Tom Waters - VP, Treasury & IR Matthew Espe - President & CEO Dave Schulz - CFO Don Maier - CEO, Armstrong Floor Products Vic Grizzle - CEO, Armstrong Building Products.

Stephen Kim - Barclays Capital Kathryn Thompson - Thompson Research Group Nishu Sood - Deutsche Bank Mike Wood - Macquarie Research Dennis McGill - Zelman & Associates Colin Sebastian - RBC Capital Markets Michael Rehaut - JPMorgan Keith Hughes - SunTrust Alex Wong - Bank of America Merrill Lynch Will Randow - Citigroup John Baugh - Stifel Nicolaus Jim Barrett - CL King & Associates.

Welcome to the Armstrong World Industries Inc First Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host, Vice President, Treasury and Investor Relations, Tom Waters, please go ahead..

Thanks Mallory and good morning to everyone on the call. Please note that members of the media have been invited to listen to the call and the call is being broadcast live on our website at www.armstrong.com.

With me are Matthew Espe; our President and CEO, Dave Schulz; our CFO, Don Maier; CEO of our World flooring Businesses and Vic Grizzle; CEO Ceiling Business. Hopefully, you have seen our press release in 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 that during this call we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong please review our SEC filings including the 10-Q filed this morning.

Forward-looking statements speak only as of the date made and 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'll turn the call over to Matt..

Thanks Tom and good morning, everyone. On our call today I'll provide a brief overview of our quarterly results, comment on market conditions and our outlook for the year. I'll update you on our business separation efforts to date and Dave will give you a more detailed discussion of the quarterly numbers and guidance.

For the first quarter reported sales of $551 million were down $39 million or 6.5% from prior year. About half of the decline is attributable to foreign exchange movements. Adjusted EBITDA of $75 million was down $8 million or 10% from prior year. As expected much of the sales and EBITDA declines were driven by residential flooring in North America.

As we previewed our February call we expect 2015 to be a year of transition in the resi flooring business with volumes still reduced from the losses we experienced in mid-2014 and profitability further suppressed as a result of our SG&A investments.

We continue to make progress and go to market engagement with our distributors and other sales partners and construction on the LVT plant here in Lancaster is on schedule. Commercial flooring sales were flat for the prior year.

In ceilings, sales were flat year-over-year as volume declines in Europe and certain North American channels and regions were offset by continued price and mix gains in all regions. So overall, the year started slower than expected in all of our business with softness in the northeast and other areas impacted by winter weather.

Canada and Russia also started slowly. However, we did see activity improve throughout the quarter into April in both of our businesses and we're maintaining the 2015 sales and EBITDA guidance we provided back in February. Turning now to the separation plan, we're making progress on a number of important work streams.

The future Board structures have also been progressing and I'm pleased to announce that a decision has been reached on the position of Chairman of the Board for the new company.

Larry McWilliams who has served on our Board since 2010 and is a member of audit and management development and compensation committees will chair the new Armstrong Flooring company Board upon completion of the separation of the transaction.

Larry was recently President and CEO of Keystone Foods and prior to that was at the Campbell's Soup company as President of their International Operations among other roles there. Larry has been a great asset to Armstrong these past five years and a valued partner for me.

He'll provide a steady hand through the separation and excellent strategic leadership for the newly independent company. Jim O'Connor will remain as Chairman of Armstrong World Industries, a role he's filled since 2007. Additional management and board compensation progress has also been made and we'll share these decisions at a later date.

As part of our separation planning, we're currently evaluating the future capital structures of the two independent companies. We have more work to do, but our current thinking is that a modest debt load, say less than two times EBITDA will appropriately position the flooring company for success.

Armstrong World Industries which in the future will be just the ceilings business will have a strong cash EBITDA history and cash generation capabilities it should be able to support approximately $1 billion of leverage which would likely be about three times forward-looking EBITDA.

We also envision that Armstrong World Industries will retain the majority of the U.S. pension plan obligations. Of course, the exact size and structure of debt and pension obligations will be determined prior to the separation and will be influenced by capital market conditions and other factors at that time.

The last item related to the business separation I wanted to share with you is the reaction of our customers. Don, Vic and I along with the senior sales team reached out to all of Armstrong's significant channel partners within hours of the February announcement. As expected they had questions and concerns which we believe we've addressed.

We'll continue to work hard to make sure that the transaction is as seamless as possible in the marketplace. Thus far, we've seen no market resistance to the separation announcement. For the team here at Armstrong priority number one is serving customers and delivering our 2015 operating plan.

So with that let me turn the call over to Dave for a detailed review of the quarter and the guidance for the year, Dave..

Thanks Matt, good morning to everyone on the call. In reviewing our first quarter results I'll be referring to the slides available on our website, starting with slide 4 key metrics as Tom Waters covered slide 2. And slide 3 is simply an explanation regarding our standard basis of presentation.

Sales of $565 million were down 3% versus 2014 on a comparable foreign exchange basis. Operating income, EBITDA and EPS were down as well. Free cash flow for the quarter was a use of $42 million and improved from last year by $14 million.

The first quarter is typically a use of cash period for Armstrong as receivables grow up below year-end level and as we build inventories for increased summer activity. Net debt was down $74 million driven by debt repayments. Return on invested capital was down due to lower profitability in the trailing 12 months.

Slide 5 details the adjustments we made to EBITDA and provides a reconciliation to our reported net income of $4 million in the quarter. As discussed in February, we're excluding the impact of our non-cash U.S. pension expense of $6 million and costs associated with the flooring separation process of $4 million from our adjusted numbers.

In addition we're excluding a gain on the sale of a closed facility in Australia and had some negative FX impacts in the quarter. The majority of the improvement in the interest slash other line relates to FX charges in 2014 and interest expense was slightly favorable.

Our 2015 book tax rate of 84% was higher than last year due primarily to two issues; first, losses in foreign subsidiaries were slightly higher than last year. This along with lower domestic pretax profit resulted in a higher tax rate due to un-benefited foreign losses.

Second, we recognized the state net operating loss write off of $3 million as a result of change in ownership under IRC section 382. This was triggered by the asbestos trust sale of stock in February resulting in a higher tax rate than the prior year quarter. Moving to slide 6, this illustrates our sales and adjusted EBITDA by segment for the quarter.

I'll talk to the businesses on the next few slides, but want to note here that corporate expenses were slightly lower than last year. Slide 7 provides additional color on the Building Products segments results. Ceiling sales were essentially flat on an equivalent foreign exchange basis with price and mix gains offsetting volume declines.

I remind you that the first quarter of 2014 was a strong base period with sales up 5% as we were not negatively impacted by weather to the same degree as some of our competitors. In the Americas, sales were down slightly with mid-single digit volume declines mostly offset by a mix in price gains.

The volume declines in the Americas were primarily in the retail channel and Canada. North American commercial sales were slightly softer than last year but activity accelerated during the quarter, leaving us optimistic for the year. European sales were flat as in the Americas price and mix gains offset volume declines.

United kingdom was up off a weak base in 2014 and Russia was up with price gains offsetting currency devaluations and share gains offsetting a very soft end market. Sales were up in the Pacific rim despite continued weakness in China where high end office projects continue to be challenged. India and southeast Asia had very strong quarters.

Despite mixed top line results, Building Products grew EBITDA by $3 million. The improvement came in the Americas where manufacturing productivity, price gains and mixed improvements more than offset lower volumes and a decreased year-over-year contribution from WAVE. Americas EBITDA margin improved 300 basis points from last year.

WAVE's results were down due to some fourth quarter pull forward in the same sales factors impacting our ceilings business. As with ceiling tiles, we're optimistic that grid results will improve as the year progresses. EBITDA in Europe was down on an increased manufacturing cost from a new plant in Russia. Pacific rim profitability was relatively flat.

Slide 8 illustrates our Resilient segment results. Excluding the impact of foreign exchange Resilient flooring sales were down 3% driven by residential products in the Americas. North American commercial and Pacific rim sales were relatively flat. China sales were down but India had mid-teens growth.

Resilient profitability was down $6 million as year-on-year mix and price declined in residential products and the increase investment in SG&A that Matt mentioned. Page 9 lays out our Wood segment results. Wood sales were down $15 million as volume declined 17% from the first quarter of last year.

This is a continuation of the share loss that we experienced starting in the third quarter of 2014. The volume declines were also impacted by inventory management in the big box channel. We did see significant improvement in wood sales as the quarter progressed. Weakness in January and February was exacerbated by some buy head activity in December.

Strength in March and into April reflects the nation impact of our competitive pricing actions in the second half of the year beginning to drive share recapture. We believe that this bodes well for the wood business in the second half of 2015.

Wood adjusted EBITDA was down $6 million to $2 million driven by the volume decline and manufacturing cost issues around our investment in the Somerset, Kentucky, engineered wood plant. We believe these cost pressures will abate as the year progresses. Price and input costs were relatively flat year on year while mix continues to be a positive factor.

Slide 10 shows the building blocks of adjusted EBITDA from the first quarter of 2014 to our current results. Of note price and mix more than offset inflationary head winds but volume continued to be a drag on earnings.

Most of the other items are similar to last year but you can see the start of our SG&A investments in the flooring business driving $3 million of higher year on year spend. Turning now to slide 11, you can see our free cash flow for the quarter versus last year.

Cash earnings were lower but essentially offset by reductions in capital spending and a lower use of cash on working capital in the quarter. The other contributor to cash flow was made up of a variety of items, the most significant of which was the recapture of VAT associated with our plant construction projects. Slide 12 shows our guidance for 2015.

The ranges for sales and EBITDA for the full year are unchanged from the initial guidance we issued in February. EPS guidance is lowered by $0.05 as a result of the $3 million IRC section 382 expense I mentioned earlier. Slide 13 provides more details on guidance.

Most numbers are unchanged but we have reduced our cash tax expectation $10 million as we have additional inputs to tax estimation process. We have also finalized our non-cash U.S. pension expense for the year at $25 million verse the range we provided last quarter.

The last item I want to cover this morning is the $43 million of income from discontinued operations that you likely noticed in our 10-Q.

This item represents the non-cash P&L recognition of a cash tax benefit that we realized in the 2010 to 2012 time frame related to tax planning we did with respect to our investment in the European flooring business.

At that time there was no income statement benefit but with the formal insolvency of the European flooring business which occurred in March we're now able to recognize the majority of this income through discontinued operations.

This Euro denominated asset will remain on our balance sheet for several years and will revalue as the euro moves versus the dollar. As such there may be future non-cash income or loss in discontinued operations going forward but not nearly of the quarter's magnitude. With that I'll turn it back over to Matt..

Thanks Dave. Subsequent to our last call I received questions on two topics that I'd like to address. First several of you inquired as to whether we explored the possibility of a sale of the flooring business prior to the decision we made to separate the businesses.

As we shared last quarter we considered a wide range of strategic alternatives, but we did not actively pursue a sale of the business because we believe in the potential for flooring that delivers superior returns for our shareholders as an independently traded company.

We believe the separation of the businesses is the best path forward to maximize shareholder value and we're now focused on successfully executing the spinoff of the flooring business on a timely basis. Second, some of you have asked about my future role with the company in light of our announcing new CEOs for the Flooring and AWI companies.

My immediate future involves executing our 2015 operating plan and of course delivering results. At the same time, I'm focused on leading the planned business separation and executing the creation of two industry leading public companies with the people, processes and resources to succeed in the future.

Upon consummation of the separation I plan to step away from Armstrong. I have no doubt that these businesses with Jim and Larry as Chairmen and Vic and Don as CEOs will build on the global investments and improvements that we've made during the past five years and I look forward to following their progress in the future.

With that said we'd be happy to take any questions..

[Operator Instructions]. And our first question comes from the line of Stephen Kim with Barclays Capital. Your line is open. Please go ahead..

My first question really relates to the market share. If you could sort of talk about the situation really in all three of your businesses.

In wood for example, it seems a little curious in light of lumber liquidators issues we would have thought that maybe your channel partners would have been gaining share and so we're wondering are you really seeing or you think you're losing share within the channel partners or something else? In ceilings one of your competitors had significantly better year-on-year results.

And then in resilient I think you indicated you thought the market was flat and I just given the things we were hearing from commercial flooring, I'm just kind of curious as to if you could elaborate on that, but mostly about market shares across your businesses..

Let me comment broadly and then I think I'll pass it over to Don to comment on wood and resilient and then Victor to comment on the ceilings activity. In terms of wood, we're focused on selectively recovering the share that we lost in the second half of last year, third and fourth quarter of last year.

I think we were very transparent in the fourth quarter last year with respect to the measures and actions we were taking. Pricing to selectively regain share. Rebalancing and remixing the percentage of revenue among the channels and of course, innovating and launching new products.

The cycle time and lag time effect of those actions and then the recovery in our share, you know, is kind of what we're experiencing now; and I would point to the fact that while we had a somewhat soft start to the quarter we had a very solid second half of the quarter and continue to have a very solid -- April was very solid as well.

We believe we're beginning to see the fruits of those efforts. So Don, I would just ask you for further comment on that..

Yes, no I would echo Matt's comments. I think you were asking about the impact of lumber liquidators. And really in the quarter a minimal impact we think as a result of the issues there. We'll let lumber liquidators speak for themselves.

I will tell you that even prior to the 60 minutes segment due to a lot of product actions that we had taken on our laminate business that we had seen a nice spike in that business. So, that's continued forward and it's really hard to determine if that's been impacted by lumber liquidators.

On resilient for our particular segments which are really focused on education and healthcare, we're I think consistent for what we saw in the market as well as competitors that kind of deal in that space..

Good, thank you and then Vic comments on the ceiling shares..

Sure, hey Stephen, on the flat sales for Armstrong let me just say right up front here we don't believe there's any change in market share here as a result of some of the comparisons that you're referring to.

There's really some timing effects here when you think about the base period comparison for Armstrong versus first quarter last year, if you recall, we had a pretty strong first quarter last year in spite of the tough weather conditions relative to some of our competitors.

And really the geographic footprint of our manufacturing operations really allowed us to serve our customers and maybe other customers better because of, again that footprint. So we had a stronger first quarter base period that we're comping to.

And then we had a couple of large projects, I think we shared some of those with you in the first quarter last year that were shipping and so there's a little bit of timing of when some of the larger projects that we have in our plan this year, in fact, in second and third quarter we have more of our larger projects shipping.

So I really attribute this to timing really in terms of what happened in our comp base period last year and what we're seeing now. I will add that, as I think Matt referred to, we had some acceleration of our order rates into March and we've seen that continue into April.

So we remain confident that this isn't a major shift in share but more of a timing..

Thank you. And our next question comes from the line of Kathryn Thompson with Thompson Research Group. Your line is open. Please go ahead..

Tagging a little bit more, pulling the string more on ceilings, two part question. What were the regional and end market differences in volumes on a percentage basis? And to what extent have you seen a competition from a new European entrant that's tiptoeing into the U.S.

market last year, but do you see them as a real competitor in the market in your ceilings business? Thank you..

Vic, I'll just let you handle that one..

Let me comment on the regional differences because the recovery that we're seeing in the U.S. commercial market is very uneven by region.

And I think that was referenced the northeast region in particular which is, Kathryn as I think you know, is one of our stronger areas in this U.S., was a very slow first quarter for that region relative to other regions in fact. It was the most -- it was the slowest of all the regions.

So there was some regional differences here and that could be explaining also some of the comp differences that you're seeing as well. Certainly, we were concerned about that early in the quarter.

We'd seen acceleration in that market bouncing back in March and April and we're confident we're going to be on plan in that region as we continue into the second and third quarter. So a little bit of the timing there again and the unevenness of the recovery showing up in the regional differences.

The second question around the European competitors, again our European competitor in particular the one you're referring to is very active and we're very aware of where they are.

They have not made a meaningful impact on the overall results in the market and we're continuing to compete and do a better job serving our customers with our local supply base and our very strong distribution network. So it remains on our radar screen, we're not taking them lightly, but there's been very little impact to the results so far..

Have your customers indicated, given an indication to you for their willingness to take on a new supplier or how difficult would it be for a new entrant?.

Kathryn no, the answer to that is no. No indication of that..

Thank you. Our next question comes from the line of Nishu Sood from Deutsche Bank. Your line is open. Please go ahead..

Wanted to follow up on some of these earlier questions. The trends that you mentioned improving from the first two months of the year into the second two months of the year. You've touched on some divisional specific factors. Vic, you were just mentioning the unevenness of the recovery in timing issue in ceilings.

And Matt, you were mentioning in flooring that it -- the benefit of your recent strategic -- your pricing changes making a difference. But it sounds like there was, there could have been, some broader market factors as well behind the broad improvements you saw as the year went on. I was just wondering if you could dig into that a little bit.

Was that weather related? End market related? In resi or commercial? Were there any broader factors that might have driven the improvement as the year has gone on?.

Clearly there are parts of the U.S. that had some significant weather issues early in the year, early in the quarter. I'm sure that market play or I'm sorry, weather played a part in the slow start out of the gates. And there is a lot of things we're doing here. You have different contributing factors.

Don's repositioning the wood business and recapturing share. Vic continuing down his strategic path.

So if I looked at the wood business and resilient flooring in total and then ceilings, I would say the relative strength in our wood business as we exited the quarter and into April, is a combination of maybe a little bit stronger of market than we out looked or certainly stronger than we were experiencing in the first quarter, combined with the rebound in volume attributed to the actions of Don and the team took late last year, kind of rolling through a little bit.

If I look at the resilient business, you know the commercial business in particular, that's probably a combination of timing of some projects along with maybe a broad strengthening of the market a little bit better than we anticipated in the short term. We'll have to see how that holds as we go through the year.

And on our ceilings business I think the first half was affected by weather particularly in the northeast. As Vic said, that's a historically strong part of the U.S. for us.

That effect, remodel as well as new business and the relative strengthening we saw there in the second half of the quarter into April is probably, maybe a little bit more robust market outlook than we anticipated.

So I think that's a summary, Don anything to add to that?.

No, I think you hit it spot on. For quarter, the market kind of came in where we expected. But it was definitely back end loaded which is good to see as we carry ourselves to Q2..

And then Vic anything?.

I would say in the northeast the weather was a factor there certainly. The Boston area got hammered with snow as we all know. That was very slow in January and February and we saw it bounce back in March and April. The one thing about the weather related impact, it's a delay, it's not a loss..

And so we're seeing those regions bounce back, so a lot of that is weather in the northeast in particular.

The other thing to note also, is that there's project timing in a very uneven recovery, some of these regions will have large projects and then a lull, before large projects so some of this can be a little bit of noise on timing and we saw that in the northeast. So there's a couple of those factors I think that are impacting those numbers.

But again, weather and timing are the two things..

Yes, I think that we're essentially unchanged in our view of the market that we provided earlier this year in February. So we're not recasting our market outlook, certainly not at this point.

And with the cyclical, the long cycle nature of some of our businesses, it's a little difficult to get too wrapped up around the performance of one quarter versus another quarter. Both Don and Vic's businesses have a project dimension to them and that project falls inside or outside the quarter that can change things dramatically.

We're happy and pleased with the progress we made through the quarter. We're certainly happy and somewhat encouraged by what we've experienced in April. But just because of the nature of the timing of some of the stuff in our businesses, we're not taking this opportunity to sort of recast the market yet..

Thank you. And our next question comes from the line of Mike Wood with Macquarie Research. Your line is open. Please go ahead. .

Matt you've given guidance in your prepared remarks, the ceilings business can hold $1 billion dollars in leverage and flooring can be under two times EBITDA.

Since your leverage is less than $1 billion now would you take actions to leverage up prior to the spin?.

We've provided about all the guidance that we're prepared to provide as we think about the capital structure of the businesses. As we go through that market conditions will dictate what we do, they should generally be a contributor.

What we try to do today and I'll turn it over to Dave to add some additional color, But what we wanted to do today is share our current thinking. The commitment we made at the beginning of the year, is, listen, as we go through the separation and we hit upon subject areas that we feel that we need to be transparent with you on, we'll do that.

A lot of work to do in the capital structure but wanted to give you kind of a sense of what we were thinking about as we sat here today..

That's absolutely right, Matt. Clearly following up from our February announcement, we obviously talked with many of you along with other investors that were interested in more details about the capital structure. As Matt mentioned our goal today was to simply provide you with some of our initial thinking.

Clearly, as we think about these two businesses going forward and thinking about their ability to handle a debt load, we wanted to make sure we provide you with at least our initial thoughts as we progress with the separation and as we see how the market conditions develop. We'll keep you informed as to that thinking once those decisions are made..

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

Just wanted to dig in a little bit on the guidance for the flooring side on EBITDA being down for the full year, I think at the midpoint it's about $25 million and about half of that is already felt in the first quarter.

Can you maybe just talk through how the investment in the business is going to phase through the year and maybe how the rest of the year progresses relative to that.

Guidance kind of implies that maybe you would be up by the end of the year, but just wanted to hear how you'd trace it?.

I'm not sure we've added a lot of color and how we're timing the SG&A investments. What we're talking about is thousands of retail displays that we're having produced and then placed in the stores. So there's going to be some lumpiness to how and when those displays get placed and how they get produced and that will drive some of the SG&A spend.

We also have, in terms of broader flooring, you have timing of the expenses related to the LVT plant. We've commented a little bit on investments in we made Somerset, Kentucky, to expand our engineer wood capacity out of that. So we've got those investments.

So Dennis, it's going to be tough to be real clear about the quarterly drop of each of these things as we go forward, but you're right. A major headwind to the flooring profitability in 2015 as indicated, is investments we felt we needed to make. The position is business to expand earnings specifically in 2016 and beyond..

I think you covered it, Matt. We've not provided any more details but clearly our focus here is improving our go to market capability through the expansion of some of our promotions and displays. We've talked about that in the past we're obviously, began that work back in the back half of 2014.

And we anticipate that, that work will continue through at least the front half of 2015. But we're very much focused on expanding our presence in the retail channel. We believe that this is the right long-term play for our business.

We've indicated that this is somewhat of an investment year as we continue to increase our go to market capability, along with some of the innovations that we're bringing in for 2015..

I would comment that the response to the new display system and new retail support system has been extremely positive. There's been a lot of enthusiasm. I think the design, the flexibility, the response has been encouraging, the uptake has been great.

Don, any comment?.

No, I would just say we're right on track with where we thought on all of those elements and very encouraged by the reaction from the market and can't wait for those displays to start generating revenue for us..

Our next question comes from the line of Robert Wetenhall with RBC Capital Markets. Your line is open. Please go ahead..

This is actually Colin filling in for Bob. I have a question on the Resilient Flooring segments. In your queue you indicated that you've implemented price increases in the first quarter for select Resilient Flooring products.

I was just wondering what percentage of the portfolio is affected and how the price increase has been accepted by the market so far?.

So that's really referring to an increase we took in our VCT segment, that's an area where we have a strong leadership position. And I would say that we're certainly seeing the benefits that come through on the price line in that particular category..

Our next question comes from the line of Michael Rehaut with JPMorgan. Your line is open. Please go ahead..

So just to go back to, I guess an earlier question about segment guidance from last quarter, just want to make sure it's safe to presume that the ceiling guidance or the building products guidance, as well as the total flooring guidance components, of the overall company guidance, those segment by segment guidance, those haven't changed at all as part of your reiteration..

It's Dave Schulz. That's correct. We have not adjusted the guidance that we provided from February to now relative to our segments and relative to the combined company. As we mentioned earlier, the guidance that we did adjust was related to our tax position and EPS related to that tax position..

Thank you. Our next question comes from Keith Hughes with SunTrust. Your line is open. Please go ahead..

Just wanted to follow backup on the acceleration of business that you discussed. Can you kind of give magnitude specifically in ceilings in March and April.

How strong the business is and is it units or pricing or both at this point?.

Yes, Keith, as you know we don't usually give kind of monthly guidance or outlook. What we were trying to do in an effort to be a little bit more transparent was just to give you a sense of how strong we were. We were very pleased. We saw a weak January and sort of the first half of February. The second half of February we started to see a rebound.

I'd say we kind of felt it first in flooring and subsequently in ceilings. March, the relative strength of that continued. Clearly, we still had pressure on the quarter overall from a revenue perspective. But we like the way we exited. And again, April, in both flooring and ceilings continues to be very strong.

So, I don't want to get into monthly guidance or insight beyond. We had a stronger second half of the quarter than we would have thought coming in to the quarter and that strength that we saw in March certainly seems to continue into April..

Thank you. Our next question comes from George Staphos of Bank of America. Your line is open. Please proceed..

This is actually Alex Wong sitting in for George. Thanks for all the details. On ceiling can you provide us an update on kind of the pace of growth in architectural specialties and whether any potential M&A opportunities in that arena..

We wouldn't comment on any potential M&A opportunities on an earnings call. So it's a platform that we're very interested in. It's a platform we're committed to. And we're investing around the world to build it out and we think it is a competitive differentiator for us. So anyway with that, Vic, over to you..

We're very pleased with where we're with architectural specialties as a platform. Again very excited about the market's response to our broader participation in that segment. So, we continue to invest in this area and look for opportunities in this area. And our sales rates are on plan.

And they're running it ahead of your overall broader market as you know. This is a big penetration opportunity for us. We're pleased with where we're with our sales run rate in that business at this time..

Our next question comes from Will Randow with Citigroup. Your line is open. Please go ahead..

In regards to trying to monetize value in the flooring business, it's been, pardon if I say it, a thorn in your side for the past couple years in the wood flooring side in particularly.

Can you talk about your thought process in not trying to think about a sale process?.

Well, I didn't say we didn't think about a sales process. I said we didn't conduct one and so what we did do was evaluate several options and we modeled each of the options as it related to shareholder value and thoughtful consideration with the board.

With some, I'd say, best in class financial advice and decided that the best path forward was a separation that allowed both of our businesses to proceed on a pure play basis.

And we felt that that allowed for the most efficient capital structure, the most strategic alignment and gave both businesses the optionality to succeed in their respective industries. The comments that I wanted to make at the end of my prepared remarks were directly, there seemed to be a sense that somehow there's a process run and a failed process.

And I just want to be very clear that no process was run. That in fact what we had done, was while considering every option, we concluded and the board decided to move forward with the separation.

We felt we were somewhat transparent on that in February, but based on the nature of the questions, we concluded we weren't, so we wanted to be as clear as we could in this call..

Thank you. Our next question comes from the line of John Baugh with Stifel Nicolaus. Your line is open. Please go ahead. .

I was wondering on ceilings if we could speak maybe a little higher level. We've had a tremendous mix in pricing in the last few years and volumes have been sluggish. And it would appear with commercial construction picking up albeit with a lag slightly better economy we may see volumes start to come back.

I was wondering whether if that happens we might though see the mix in price tail winds subside and that would replace that or how that may play out in the future..

This is Vic Grizzle. We're very pleased with the operating leverage that we got in the first quarter on soft volume or weaker volumes to our comp based period. And it was helped by price and mix. We also had some really good efficiencies in our operations we controlled our cost well, so overall I'm very pleased with that.

The price and mix again, the market is moving to a higher value product. They're demanding a better visual, they're demanding more acoustics and higher performance around that, those platforms.

So the market is moving that direction and that's where we're leading with our innovation and our new product introductions to make sure that we're serving that market. And when the market comes back as we're referring to as it recovers, we don't anticipate a change in that market trend and that's going to continue to help us with the overall mix.

And the price, you know, again, price comes from serving customers and providing a higher level service that justifies higher prices. And we're going to continue to invest in those service enhancements and value creators for our customers to allow us to do that.

So we're not anticipating price and mix subsiding as we go forward, it's a part of a measure of our value creation in the customer base..

Thank you. Our next question comes from the line of Jim Barrett with CL King & Associates. Your line is open. Please go ahead..

This question is for either Matt or Don. For the Wood Flooring business to regain the operating margins it achieved in 2011 and 2012, will that be more a function of realizing further pricing and mix gains or more a function of growing volume or improving manufacturing efficiencies.

Could you give us some sense as to what it's going to take to get there?.

Yes, I mean just to frame it and then we'll let Don comment. The answer I guess to some extent is all of the above. What we need in the Wood Flooring business is balanced execution. We need to make sure that we have the right volume coming through the plants and we need to continue to position new products in the market to get the right mix.

I think channel balance is an important element of the strategy. We think we have an opportunity to regain share, particularly in the independent retail channel and a lot of what Don and his team and the investments we've made are geared towards that end. And as always we need to make sure that our plants run efficiently.

We have to have the right loading and the right cost structure in the plants and mix, again, has a great deal to do with that as well. So the answer is a little bit of all of it..

Yes, I would say Matt covered it, Jim. This is Don. I think the key piece here is certainly all of our channels and segments are important to us. But we really want to rebalance our mix to a much heavier mix towards retail.

That's where we've been spending a lot of time in our effort with our distributors as well as our retail customers to focus on getting back into a higher mix with them. That's combined with a lot of product actions as well to drive a higher product mix.

If we can drive product mix and customer mix along with the other items that Matt mentioned, that's what will get our margins back to where we need to be..

Obviously, it probably doesn't need to be said, but a slight market recovery, a little tail wind and volume wouldn't hurt us either..

And we have a follow-up question from the line of Keith Hughes with SunTrust. Your line is open. Please go ahead..

Yes, question on hardwoods. We've seen some of the species, some of your inputs, the species prices are falling off pretty notably in the last 30, 45 days.

Just give any kind of a comment, is that kind of widespread through the industry? And moving forward, do you think you'll be able to hang onto those lower inputs as we go through the rest of the year?.

Sequentially Keith we've seen some improvement of reduction in lumber inflation. We can only assume that is widespread that it's a traded commodity with tons of visibility. So we're experiencing it and I think you can assume our competition and other consumers of those species of lumber are experiencing it as well.

Year-over-year it's not significant but it's nice to see some sequential improvement. Obviously, we're going to work very hard to maintain as much of that as we can. And again the things Don and his team are doing will help that.

Eventually, we expect that we're going see some -- we'll anticipate if we have significant reduction in lumber costs that competitive pressures will come to bear and we'll see some compression in those prices.

It's very difficult at this point with the cycle and the level of volume that we're seeing to kind of outlook exactly when and where we'd feel that. If we see significant reductions in raw material, we should anticipate a little price pressure behind that. Don..

I would say we do see a nice sequential improvement. That's encouraging after a fairly significant rise over the past year, year and a half, in the commodity.

Having said that as you know and as we talked just a bit ago about the price compression that we've had or the margin compression that we've had, we've got a long way to go, I think, to get back to where we really need to be as far as the price of the commodity juxtaposed with what we can get in the market.

I'm hopeful that we can make up some of the ground that was lost over the past year or so..

Thank you. And our last follow-up question comes from Michael Rehaut with JPMorgan. Your line is open. Please go ahead..

I know it might be a little premature and obviously, you've probably said all you can say in terms of some of the separation related topics, but you know, I guess I want to try anyone. Give it a shot. On the corporate expense, any kind of feeling for, the $65 million to $70 million of EBITDA or roughly $80 million, I think, of core corporate expense.

How that would change for the standalone company and any kind of thoughts around what the flooring company would incur on that level?.

You know, Mike, you sort of answered your own question at the beginning. It's a little early for us to provide more clarity there. We have said that we believe there are some synergies, but we have got a lot of work to do to see how those costs flow and the details of the separation.

There's lots of factors and there's tons of work going on right now that will lead to that answer. But it's premature to provide a lot more clarity. Dave I'll hand it over to you..

It's Dave Schulz. We did say in our last call that if you take a look at the current corporate segment, we believe as you split out into the two standalone companies that there would be minimal changes to the operating expense profile.

So clearly as Matt mentioned, we're still working through the details both from an organizational structure perspective plus some of the other services that will be required and what is the expense profile for each. But I would say that as we've continued that work we're standing by what we said back in February.

Right now there's still work to do but we would anticipate a minimal change in the overall operating expense profile from AWI today as we split out the two companies..

I'm showing no further questions, I would like to turn the call back to Matt Espe for any further remarks..

Thank you very much, just a couple of remarks, we're encouraged by the second half of the first quarter and what we're seeing so far in April. It would be great to see that continue. We're working hard here on the necessary work with respect to the separation.

Don and Vic and their teams are focused almost entirely on serving their customers, competing hard in challenging markets and delivering operating results that we commit to. And on a closing note, I'm very, very happy to be able to share with you the fact that Larry has been appointed the Chairman designate of our flooring business.

Larry will bring a tremendous amount of positive and constructive energy and enthusiasm to the organization. And we're thrilled to have Jim O'Connor stay on as the Chairman of Armstrong World Industries.

So we have two strong Chairman, we've got a very aligned board structure and so I think we're making meaningful progress on the separation path and we’re very pleased to have those announcements made today. Thank you very much, everybody. We appreciate all your attention..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day..