Speaker 5

Yeah, I don't think we're prepared to disclose that specific burn rate, Rodney.

Speaker 6

Okay. Into 2012, I know you haven't provided guidance, but with some of that, the anticipated CapEx in the first half of next year, would the CapEx for 2012 look like 2011?

Speaker 5

We haven't provided guidance, but you got to remember the two of the plants don't open till 2013. You know, we have two opening next year, the Millwood plant in the first half, the homogeneous flooring in the second half. There will be continued spend to open both of those next year with those completion dates. Clearly, the bulk of the CapEx on the second two plants in China that opened in 2013 is going to be 2012 spend and partially 2013.

Speaker 7

Your next question is coming from the line of Catherine Thompson from Thomson Research Group. Please proceed.

Speaker 3

Hey, Catherine.

Speaker 0

Hey, how's it going? Just one thing to make sure I'm clear on something. Last quarter, when you raised guidance, one of the primary drivers were favorable comps with residential, which you talked about earlier today. Was residential the primary driver for lowering your guidance in the current quarter?

Speaker 3

Yes. I think it, like we said, it just didn't come through the way we anticipated. We didn't see a precipitous drop, as I think we said in the remarks. We just didn't see a lift. What we're experiencing is flattish versus something that got significantly softer. Think about it more as a lift we expected to see that we didn't versus softness that we didn't expect to see.

Speaker 0

Okay. Europe was cited as a weak spot, not surprisingly, particularly for resilient flooring. How much of your resilient flooring business is in Europe, and how much is it for your other divisions?

Speaker 4

Europe, for total flooring, is roughly 25% of the total flooring business and is focused on Western Europe.

Speaker 6

Yeah, in the building products business, it's the same ratio, about 25%.

Speaker 7

Your next question is coming from the line of Keith Hughes from Truist Securities. Please proceed.

Speaker 2

Thank you. On the $165 million restructuring plan, do we have $30 million less if it stays at $165 million coming next year? That's the first question. The second question on resilient, given kind of your views into the fourth quarter, specifically on the residential side, will we see profit margins roughly similar to what we saw in the fourth quarter of last year?

Speaker 3

This is Matt. I guess the way to think about it, we're really not going to comment on 2012 yet, but as Tom said, we're not giving up. We're running through the tape this year. We're not finished. When we talk 2012, the next call will be more explicit on the savings for next year.

Speaker 5

Your question, Keith, was on, you know, should we see comparable margins to last year? Is that what you asked?

Speaker 3

Yeah, on resilient.

Speaker 5

Yeah. I have certainly, you know, we are still fighting the inflation headwind. I think we'll get it covered with price. I think, as you model out, I think a margin expectation consistent with last year, on worldwide resilient would be a fair assumption.

Speaker 6

Okay. One other thing too, just on LVT and resilient in the United States, is that becoming a substantial part of the business? Just kind of any update there would be helpful, Frank.

Speaker 4

Yeah, and Keith, LVT, there's probably different answers, commercial versus residential. Commercial, we continue to see nice growth organically. It's becoming a bigger piece of the business, but off of a pretty small base. If you look at total demand and you look at LVT's role within that total demand in the market, it's only about 5% of the opportunity, but it is growing. Where we're seeing significant change is on the residential side, where it's gone from nothing three years ago to a very substantial piece of the business today, both in terms of traditional installation with the glue down, as well as floating. That's where the real growth is coming from right now, the residential and the floating segment of the business.

Speaker 7

Next question is coming from the line of Dennis McGill from Zelman & Associates. Please proceed.

Speaker 1

Hello, thank you. Just a quick question on the cost saves. Can you just revisit? I know you've touched on this a couple of different times, but what's the absolute number for 2011 that you expect to net? Is that equal to the gross number, or is there something in between?

Speaker 5

Okay. Dennis, this is Tom. When we first put out our cost savings goal of $150 million, now $165 million, we've always said it was a gross goal, not a net goal, that we'd be spending some back. Fortunately, to date, it's all been net falling to the bottom line. You know, we are continuing to strive for that level of delivery, although we haven't promised it for that last tranche. Our goal, we delivered $35 million in net last year. We have delivered year to date just shy of $100 million in net. As we push forward, as Matt said, we're looking to do more, particularly as the economy continues to bounce around here. Just so we're tying back, we never promised it'd be net, but so far we're delivering it as net.

Speaker 6

What would be some examples of things that would have been reinvestments that didn't have to occur?

Speaker 5

All our market investment in China, we're doing it, we're adding substantial headcount in emerging markets like China, Russia, and the Middle East that have been incremental spends that we have executed. You just haven't seen a pop on the bridge because we've done more on our overall program.

Speaker 6

You're saying the gross has come in ahead of the original net to offset the investments?

Speaker 5

That's correct, yeah.

Speaker 6

Okay. Got it. And then just thinking about profitability within ceilings, I think you mentioned the flow-through being consistent with what you'd expect. I think that might have been including WAVE. I'm not sure. For the quarter, it seemed like ex-WAVE margins were down year-over-year. I just wanted some color there. As we think about fourth quarter, I guess we'll typically see a sequential decline. If we look at the last couple of years, is that a good way of thinking about the profitability this year?

Speaker 5

Okay. I think certainly WAVE is embedded in our numbers, and they're always embedded in our numbers. When we talk about typical flow-through, we are considering the impact of WAVE. WAVE has had a good quarter this last period.

Speaker 6

I guess my question was, if we back WAVE out just to understand the tile side of the business, year over year, I think margins were down. I'm just trying to understand the puts and takes there.

Speaker 5

First, I'd say that, you know, we've continued to be under pressure in Europe and on commodity costs. While we've experienced good pricing capability in North America, we continue to be fighting a commodity headwind battle in Western Europe and a soft volume environment. You know, we're over-relying on the North American business to deliver our margin progress.

Speaker 7

Your next question is coming from the line of Gerard Rappagie from Longbow. Please proceed.

Speaker 6

Hey guys, good afternoon. Back to the Woods segment. With the fixed cost reductions that you guys have taken to date, what's your capacity utilization within that segment? Then while you're on that, just kind of across the other segments as well.

Speaker 4

We don't typically publicly state what our utilization is. What I can tell you is we're very comfortable that we're in a position where we can support the anticipated demand easily over the next two or three years. We have some flex capacity that we can crew up and crew down, but feel very comfortable where we are today and our ability to go with the market.

Speaker 6

Okay. Any, maybe housing start guidance that potentially you'd get up to at the current capacity? Any way to frame that?

Speaker 4

Yeah, I don't think we'd want to try and frame that other than what I said earlier. I feel very comfortable over the next two to three years, we're in a very good position.

Speaker 7

Next question is coming from the line of John Lovallo from Stifel Nicolaus. Please proceed.

Speaker 5

Thank you. Good afternoon. John, can you relate the size of that market? What do you see going on there? Maybe the prospects for 2012, and then, you did add a lot of, I think, salespeople in China in particular. I can't remember about India, but if you could just update us on sales trends in those three markets, thank you.

Speaker 3

Yeah, just, I mean, I'll frame it a little bit. Australia, because we've been in China and India for 20 years, but arguably maybe have under-resourced it. When we talk a lot about the Pacific Rim, we focus on China and India because that's where, to your point, we're investing resources. The way to think about that, by the way, is we've invested about a little over 100 heads in emerging markets. That would be China, India, and Russia in general. I don't think we've been more, you know, transparent than that. Those investments are in place, and they are driving what we think are very attractive revenue progress in China and India. Australia is a mature market for us. We have a relatively large share position there. We have a manufacturing facility there, so our presence is a little bit bigger.

The Australian economy has been very similar to that that we've experienced here, you know, soft. They had a stimulus package in 2010 that didn't repeat in 2011. They've had significant weather issues and, you know, floods and things like that. We've seen a very, very soft market in Australia really throughout 2011, and that's a bit of an overhang on the broader Pacific Rim performance. As we are, you know, we don't really want to comment on 2012, like we said a couple of times, and we're in the middle of putting together the operating plans, including those for Australia. As we think about Australia, we're not expecting significant recovery in 2012. I don't know if anybody wants to comment further on India.

Speaker 8

If I can say what we're saying about Australia, because it is a long-term and a strong developed market, its margins are disproportionate to the region. You know, when Australia has a hiccup, you know, we feel it pretty significantly. They are experiencing those soft trends, as Matt described, and it takes a lot of volume in China and India to offset it profit-wise.

Speaker 5

A quick follow-up, if I could, on raw materials. I don't have it in front of me, but it just seems like we've been battling inflating raw materials for a long time now. Is there a very recent flattening in your incoming input costs? If we saw that flattening continue into 2012, would you take some level of pricing regardless, where you think you maybe get some margin expansion as opposed to a net negative that seems to be happening between price and ROS? Thank you.

Speaker 3

We're not seeing a lot of relief on the incoming, at least not to the extent that we are changing our outlook for 2011 on inflation. Again, we're not going to comment on 2012. We're in the process of going through that now. In some cases, you have supply constraints. In some cases, you have, as we've said, oil-based increases. The raw material suppliers have done a very good job balancing demand and supply extremely effectively. We're pleased with our progress on pricing. As we said, year to date, at a company level, we're pricing to offset inflation. Again, I think the teams have done a great job leading and executing on price increases because we're getting historical yields in both of the businesses. We're comfortable with our position on performing there.

I don't know if there's anything else we want to add in terms of the fourth quarter of 2012. When we sit down and talk about 2012, we'll have a view on what we think the outlook will be in inflation.

Speaker 7

Your next question is coming from the line of Jim Barrett from CL King. Please proceed.

Speaker 9

hi, everyone.

Speaker 3

Hey, Jacob.

Speaker 9

Tom, I had a question for you. You did indicate $100 million of cost saves or close to it, I think, year to date. Should that give us reason to believe that you should exceed your $100 million target by the end of Q4? Or how should we look at that?

Speaker 5

I would stay with the guidance we gave, but yeah, our past track record is we've done a little bit better than we said we were going to do the last couple of quarters. Part of the way we got there in the third quarter is we saw the market softening in early August, as I said. We made some choices to not go after some discretionary items that, you know, hopefully we'll get to in the fourth quarter. I wouldn't assume that there's a ton of upside there, but sure, we're going to continue to push hard and accelerate as much as we can to deliver the earnings progress that we need.

Speaker 9

Okay. Matt, one question for you. With the Marietta plant on lockout, if that continues well into 2012, is there any impact on product availability? I understand that plant is running. In any case, how should we look at that in terms of what risk that might represent?

Speaker 3

We don't foresee any issue or challenge in maintaining customer demand or supply. There's been no significant disruption at all. We're very pleased with the way the plant's running and proud of the team that's in there running the plant. The output's terrific, and we're not concerned at all about that.

Speaker 9

I see. Okay. Thank you both.

Speaker 3

Thank you.

Speaker 7

Your next question is coming from the line of Jack Kasperczak from BB&T. Please proceed.

Speaker 4

Thank you. Good afternoon, everyone.

Speaker 3

Hey, Jack.

Speaker 4

With regard to the wood flooring and cabinets business, where I think you guys said your improvement there was due to market share gains, could you talk about what's going on? Has that been a concerted effort to take share here lately? Is it the shift in the market more toward your products? Is it customer competitors falling away? Could you elaborate a little?

Speaker 3

I think the primary driver is we introduced a series of new products earlier this year in the hand-scraped and exotics category. I've used that to really leverage our position and take shelf space and share from the competition. What I would tell you is a big driver of it is new products. There's also a piece where we honestly, with a stronger position on the cost side, could be more aggressive in those more competitive segments to enhance our share position as well. Primarily driven by new products, but a conscious effort on our part to go after that market.

Speaker 4

Okay, great. Second question is, you guys also mentioned your various pricing initiatives that you've detailed recently. Could you just talk about how they're being accepted into the market right now? How are you feeling about getting most or all of those pricing initiatives?

Speaker 3

I was just going to say, Jack, it's Matt. As I said earlier, we're pleased with the team's execution on pricing, both in flooring and our ceilings business globally. We're getting historical yields. You know, we're leading most of the increases. We feel pretty good about where we are. I think the teams are doing a great job.

Speaker 4

Okay, great. Thank you.

Speaker 7

At this time, I'm showing no further questions in queue. I would like to turn the call back over to Mr. Matthew Espe for any closing remarks.

Speaker 3

Thank you very much. Listen, everybody, we appreciate your attention and questions, and we wish you all a very good afternoon. Take care.

Speaker 7

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.