Tom Waters - Vice President, Treasury and Investor Relations Matt Espe - President and Chief Executive Officer Dave Schulz - Chief Financial Officer Tom Mangas - Chief Executive Officer, Worldwide Floor Vic Grizzle - Chief Executive Officer, Worldwide Ceilings.

Keith Hughes - SunTrust Bob Wetenhall - RBC Capital Markets George Staphos - BoA Merrill Lynch Nishu Sood - Deutsche Bank Stephen Kim - Barclays Dennis McGill - Zelman & Associates Will Randow - Citigroup Eli Hackel - Goldman Sachs Michael Rehaut - JPMorgan Kathryn Thompson - Thompson Research Group Mike Wood - Macquarie David MacGregor - Longbow Research Jim Barrett - C.L.

King & Associates Ken Zener - KeyBanc.

Good day, ladies and gentlemen and welcome to the Q2 2014 Armstrong World Industries Incorporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.

I will now like to introduce your host for today’s conference, Mr. Tom Waters, Vice President of Treasury and Investor Relations. Sir, you may begin..

Thanks, Sylvia. Good morning and welcome to everyone on the call. Please note that members of the media have been invited to listen to this call and the call is being broadcast live on our website at armstrong.com.

With me today are Matt Espe, our President and CEO; Dave Schulz, our CFO; Tom Mangas, CEO of our Worldwide Floor businesses; and Vic Grizzle, CEO of our Worldwide Ceilings business.

Hopefully, you have seen our press release this morning, and both the release and the presentation Dave Schulz will reference during this call are posted on our website in the Investor Relations section. I advise you that during this call we will be making forward-looking statements that involve risks and uncertainties.

Actual outcomes may differ materially from those expected or implied. For 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 discussion of operating performance will include non-GAAP financial measures within the meaning of SEC Regulation G.

A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation. Both are available on our website. With that, I will turn the call over to Matt..

Thanks, Tom and good morning everyone. Our second quarter financial performance was largely a continuation of the first quarter. Our global sales and manufacturing operations executed crisply, but similar to the first quarter, markets were softer than expected.

Sales versus guidance came in at the low end of our range, but as with Q1, we were able to deliver EBITDA in the middle of our guidance.

Now, when we discuss market conditions in April and May, we were cautiously optimistic that the first quarter subdued activity was a result of the severe winter weather in parts of North America and that’s the second quarter and especially the second half of the year would see improved conditions.

We anticipated that 2014 would mark an inflection point in commercial markets in North America. And as a result of market activity in May and June and the recent significant downward revisions to GDP, we no longer believe this to be the case. While we continue to see growth in new commercial construction, that’s a small part of our overall business.

We now believe that both residential and commercial discretionary repair and remodel spend, the large majority of our U.S. business will be flat to down for the full year, and that overall commercial volumes will also be down.

Now, I say this while being fully aware that GDP and construction forecast for the second half of the year remains favorable and that there remains significant optimism in our customer base. Well, that said, we do not believe it’s prudent to maintain optimism in our guidance absent actual realized activity to support the view.

But as a result, we are lowering our full year guidance for sales by $100 million and our adjusted EBITDA range by $30 million. Other than other lower than expected volumes and some related mix degradation primarily in the Americas, very little has changed from our previous view.

Dave will provide more specifics on guidance, but I wanted to be upfront about this change in our outlook for the year. So, turning back to the quarter. As I mentioned sales of $710 million were at the bottom of our guidance range of $710 million to $750 million. Sales were up $3 million or 0.5% from 2013.

Foreign exchange had minimal influence on the year-on-year sales growth. Adjusted EBITDA for the quarter of $99 million is right in the middle of our $90 million to $110 million range as softer sales were offset by lower than estimated SG&A spending, most of which is timing related as spend was deferred in the second half of the year.

As we mentioned at our Investor Day in May we constantly review our portfolio of businesses and our manufacturing footprint. In the quarter we took additional steps to right size our global plant portfolio. We announced the closure of our Thomastown, Australia vinyl tile flooring plant effective July 31.

This small facility was no longer economically viable given the shrinking size of the Australian vinyl tile market. We will be able to service Australian customers cost effectively from our South Gate, California plant.

And also just today we announced that we would be closing our Kunshan, China engineered wood flooring plant with production scheduled to cease at the end of September. As many of you know this facility manufactured wood flooring utilizing veneers shipped from the U.S. scraped by hand in China and then exported back to North America for sale.

Rising labor and freight costs of these products have been among the factors negatively impacting our recent segment profitability. Proprietary manufacturing advances now enable us to onshore this production to our Somerset, Kentucky facility and produce the desired scraped visuals more cost effectively here in the U.S.

In addition, this shift will allow for lower transportation costs, reduced inventory levels and better customer service. This is yet another action we are taking to restore the wood segment to an acceptable return on capital.

Dave will walk you through our performance by segment and geography, but I want to talk about a few of the areas of recent interest, wood performance, Russia and our European flooring business. As many of you know we had a good first quarter in the wood segment when compared with last year.

We highlighted that the second quarter was likely to be a pause in the upper trajectory of this segment as lumber inflation was again likely to be out in front of price increases. We are pleased that in the second quarter, the segment delivered EBITDA up almost 50% versus 2013 and modestly above our expectations.

Sales were up slightly versus last year’s 10% volume declines were offset by strong price and mix gains. As expected price lag year-over-year inflation but we should now be priced appropriately versus our outlook for lumber costs for the second half of the year.

Mix was positive year-on-year as our emphasis on higher end products continues to bear fruit. However, as I mentioned in my opening comments wood volume especially in repair, remodel channels was below the expectations that informed our guidance. This also drove negative mix results guidance, mix versus guidance.

SG&A spend was also lower than we forecasted as spending was moved in the back half of the year. Despite improvements in unemployment and housing prices, we continue to see restrained demand for big-ticket discretionary projects.

As we look forward, we continue to expect the wood segment to make progress but the challenge in the second half now looks to be an uncertain consumer demand environment.

I want to comment on Russia, last quarter I mentioned that our construction and business process were proceeding without complications despite the issues in Ukraine and that our biggest challenge was the decline in the ruble.

We instituted a 10% price increase in April to offset the ruble devaluation and so far this has been – this has held with seemingly minimal impact on demand. Plant construction and product shipments continue unimpeded, the situation remains fluid, so we will continue to keep you posted.

And finally at our Investor Day in May we discussed the challenges that we have been experiencing in our flooring business in Western Europe. And as you may have noticed in our 10-Q we mentioned that we are evaluating strategic alternatives for this business.

At this I really don’t have anything more to add to this statement other than say all options are on the table and that we will keep you appraised as decisions were made.

I also want to be clear that any decision we make on the European flooring business will have minimal to no impact on our core markets here in North America the Pacific Rim and the Middle East. So with that, let me turn the call over to Dave for more details on our financial performance and guidance.

Dave?.

Thanks Matt. Good morning to everyone on the call. In reviewing our second quarter results, I will be referring to the slides available on our website, starting with Slide 4, key metrics. As Tom already covered Slide 2 and Slide 3, it’s simply an explanation regarding our standard basis of presentation.

For the second quarter sales of $705 million were up slightly versus 2013 on a comparable foreign exchange basis. Operating income was down 5%, but EBITDA was up 2.5%, largely due to higher depreciation in 2014. Earnings per share, was roughly flat as this year’s lower share count offset lower after-tax income on a per share basis.

Free cash flow for the quarter was $10 million, down from $32 million last year. I will talk more about cash flow and EBITDA on coming slides. Net debt was up $199 million driven by our $260 million share repurchase in September 2013 partially offset by operational cash generation.

Return on invested capital was lower driven by reduction in unadjusted earnings and a slightly higher capital base. Slide 5 details the adjustments we made to EBITDA and provides a reconciliation to our reported quarterly net income of $21 million.

Matt mentioned the plant closures we are executing at Thomastown and Kunshan, and as a result, we are recognizing $8 million of cost and impairment charges, primarily associated with these actions. In contrast, last year we had $3 million of cost reduction expenses related to actions in Europe.

Our 2014 tax rate of 54% is higher than prior year as the impact of un-benefited foreign losses was greater this year than in the second quarter of 2013. The increase in un-benefited foreign losses in the current year was also impacted in part by the Kunshan plant closure I just mentioned.

Moving to Slide 6, this illustrates our sales and adjusted EBITDA by segment for the quarter. Excluding the impact of foreign exchange, resilient flooring sales were down 2% as volume declined in North America and Europe. North America was driven by the repair/remodel factors Matt discussed as well as continued weakness in the healthcare sector.

EMEA sales were impacted by continuing weakness in Central Europe. Of note in this region, sales in the Middle East more than doubled in the period.

Pacific Rim sales benefited from a more than 50% increase in China and very strong growth in India partially offset by continued weakness in Australia and a down quarter in the volatile Southeast Asia markets. Mix in North America continued to be positive.

Despite lower sales, the resilient segment delivered flat EBITDA as manufacturing productivity, reductions in SG&A in the Americas and profitability improvements in Asia offset the volume weakness. The wood segment saw sales increased 1% driven by price and mix and profitability increased $3 million despite significant volume declines.

Matt commented on these results, so I won’t dwell on them, but I will note that lumber costs appear to be stabilizing albeit at near record level. Ceiling sales were up 2% on an equivalent foreign exchange basis despite volume declines in the Americas and Europe.

Volume in the Americas was impacted by the same factors as the resilient business, but somewhat softened by the relative strength in new office activity. Europe experienced continued soft demand in Eurozone and the UK. We called out the UK in the first quarter and mentioned that the issue was largely related to distributor inventory levels.

We continue to believe this to be the case and expect a stronger performance from the UK in the back half of the year. Europe did benefit from strong sales in the Middle East, up over 25% from last year as the architectural specialties business had a great quarter related to the Jeddah, Saudi Arabia Airport project.

Russia’s sales were up driven by our April price, but volumes were relatively flat. Pacific Rim sales were up mid single-digits aided by strength in the architectural specialties business. China volumes were up, but mix was down as the project business remains soft.

India had a strong quarter and Australia was up on the quarter behind growth in the architectural specialties business. Price and mix was up modestly in all regions. Building products’ EBITDA was up $2 million on a global basis as margin gains in the Americas were offset by declines in Europe and the Pacific Rim.

The Americas benefited from price and mix gains as well as SG&A deferral. European profitability was down due to the Russian plant construction costs and Pacific Rim profitability was impacted by higher SG&A spending.

Corporate expenses were higher than last year largely due to the timing of project work, including expenses associated with the analysis of strategic alternatives for the flooring business in Europe. Slide 7 shows the building blocks of adjusted EBITDA from the second quarter of 2013 to our current results.

Of note, price and mix offset inflationary headwinds from lumber costs, but volume was negative primarily in flooring. Manufacturing was a positive, primarily in flooring in the Americas and Europe. Despite the business segments deferring some spending in the quarter, SG&A was up year-on-year due to the corporate expenses I just mentioned.

Turning now to Slide 8, you can see our free cash flow for the quarter was impacted by lower after-tax cash earnings and greater year-on-year capital spending. On capital, the Russia and LVT plant expenditures are at a high level now versus the China plant spending winding down at this time last year.

The other category largely reflects VAT recapture in Asia as our plants begin to sell finished goods and collect VAT. Slide 9 begins our discussion of year-to-date results. Sales, operating income and EBITDA are following a similar pattern to the quarter.

EPS is up in the first half of the year, driven by our $260 million share repurchase last September. Free cash flow was down and I will discuss that you in the EBITDA details on the next few slides. Slide 10 shows segment level EBITDA year-to-date.

And the only significant variance with the second quarter results is the inclusion of the relatively strong first quarter EBITDA performance in the wood segment demonstrating the effectiveness of our new strategy. Slide 11 shows the building blocks of adjusted EBITDA from the first half of 2013 to our current results.

All of the bars mirror the quarter directionally as first quarter trends continued into the second quarter. Turning to Slide 12 you see that our free cash flow for the year is down versus 2013. Primarily due to unusually favorable working capital in the first quarter of 2013 and higher CapEx spend in the second quarter of 2014.

Slide 13 updates our guidance for 2014. As Matt mentioned as a result of market conditions we are reducing the top and bottom of our sales range for the year by $100 million to $2.7 billion to $2.8 billion. At the midpoint this will be a 2% increase in sales. I want to provide some additional comments on the market.

Recall previously, we assumed a modest recovery for the year. While we still believe key market indicators points to a longer term recovery, particularly in new construction, continued softness in GDP and the impact on the repair, remodel segment inform our view that 2014 will be flat to slightly down compared to last year.

For markets outside the U.S. our view is generally unchanged for the year. We believe key markets in Western Europe and Australia will be flat to down, consistent with our previous guidance.

The Middle East continues to be an area of growth, while we now expect the Russian market will be down high-single to low-double digits given the current political environment. We are also reducing our operating income and EBITDA ranges by $30 million due to lower volume and the fall-through to profits.

At the midpoint of the range EBITDA would be up 5%, earnings per share is also reduced and at the midpoint of the – of our range EPS would be up 15%. Free cash flow is lower than the previous guidance, primarily due to lower after tax cash earnings. Slide 14 provides more details on guidance.

Our inflation expectation for the year is unchanged at $30 million to $40 million. This assumes lumber prices remain stable through the balance of the year. Productivity and SG&A as a percent of sales worsened as a result of the lower volumes and mix decline. Expectations for capital spending and earnings from WAVE are unchanged.

On taxes we continue to anticipate an effective tax rate of 48% to 50%, but have taken our cash taxes down $5 million. For the third quarter, we expect sales of $740 million to $780 million and adjusted EBITDA of $110 million to $130 million.

Finally with the closures of Thomastown and Kunshan, we have increased our expected exclusions to $15 million to $20 million. With that I will turn it back over to Matt..

Thanks Dave. Well, overall, this is a mix quarter for Armstrong. On the plus side adjusted EBITDA improved in wood for the second quarter in a row after our strategic pivot at year end. Architectural Specialties especially in the EMEA and Pacific Rim regions had a very solid quarter.

The Americas ceilings business achieved a record EBITDA margin and the total business was able to deliver the midpoint on our EBITDA guidance despite softer sales. On the negative side, our view of improving end markets, especially here in North America is not being realized.

If markets are stronger than we now anticipate, we are well positioned to take advantage of the opportunities, but now believe 2014 will be another down year for volumes. We continue to focus on the items in our control and drive commercial excellence around the globe. And with that, we would be happy to take questions..

Thank you. (Operator Instructions) And our first question comes from Keith Hughes from SunTrust. Your line is open..

You bet.

My question on the guidance, is there something occurred in your commercial orders in June or July, making you – takes some upside out of these numbers, just anybody seen recently, I guess is the question?.

Well, Keith, it’s Matt. First of all in the commercial, a new construction in commercial segments we’re actually seeing fairly robust activity in office and to a slightly lesser degree in retail. And that’s showing up in backlog particularly in ABP business and a mix in the backlog in ABP business.

The issue is that’s only about 20%, 25% of our – of the revenue stream for ABP. Overseeing is the fact of a relatively softer GDP and the overall market demand for remodel and all commercial segment, applying downward pressure not only in our ceilings business, but also to a lesser degree Resilient Flooring.

So, there is a fairly high correlation between performance and GDP and the remodel business. So, we’re seeing little bit softer remodel and repair than we anticipated..

Thank you. And our next question comes from Bob Wetenhall from RBC Capital Markets. Your line is open..

Good morning. A lot of granularity on that, Matt, if you could extend just office retail industrial as well as healthcare and education, how those trends are playing out obviously your commentary on volume was – your commentary suggest that there is a not a lot of acceleration.

Is it because trends are going in one direction for all these categories or do you see pretty substantial differences by end market. Thank you..

Yes, it’s a good question, Bob. If you look at commercial in North America, offices up new construction into a lesser degree remodel. Healthcare is weaker in both.

In some cases actually significant weaker than – than we outlook coming into the year, education is flat to down in both new construction and remodel and retail is slightly up, I’d say a little better than anticipated particularly in new construction, but not quite strong as we’re seeing in our office.

And we’re seeing pretty significant new construction closes in retail and office and both of our businesses in North America. Again, the issue – the issue we’re experiencing is in the remodel business. If you look at Western Europe, coming year just going outside the U.S. coming in about as anticipated flat to slightly down.

As we said in remarks, Russia is down high single digits to low double digits based on sort of the political environment that we’re experiencing there. There are revenue in Russia is actually up due more of our price performance in volume and we think we’re actually continue to gain share in Russia.

And then emerging markets in China and India are performing largely as we expected. That’s kind of a quick run around the world..

Bob, I’m Tom.

Just a just a couple of extra thoughts on education, I mean it was a slow start, also back to Keith’s point, it’s was a slow start to the summer repair/remodel season, I think the delay particularly in the North Mid-Atlantic weather extending school openings through a middle of June in many places, but a significant delay on school remodel and we’re still trying to read tea leaves on that one.

I think that’s somewhat of the weather hangover effect and people are trying to jam job in and there is significant amount of pent-up demand out there, but I’m not clear what the demand trajectory is for the balance of the summer given the late start.

And just to amplify Matt’s math point on healthcare, I mean, which is a big important segment to the foreign business. It’s has been tough on healthcare and I think people are still on the wait and see model on how the economics work out for healthcare reform and before they dive in and put a significant new capital into repair/remodel..

Thank you. And our next question comes from George Staphos from BoA Merrill Lynch. Your line is open..

Good morning. Thanks for all the details. Continuing on the guidance adjustment question so, in the end markets where you’re seeing less than expected improvement.

If that’s the seam here, in which markets did you see the most variance relative to what your initial forecast were and the related question would be free cash flow guidance dropped more than the guidance for other metrics recognizing it’s off a small base, what was driving that? Thank you..

Let me comment on the market and segment performance. I will let Dave comment on free cash flow. I guess, in general, George we are seeing greater than expected softness in all of our served commercial markets in repair and remodel again due primarily to the GDP weakness in demand there.

We anticipated the first quarter softness to be somewhat related to weather-related issues we experienced, but as we exited the first quarter and entered to the second quarter, we saw very choppy demand month by month in Q2, which pointed to some other than weather.

Going to new construction and commercial, I would say that I would characterize office new construction about as expected, retail about as expected. I think as Tom mentioned healthcare weaker than we expected and education about as we expected in new construction. Residential, we had a very good start in new construction. It’s weakening a little bit.

The challenge we have with the housing starts performance is the mix of multi-family versus single family. Multi-family units do not use as much wood in the resilient product that goes into those applications is little bit lower mix. So, while we are encouraged that in general, there is some level of strength in new residential construction.

We would like to see more single-family starts. And of course, residential remodel is kind of attracting somewhat lower experienced in commercial.

And then Dave?.

George, it’s Dave Schulz. So, just on the free cash flow as we mentioned during our prepared remarks, the primary driver is just the lower fall through from the volume that we guided to. Also the mix of where that volume is anticipated impacting our cash flow..

Thank you. And our next question comes from Nishu Sood from Deutsche Bank. Your line is open..

Thanks. Digging into the third quarter guidance, you have revenues midpoint to $760 million, which is a 4% increase from last year, but EBITDA you have at $120 million midpoint, which is a decline year-over-year.

It certainly runs counter to what we have seen in the first half of the year, where you have been able to deliver some solid operating leverage despite some softness in revenues.

You mentioned some SG&A being pushed from the second quarter into the third quarter, I was wondering if you could quantify and describe that a little bit more? Also, you have this phenomenon, I am describing reversing in your kind of implied fourth quarter guidance with better operating leverage.

So, I guess I am just trying to dig into why the EBITDA outlook for the third quarter is worse than the revenue outlook and why that reverses in the fourth quarter?.

Well, Nishu, it’s Dave Schulz. Thank you for your question. Couple of factors. The first is that we do have a couple of the expenses associated with the Russia plant build that are going to impact those expenses are higher than what we had realized in Q3 prior year related to our China plant build.

The second part of your question about the SG&A is absolutely right. So, we do have more SG&A that was deferred out of Q2 obviously as we saw some of the volume patterns developing in late May and in early June, the business units deferred some of the spending on SG&A related to the volume build plans.

We haven’t provided you any specific guidance on Q3 to that relative impact, but I can tell you that some of that is related to some of the additional promotional and selling activities that we have planned in the back year half primarily here in the United States..

Thank you. And our next question comes from Stephen Kim from Barclays. Your line is open..

Thanks very much. I wanted to follow-up on the raw material energy inflation guidance you have given for the year $30 million to $40 million. I think we heard in your prepared remarks that lumber was about $17 million year-to-date.

And so what I was hoping we could get from you is a little bit more of a granular breakdown separating maybe raw material versus energy first of all in that $30 million to $40 million? And then secondly, the remainder how you expect that to play out over the different divisions that would be great? Thanks very much..

Stephen, its Dave Schulz. So in terms of what you are seeing year-to-date and what we already commented on related to wood, as I mentioned we anticipate that wood pricing has stabilized for the balance of the year. That’s incorporated into the guidance that we have provided you.

And so I would anticipate that we would see about 2X what we experienced in the first half of the year impacting the wood business. Obviously, as you take that into account, we have some puts and calls related to materials plus freight and transportation and energy costs within the business units.

We generally don’t break those out for you, but obviously just based on the trends that you are seeing on lumber relative to the total inflation impact for the year, I would anticipate that the balance of that would be split between the two business units about equally..

Thank you. And our next question comes from the line of from Dennis McGill from Zelman & Associates. Your line is open..

Thank you.

Matt just going back to your comments on the non-res, I think the number that you have been saying are the McGraw-Hill starts numbers, but correct me if I am wrong, when we look at those, those were up double digits the last couple of years and there was a lag with that flowing through both the ceilings and flooring and the volatility around GDP, but GDP has been positive, employment has been accelerating, so even if you were look over the last four quarters or so it seems like volume has been a struggle on the non-res side even though that backdrop would seemingly imply some volume improvement, whether you want to look new construction or remodel, so just wondering why some of those macro data might not align with what you are seeing on the ceilings and floorings side?.

Sure Dennis, it actually is aligning in terms of new construction. Our new construction orders are up and backlog is up, the issue is really one of mix and percentage represented in the revenue streams. And GDP has to be better than positive in order for volume growth in remodel. It has to be close to 3%.

So GDP growth at 1.5% or 2%, 2.5% doesn’t really help as much. Market volume has been down really year-over-year in remodels since 2008. So we are seeing traction in new construction as we said particularly in office and to a lesser degree, but positive in retail showing up in our backlog, showing up in richer mix in our backlog.

But with GDP tracking - trailing anywhere – tracking anywhere between 1.5 and 2.5 points that’s not enough to drive meaningful remodel business in the commercial segment.

Tom?.

Yes. Dennis this is Tom Mangas. So I have got the McGraw-Hill data. Education and healthcare in 2012 and 2013 on starts were both down. So like we agree that we live off those on a lag basis. And so on the new component of education and healthcare we are living though those negative years in 2014.

And I think the important point is on where it is favorable on retail and office, but just on the proportion of the total business it’s only probably 20% of the total volume there. So we really are much more dependent on the repair, remodel side to pull that through..

Thank you. And our next question comes from Will Randow from Citigroup. Your line is open..

Thank you for taking my question.

Regarding the European resilient business, I apologize if you touched on this, can you talk about what a drag it’s been in regards to EBITDA as well as when you think you have come to the decision on what to do that business?.

Sure. We have been fairly transparent on this and I think we went into some detail at investor meeting. It’s been a negative EBITDA performer for the last decade.

Just in some context, four years ago, we decided and executed a plan to exit a significantly underperforming portion of our business, resilient business in – resilient flooring business in Europe, that being the residential business. And we also exited our business in France, the home of our two largest European competitors.

So what we had was a focused kind of number four position commercial business. That business has further been pressured primarily due to lack of recovery in the European markets. We are focused on the Germanic markets, Scandinavian (Denmark) primarily.

And the volume has not come back particularly in government related investment as we anticipated three or four years ago. So we shared this on what Tom commented on it in a second. We shared this with increased transparency during the Investor Meeting in May. And we’ve reached the decision to start reviewing strategic alternatives.

We’re not in a position to comment that we’d say that everything is on the table as we said in our remarks, really not position to comment on timing yet, but we wanted you to know that we begun the work.

So Tom?.

Yes, well so, the business – the European business has been running in the low single-digit EBITDA margins – negative EBITDA margins relations we emerged and that was through significant restructuring and of course European crisis.

We’ve not been able to get above breakeven which has been a long-term goal of ours, as Jacks are better to open point of view, certainly want to make it a – our aspiration has been an – to make it a ROIC accretive business and it’s just increasingly difficult to do that hence we started the strategic option review.

Timing wise, we’re going with haste. It is an important structural building block in our assessment how we improve the overall attractiveness of the resilient segment. And I think we put in the queue that we hope to have a decision, it’s likely we could have a decision by the end of this calendar year..

Thank you. And our next question comes from Eli Hackel from Goldman Sachs. Your line is open..

Thanks, just sorry again I just wanted to touch on the commercial R&R side, are you seeing on our growth decelerator turned negative.

Is it getting worse as the year goes on? I’m just trying to understand the different drivers from May 21st to today that obviously impacted the guidance or things getting better slowly or they actually starting to go the other direction. Thank you..

Hi, it’s Dave Schulz. So, let me just provide a little bit of context on that and you referenced back to our Investor Day. What we saw was a relatively a good April consistent with what we have guided towards back during our call on the Q1 results.

We saw towards the tailend of May things really started to look much different and what we had discussed during our Investor Day. May came in much softer than we had anticipated. June did recover very nicely, but not enough to offset what we saw during the month of May from an overall sales perspective, primarily here in the Americas.

So what we would anticipate is continued acceleration, but still when you take a look at the full year on both the U.S. commercial R&R and both businesses we don’t see that being better than flat to slightly down versus the prior year.

What I would say is that we really saw a deceleration during the month of May to recover we anticipate based on our input from all our contacts through the industry overseeing through our discussions with our management teams, with our sales force as we do see some of that recovering in the back half, but not enough to make the full year better than flat year-over-year..

If I could just add some additional color. Just to provide some context for or how we outlook or remodel. Our visibility to the remodel business is sort of 60 to 90 days in past, I mean, so these are largely jobs. There is some exception of this, but these are largely projects and jobs served by our independent distribution in the local marketplace.

We wouldn’t track these as projects as we would have new office building or a new target store for instance. But we would – but we see these as restocking or replenishment orders from our distribution channel. So, it’s – this is not a segment that w have a lot of visibility too. It’s a segment that we can model fairly confidently as it relates to GDP.

So when we take a look at the outlook is a combination what we’re experiencing currently, but also forecasting based on our model knowing that we don’t have a lot of visibility beyond 30 to – sort of 60 to 90 basis points..

Are you asked about commercial, I think it’s worthwhile for residential to take it’s kind of (indiscernible) because it’s not all the commercial story on the guidance range.

So, we are seeing weaker consumer repair/remodel trends, I think you seen it another consumer flooring companies that have announced and you see a showing up both in starts that we’re anticipated in June from May decelerating June year-over-year decelerating on single-family starts the deceleration of total starts from the May to June so that’s a piece that’s impacting our residential business which again you say $150 million to the company.

And similarly, you see it just track through in some of the key regions, you know we continue to see couple of key regions like the Northeast and Mid-Atlantic struggle on a year versus prior year basis across the product categories. I’m not sure why that is, but it is – seems to be pretty specific.

And we are pretty convinced that it’s not a share-related issue, it is simply a consumer dynamic in these markets in the Northeast and the Mid-Atlantic.

So, that’s what’s also influencing some of the sales decline in our guidance?.

Thank you. And our next question comes from Michael Rehaut from JPMorgan. Your line is open..

Thanks. Good morning, everyone.

Just wanted to hit on wood flooring for a moment, I appreciate all the details always and I guess looking at the top line and then the margins, from the top line perspective, with the volumes down continuing from 1Q into 2Q, just wanted to get a sense of how much of that is the continued new direction of the company in terms of not chasing volume or going after more profitable segments rather than the industry itself and if that’s going to play out for the rest of the year? And then on the margin side, margins were down sequentially I think as you had pointed to last quarter, you have said that the input costs have stabilized albeit at very high levels and given the timing of price increases, I mean, a quarter ago we were thinking about a rebound perhaps back to 1Q margin levels, if not higher in the back half of the year, just wanted to know if that’s the right way to think about things at this point given your updated comments on inflation?.

Just a quick comment and then hand over to Tom, what we clearly have is one of the cornerstones of our new approach of the wood business capping volume at our drawing capacity and the team is executed extremely well on that, if executed extremely well and on price and mix over inflation.

So, I think on the things under our control in the wood flooring business, we have done a great job.

The primary driver for the relative volume weakness in the wood business is not necessarily our containment strategy on production volume and we are executing, but again it is as Tom pointed out, a weaker than outlook market opportunity particularly again the repeat in remodel and repair and we have seen that evidence through other retail channels and also in the mix of new construction again multi-family over single-family starts.

Tom?.

Thank you, Michael. I appreciate those questions. They are very good questions. Let me try to dive into that a bit.

First, as Matt said, we are – the market is a driver of our volumes, it’s not 100%, it’s clearly the weather impacted us in the first quarter affect consumer demand and that is part of what I just described affecting weather or the GDP or the spill-on effects, but the high wood markets like the Northeast and Mid-Atlantic continue to struggle across all product lines, not just wood.

So, we do think there is a market element there. Clearly, we are being scraped by competition and that’s costing us some share.

And we think that’s the appropriate share to get back as we try to give a much more aggressive pricing and mix up approach and that’s providing some opportunities at the opening price point level for some of our competitors to scrape along, I mean, they are certainly feeling the same level of commodity increases that we have had to endure, but see there is an opportunity to scrape in and take some near-term volume.

One that we don’t think it’s particularly sticky as we experienced as a loss probably can get it back to the point, where we think sort of attractive volume to get back. So, there is a mix of market and our approach there to management the business from better margins. We are very pleased that we were able to grow EBITDA.

And I think EBITDA is the most important measure to look at, because we have had a lot of – with the Kunshan closure and as you will see in the Q some other asset impairments – fixed asset impairments that we have tried to clean up a bit with the Kunshan closure, get a little bit lost at the operating income, but on EBITDA, we are up almost 50% in the second quarter on earnings of almost 90% year-to-date.

So, we are making progress. Now, that’s just prior to relative to last year is not nearly where we would like to be. And so we are continuing to push on our price and mix program. We have taken pricing in June-July. It has been sold through and continued to work our mix approach.

The one thing on the commodities as I anticipated and we called out in either the quarterly call or the investor call our inflation costs relative to the first quarter, so second quarter versus first quarter were up 50%.

And that is what’s putting pressure there, our price achievement is still equal to a better price mix achievement, equal to or better than what we achieved in the first quarter. So I mean really if that is the story there.

And when we guided the $30 million to $40 million of commodity costs at the company level, we had forecasted a trajectory of wood and that trajectory is about what’s playing out that is the leveling out at this point, which is still embedded in our guidance for commodity costs.

But yet that still the bulk of the company’s $30 million to $40 million commodity increase as evidenced by the $17 million absorbed year-to-date. So we think we go the hopefully commodities have stabilized. I think we have got that called right. We have price to recover at current level of commodity inflation.

And then the challenges as your last part of the question was how do I exit the year, we are still not in a position to guide on that because it’s volatile given what you have seen in commodity and commodities will be up or down. Also the volume is a big wildcard as Matt mentioned.

And we are simply less optimistic on the back half plus we are anniversarying, go back to Q3, Q4 last year relatively the first half. You recall we had all sorts of service issues in the first half of the year. We weren’t able to get the volume out, we crewed up massively.

Started buying PKD and chased it and that volume flushed out in third and fourth quarter, and you will see it back then we were growing sales at a clip of 20% plus, mostly volume driven. And so clearly, that surge of backlog to orders is going to flow through this year because we are not sitting on the backlog.

We have been able to ship what we have been promising. And so that’s a little bit of the year-over-year comparison that you want to factor through.

But we feel very confident, we are on the right track with wood, we wish we won’t be in scraped, but we will continue to be aggressive on addressing the cost profile of this business as set with our Kunshan closure and on-shoring a significant product line that I think will be very exciting for consumers to be able to have a made in America engineered scraped product.

And I think it will be a margin and a share builder for us. Thank you, Mike..

Thank you. And our next question comes from Kathryn Thompson from Thompson Research Group. Your line is now open..

Hi. Thanks for taking my question today.

Focusing on ceilings, the 2.3% growth in the quarter how much was volume versus price and to follow along with that how much of the spring price do you think is accepted, you have another price increase that is going to be flowing through the market, so how much of the spring price increase do you think is accepted, the thought process for the second price increase.

And more broadly speaking in terms of price are you seeing any type of change in conviction level with the end market in terms of accepting price? Thank you..

Yes, I will be happy to take that. Hi Kathryn, this is Vic Grizzle. In the second quarter your first question around price mix and volume really it was mostly price and mix for the most part driving the top line growth. Again the Americas volume was soft and slightly down. So that was – that’s the dynamics really of the second quarter.

On the pricing, our pricing actions continue to be driven by raw material increases both energy and transportation contributing as well. These are industry wide and very public though they are not specific to Armstrong and those discussions with customers are going very well.

So we remain confident that the price increase that we have in the fall will be realized as we realize the expected price that we had in February. We don’t see any change from that. I think those discussions continue to go well with our customers.

And again, they understand this is an industry wide raw material and price cost increase that we are seeing..

Thank you. And our next question comes from Mike Wood from Macquarie. Your line is now open..

Thank you. You mentioned several times the better new construction versus the weaker repair, remodel across your various end markets, how significant was that on the margin mix particularly in hardwood where you are putting 18% sequential sales improvement but you barely moved the EBITDA performance, so was that meeting your expectations? Thanks..

Well, in terms of new construction we saw the benefit of new construction, more in commercial and again in our office and retail and residential. The residential new construction is hampered somewhat by the mix, again multifamily over single family. Tom do you want to….

I would say on the sequential progress on EBITDA with the sales, it’s mostly a raw material commodity story it’s the increases of 50% higher commodities in the second quarter versus the first quarter, driving that fundamentally. But, yes the builder business tends to be a lower price, lower mix, product form to us.

So that does create a drag in a high builder closing season, whether finishing the floor up and closing the building and that has some drag. But again we have been working through those builder fixed pricing contracts, but you didn’t make progress on that, builders about a third of our overall wood business. So, it is a meaningful piece.

There is a seasonality to it, but we have – we’ve been able to take price and through both from builder contracts and think it’s going to be continue to – very important business for us when we’re committed to winning and our goal there is going to make sure we’re bringing kind of product and product innovation through the builder channel that allows them to have an attractive opening price point, but then incentivize their consumers to mix up with us..

Thank you. And our next question comes from David MacGregor from Longbow Research. Your line is now open..

Yes, good morning everyone. You talk about Russia being down so, I guess the question pertains to investments and emerging market SG&A and I guess end changes to the rate of which you’re making these investments and then presumably with the guidance provision today you’re going to begin 2015 a slightly lower phase with slightly slower phase.

Do you have any opportunity to flex up there the fundamental storage should improve and may be just update us on several emerging market growth story, I think at 2015. Thanks..

Sure, in a – in summary, we’re finished investing in the emerging markets. So, we are – the three plants in China or up in operational. The plant in Russia is on schedule and on budget. We should complete construction at the end of the year and we should have products sellable out of the plant really next year. So, no changes whatsoever.

We’re not anticipating any additional investment in the emerging markets at this point. So, in terms of greater investment consider the rate of investments going down significant after these plants are built.

The challenge we’ve had in both markets in both India, I’m sorry, both China and Russia are the market conditions as outlook when we start growing the plants are different, now the plants are constructed.

More dramatic difference in Russia hopefully a short-term dramatic difference, little bit just more broad – broadly experienced market, growth erosion in China, but we’re still seeing a GDP in the 7% or 7.5% range.

And we’re – we still see significant opportunities, remember that China is the second largest suspended ceiling market in the world with penetration in the commercial office base of ceilings of kind of 10% to 15% as compared to a fully developed market where that penetration is close to 85%.

So, the macro opportunities in China for both ceilings and flooring continue to be extremely attractive and we’re seeing pretty solid revenue and volume growth in both of our businesses in China and India as a result of the investments in the new plants and investments in the new plant in China gives a stronger platform from which to enter Southeast Asia, again both of our business itself.

We’re still very bullish on those investments, even though the market outlook extends to payback a little bit. We think it’s still makes fundamental good sense to be there while we made the investment.

Russia is the third largest suspended dealing market in the world, one where we had significant share position arguably demonstrably the share leader and again, the investment in Russia is a significant improvement when completed to our margins there as we’re able to move production inside of Russia that’s allowed us to going local there has provided the opportunity to expand our geographic coverage.

We’ve expanded our distribution footprint and again experiencing very significant performance there in light of a hopefully near-term pressure environment. We expect that’s the kind of move through. So, we think that – we think in both of these investments make long-term, mid-term sense.

We certainly wish the markets a little bit more stable, but I think long-term will be glad we made those investments, no further investments anticipated at this point. And when it comes to 2015 and how we’d infect up or bounce up, it’s a little premature for that. We’ll save comments in 2015 until we get little closer to that.

We still believe that in a mid-cycle recovery of the fundamental position we’re provides real opportunities to gain leverage. The business in our company both of our businesses have tremendous earnings leverage over volume and broad-based volume that would be new construction and remodel that comes with the mid-cycle recovery..

Thank you. And our next question comes from Jim Barrett from C.L. King & Associates. Your line is now open..

Hi, Barrett..

Matt, a question for you, are the outside consultants, are they focused just on the European flooring business, are they also – can you share with us what else they are studying in other parts of the business if they are?.

Most of the work that’s being done and virtually all the work that’s being done is to help us develop options for the European foreign business..

Okay..

Yes..

Okay, well thank you very much..

You are welcome. Thanks for asking..

Thank you. And our next question comes from Keith Hughes from SunTrust. Your line is now open..

Yes, to build on that last question, you report in resilient segments or revenues that are Europe and the Middle East, are all of those part of this review or is it just a subsection of them and if so, how much?.

Keith, at this point, let’s just say that all options for the European business were on the table.

Tom?.

Yes. So you are correct. Middle East is included in the sub-segment for revenue that’s broken out there. We as Matt had in his opening script the Middle East is a very important business for us and really that our strategic review really is focusing primarily on Western Europe..

Thank you. And our next question comes from Ken Zener from KeyBanc. Your line is now open..

Good morning, gentlemen..

Good morning, Ken..

So, you guys continue to have I think the best – some of the best exposure in the industry, in your filings so I appreciate that, but no good deal like unpunished. So, I have a compound question as it relates to ceiling, given the changing outlook driven largely it sounds by the U.S. market. You had kind of talked about 2% to 3% positive volume before.

If I do a 3% volume change on roughly 750 of sales, that’s about $25 million or has 40% leverage we think about $0.10, which will be a quarter of your guidance per million. So, could you kind of talk about how much in the U.S.

is changing? And the second part of that in the filing you highlighted $5 million of increased costs versus last year, which is an increase from the first quarter $1 million headwind, what costs are going up and how we have had not impacted I guess the annual guidance? Thank you very much..

Ken, let me – it’s Dave Schulz, let me address that. So, obviously we never came out specifically with what we were assuming the U.S. market would recover. I think that you are implying that there was a 2% to 3% volume opportunity in the U.S. ceilings business. So, we never provided that specific of guidance, particularly by segment.

What I would say is that relative to the outlook we are seeing overall in the U.S. residential and commercial markets primarily on repair and recovery that has been the majority of the reduction in our guidance range.

One of the things that we have also mentioned that you can see in our results year-to-date is that we would anticipate that we would have a little bit of a mixed drag as the market opportunity is lessened. And so the combination of that volume plus mix is what makes up the majority of our guidance range coming down.

As you also mentioned, the increasing costs about $5 million, obviously we have not only some increasing costs, but we also have productivity programs. And based on the timing of when those productivity programs offset some of those cost increases, it’s informed our guidance for the balance of the year..

Thank you. And our next question comes from George Staphos from Bank of America Merrill Lynch. Your line is now open..

Thank you. Thanks for taking my follow-on question. Question for Vic Grizzle, Vic on pricing within ceilings, you mentioned that there are some very well understood raw material cost increases that are driving it.

Could you comment as to what actually is driving it, because it sounds like most of the commodity pressures is really in as you mentioned in wood? And then the related question, obviously you have got a great track record when we look back at history and passing along costs ultimately to your customer and getting paid for the value provide.

If we look back in the past, has there been ever times, where you haven’t been able to get that accomplished and what kind of economic environment was associated with that kind of a misstep on pricing? Thank you and again good luck in the quarter..

Yes. Thanks George. With regards do the cost input drivers I would refrain and say energy and transportation are the largest impact or raw material increases along that, but the major drivers are higher gas and transportation expenses. Again, this is why we believe this is an industry wide and not very specific to Armstrong.

To go back to your second part of the question, we have not been able to recover our inflationary cost with price you would have to go back many years.

And so again, we remain confident that the discussions we are having with customers around these increases are going very well, but we remain confident in this current environment that we will be able to realize and recover the inflationary impact on our business..

Thank you. And our next question comes from Michael Rehaut from JPMorgan. Your line is now open..

Yes, thanks. Thanks for taking my follow-up.

Just wanted to go back to and certainly no mean to beat a dead horse too much on this topic, but back six weeks, eight weeks ago when we came out to visit, there is really two company specific comments that kind of anchored your optimism for the back half and certainly appreciate the month by month commentary and how things have come along, but just want to understand when we met, you talked about optimism across the distributor network as well as positive backlog trends.

So, I was just curious when you think about those two drivers to your back half outlook? Then how those two areas – how you are seeing both of those two areas in terms of the distributor network and the positive backlog trends have either of those changed and this is just or is have they remained the same and revised we are guided to is actually just what you are seeing in the marketplace notwithstanding?.

Yes, Michael, great question. The channel remains optimistic, particularly as it relates to new construction. They are active in bidding and closing new construction work that’s coming through in our expanded backlogs and again particularly in commercial office and retail.

That would boost our ceilings business a little bit more than resilient flooring business just because of the relative position of application. I mean, what we would really like to see, for example, flooring you come through is stronger healthcare, stronger education.

So, that I would say if you talk to our distributors today, they would still be guardedly optimistic, particularly when looking at new construction. The largest change in forming our outlook and again sort of like I am beating the dead horse now is a significant reduction in the outlook for GDP for the year coming at the end of the second quarter.

As Dave said, we had a relatively weak first quarter. We had an acceptably strong April, a very weak May, and a respectable June, although as Dave said not strong enough to offset the weakness in May. So, we came out of the second quarter with this kind of lumpy choppy demand, along with a revision downward in GDP.

And again, that drives the remodel business. So, I think as I said in my remarks, we would love to share everybody’s optimism and we do as it relates to our couple of segments in new construction, but we also feel responsible to sort of report an outlook what we are experiencing.

And there has been a full percentage point reduction or 1.5 point in some cases reduction in the outlook for the GDP this year. And that applies a tremendous amount of headwind to the remodel pieces..

Thank you. And I don’t see any questions in the queue at this time..

Okay. Well, thank you very much for your interest and great questions. We certainly understand the nature of the questions and thank you very much and have a good day..

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a wonderful day..