Armstrong Flooring, Inc.
Q1 2018 Earnings Call Transcript

Published: 8 May 2018

[Operator:]

Greetings and welcome to the Armstrong Flooring's First Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Doug Bingham.

[Doug Bingham:]

Thank you for joining us today for Armstrong Flooring’s first quarter 2018 earnings conference call. Today’s call is hosted by Chief Executive Officer, Don Maier; and Chief Financial Officer, Ron Ford. We trust you have seen our press release this morning. Additionally, a copy of the slide presentation to accompany this call is available on the Investors section of our website at www.armstrongflooring.com. I refer you to Slide 2 of that presentation and 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 a more detailed discussion of the risks and uncertainties that may affect Armstrong Flooring, please review our SEC filings. Forward-looking statements speak only as of the date they are made and we undertake no obligation to update any forward-looking statements 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 to the most directly comparable GAAP measures is included in the press release and in the Appendix of this presentation. Finally, in accordance with changes on how pension and postretirement costs represented under GAAP, we have restated our operating income and adjusted EBITDA. Further details can be found in our 10-Q and the full historical reconciliation is available on our website. With that, I will now turn the call over to Don.

[Don Maier:]

Thank you, Doug. Good morning, everyone, and thank you for participating on our first quarter 2018 earnings call. Today, I will discuss our operating highlights and business activity. Ron will then cover additional details on our financial results and outlook before I offer closing comments. After our prepared remarks, we will open the call to answer your questions. Before I proceed, I want to thank the entire Armstrong Flooring team for all their hard work and significant accomplishments which are the underpinnings of our successful results. This dedicated team of professionals is focused on our customers around the globe, ensuring that our brand's promise, let the buyer have faith, endures. Turning to Page 3, which provide some key highlights and updates. The first quarter marked progress against our goal to improve adjusted EBITDA dollars and margin in 2018. Adjusted EBITDA increased by 11% to $10.1 million compared to $9.1 million in the prior year. We are realizing benefits from a number of targeted productivity and cost control initiatives to improve our competitive position. Additionally, investments in product innovation, distributor relationships and plant network enhancements have helped generate double-digit growth in both Vinyl Composition Tile, or VCT, and Luxury Vinyl Tile, or LVT, bringing attractive mix benefits to our business. As expected, first quarter net sales overall were slightly lower due to higher distributor inventory levels at the end of 2017 and continued challenges in some of our legacy categories. However, our strategic initiatives are on track to accelerate net sales growth in the second half of the year. We are confident in these growth prospects, and we have actions underway on price, productivity and other cost saving measures to offset intensifying inflationary pressure evident across the entire industry. Our improved free cash flow performance in the first quarter is aligned with our expectations to generate cash flow in 2018, in line with recent years. With our strong liquidity and conservatively leveraged balance sheet, we are actively working to build value in our company through all avenues and we are committed to investing in our business to generate solid returns. Moving to our strategic priorities on Page 4. We have discussed on prior calls our strategic priorities, which will help improve our competitive position and drive transformative growth. These priorities include LVT leadership, innovation, share of wallet with distributors, wood profit enhancements and revitalization of our legacy categories. These combined efforts are all geared towards delivering on our medium-term goals. Today, I will share with you updates on our progress. In LVT, we have one of the broadest and most compelling portfolios in the industry, driven by innovation, new product introductions and our expanded supply capabilities. Prism continues to perform well in the marketplace due to its superior dent resistance and sharper visuals. In January, we debuted several higher-end products including Alterna Plank and Rigid Core Elements, which have gained rapid market acceptance. Beyond these products, we have an exciting pipeline of products in the next generation of LVT, including our new Vantage SPC Rigid Core product that we are currently introducing, which provides a range of width options and stunning visuals with embossed and registered textures. At entry-level price points in LVT, we have successfully increased shipments from our third domestic LVT plant. This was made possible through technological advancements that allowed us to produce LVT at an existing resilient sheet plant. While this expanded capability still represents only a small portion of our current LVT sales, we are actively working to expand our offering out of this plant. Additionally, we have plans to repurpose additional existing plant capacity for domestic production of LVT, including our Rigid Core product line. This advanced production capability is a direct result of our focus on innovation, which has been increasingly woven into all facets of our company. Innovations in durability and design is especially essential to our strategy in all major Wood and Resilient categories. We have expanded our Diamond 10 Technology to numerous categories in response to stronger market appreciation for our sharper visuals, enhanced scratch and stain resistance as well as lower maintenance cost. Last week, we announced to the trade the launch of VCT with Diamond 10 Technology. VCT is a key part of our business, and this product enhancement marks a meaningful milestone in our efforts to grow our business. As a reminder, VCT is a large and important category within the overall hard surface flooring industry, and VCT products are used extensively in educational facilities and mass merchants. Customers prefer flooring that looks good, is durable, and is a great value. For the commercial customer with the high traffic areas, nothing beats our VCT flooring with Diamond 10 Technology. More scratch and stain-resistant than competing products, it has a premium appearance and significantly lower installation cost as well as maintenance cost that are, on average, 40% lower than polished VCT. Customers who might previously have chosen stained concrete have told us they love the look, comfort, durability, pricing and maintenance of this game-changing value-priced flooring product. In addition, our VCT recycling program provides a sustainable flooring option to our customers. With the rapid expansion of Diamond 10, from LVT to residential and commercial resilient sheet, solid wood, and now VCT, this innovative technology is now an option in five key product categories which collectively represent over 80% of our sales. In distribution, we are committed to gaining additional share of wallet and aligning ourselves with partners who are best positioned to support our growth strategy. We are making good progress on our previously announced change in our distributor partnerships, including a shift in our direct marketing and merchandising efforts for our residential products. We expect distributors will begin providing their own merchandising in Q3, with a full transition completed by the end of the year. We are excited by the opportunity this gives us to focus more on commercial and national accounts, which we believe will be an important contributor to our collective success. In our Wood segment, our consolidated manufacturing network is more in line with current customer demand, and able to better leverage productivity benefits realized across our wood flooring operations in recent years. In addition, we continue to work towards improving the margin profile of our engineered wood portfolio, including outsourcing more products as well as using a licensing model similar to the steps we have taken in laminate. We have used sourced products to improve our speed to market for new products without investing additional capital, and as a result, have increased our sourced engineered wood sales by roughly 50% in 2017. In our legacy categories, we are actively revitalizing our portfolio, improving capacity utilization and driving productivity at our plants to more effectively compete in our markets. We have applied Diamond 10 technology to a range of products including resilient sheet, wood, and most recently, VCT, as I just discussed earlier. In VCT, which is one of our most attractive categories, we have fully ramped up production and selling efforts using our existing facilities and go-to-market structure to support the acquired Mannington VCT assets. The integration of this acquisition is on track and it is generating not only top line growth but also accretive benefits to adjusted EBITDA in 2018. Overall, we are confident in our ability to deliver on our strategic priorities in the medium-term. We expect to continue executing on these objectives as we build upon our goal of driving sales growth by providing an even more competitive lineup of winning products for our customers. I’ll now turn the call over to Ron to walk through the details of our financial performance.

[Ron Ford:]

Thank you, Don, and good morning to those on the call today. I’ll begin with a review of our financial results on Page 5. In Resilient, net sales were up 2% due to strong growth in VCT and LVT, partially offset by declines in certain of our legacy businesses. The double-digit growth in VCT sales was a result of the recent acquisition of the Mannington VCT assets in June 2017. In LVT, we also generated double-digit volume growth which drove a positive impact on mix. In our other Resilient categories, as Don mentioned, we’re working on a number of promising avenues to offset sustained market pressures. Additionally, the migration of a portion of our laminate sales to a licensing model generated lower reported sales, albeit at a more attractive EBITDA margin for that category. This accretive laminate licensing transition will occur throughout 2018. In Wood, net sales were down 9.8% to $94 million compared to the prior year quarter. The decline was primarily the result of previously disclosed higher distributor inventories at year-end 2017, along with market challenges in both solid and engineered wood. We are actively working with our major retail customers to reverse the trend in solid and look forward to updating you as we make progress in this category. In engineered wood, the industry continue to face pressures at the low end from import competition. Total adjusted EBITDA increased 11% to $10.1 million compared to the prior year quarter, with the increase largely driven by lower SG&A, including $4.3 million of customer reimbursements for prior investments in merchandising, along with the benefit of productivity gains, cost reduction actions and our previously announced plant closures. In regards to the reimbursements, we continually collaborate with our customers on marketing activities to drive volume in their markets. We periodically assess the returns for the investments we’ve made, and while the significant majority of these selling efforts have been successful, we may seek reimbursement if the sales growth is less than expected. The $4.3 million in reimbursements represents a minor portion of prior merchandising efforts which can now be reinvested in our business. The efficiencies from our go-to-market change and the reductions in corporate overhead that we announced in February were largely completed in the first quarter of 2018, and are on track to generate annualized savings of $10 million to $12 million. As we indicated on our last call, raw material inflation was significant in the first quarter in both our resilient and wood businesses. We are experiencing increases in energy, transportation, raw materials and operating costs, which we expect to continue rising throughout 2018. This includes lumber costs, which have moved considerably higher as availability has tightened. In response, we’ve announced a range of price actions. In Resilient, we announced a 3% to 6% price increase effective in April 2018 for many of our legacy commercial products. We’ve announced a 5% to 7% price increase on our solid wood products effective May 2018. In addition to these pricing actions in both segments, we’ve implemented a freight and energy surcharge on shipments effective May 1. We anticipate the impact of these pricing actions, combined with additional productivity gains and other cost savings, will help offset intensifying inflationary pressures. Turning to our free cash flow and liquidity on Slide 6. During the first quarter, we experienced a $15 million free cash outflow compared to $46 million free cash outflow in the prior year quarter. The primary factors of this improvement were enhanced working capital management and the timing of planned inventory spend. CapEx was below depreciation, which has an annual run rate of $50 million. We continue to anticipate 2018 free cash flow will be in line with recent years as we build inventory over coming quarters. During the quarter, we continued to repurchase shares, bringing our aggregate repurchases to $41 million since inception of the program on March 2017. We ended the quarter with a strong balance sheet, consisting of $62 million of net debt. This places us conservatively below our long-term target net leverage ratio of 1.2 to 2 times, which gives us the flexibility to invest in ongoing transformational initiatives and pursue additional acquisitions. Turning to our outlook on Slide 7. Today, we’ve discussed a number of transformational initiatives which reinforce our expectation to deliver adjusted EBITDA in the range of $70 million to $80 million in 2018. This includes mixed benefits from our investments in VCT, LVT and product innovations, along with increased efficiencies from our wood plant closures, enhanced distribution partnerships and announced cost reduction actions taken. Since our last call, input cost inflation has intensified and exceeded our initial outlook, especially in lumber. We believe that we can offset the impact of these higher costs through price actions and additional productivity gains. Our unchanged adjusted EBITDA outlook for the full year 2018 assumes sales growth in the low single digits, weighted towards the second half of the year. This weighting towards the second half is particularly relevant in the Wood segment as the tide lumber availability, which I mentioned earlier may defer some Q2 shipments while we work to address supply constraints at some of our plants. Beyond that, we anticipate that our focus on higher growth categories, product innovation and strengthened distribution partnerships will allow us to accelerate sales in the second half of 2018. We continue to expect capital expenditures for 2018 to be in the range of $40 million to $45 million. Maintenance CapEx should be approximately 2% to 2.5% of sales, with the balance of the spending budgeted for high return investments consisting of productivity projects with short paybacks or innovation projects where we expect a strong return. Moving to our taxes. We still expect a cash tax rate of zero as a result of federal NOLs. On the P&L, based on our current tax position, including the valuation allowances we established in the fourth quarter of 2017, accounting rules prevent us from recording a tax benefit this quarter. Our effective tax rate could change significantly quarter-to-quarter, but it’s worth remembering that we expect our full year cash taxes to be zero. We anticipate that 2018 will be another year of positive free cash flow, in line with recent years. We continue to expect to end the year below our target leverage ratio of 1.5 to 2 times EBITDA, while preserving ample liquidity to invest in internal projects and other value enhancing initiatives. With that, I will now hand the call back to Don for closing comments.

[Don Maier:]

Thanks, Ron. Turning to Slide 8, we’re excited to continue driving improvement in each flooring category that we serve. We believe we are taking the appropriate steps to improve our overall business performance through our strategic priorities. Innovation, technological advancements, strengthened distributor relationships and operating efficiencies are the cornerstone of our profitable growth trajectory moving forward. This focus will allow us to improve our mix of sales to higher growth products, while maintaining strong competitive positions in legacy categories. As such, we remain committed to achieving a 10% EBITDA margin by 2020 under a range of growth scenarios. We have a clear strategy with multiple levers to accomplish this goal. We look forward to executing on all of our objectives as we build upon our strong brand and market leadership to drive shareholder returns. Operator, we're now ready to take questions.

[Operator:]

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Keith Hughes from SunTrust Robinson Humphrey. Please proceed with your question.

[Keith Hughes:]

Thank you. I just had a question on the customer reimbursements, the $4.3 million. Is that a function of the relationship change you're undergoing with your distributors right now? Or is that more just regular course of business?

[Don Maier:]

Hi, Keith, thanks for your question. I hope you're well. It is -- we continually do this with our customers of all kinds. And while we don't comment specifically on any individual customer or customers, as you would expect, while we do this from time-to-time, in this particular case, the amount was large enough that we felt like we ought to call it out just to bring it to the market attention. But it's a normal course of business activity.

[Keith Hughes:]

Okay. So this is not something we're going to see every quarter, correct? This just happens periodically?

[Don Maier:]

It happens periodically, and somewhat difficult to predict the timing.

[Keith Hughes:]

Okay. And you called out LVT, like everyone else in the industry is growing, growing really well. Could you give us sort of an update on LVT in terms of how much of your LVT that you're currently selling are you producing? And how much is being sourced?

[Don Maier:]

Yes, Keith, I think, probably the easiest way to term that is it's about 1/3 is domestically manufactured and 2/3 sourced, at this point in time. Obviously, with the addition of our third plant in Stillwater and the capabilities there and our plans to have a fourth Rigid Core repurposing activity as well, we see that growing as we move forward. Frankly, a lot of the growth in LVT right now has come from the Rigid Core products and those are 100% sourced for us right now.

[Keith Hughes:]

And the fourth plant with under current plans would be Rigid Core, is that correct?

[Don Maier:]

That's what we discussed last quarter. Yes.

[Keith Hughes:]

Okay. And any kind of timing on when that would come in?

[Don Maier:]

No. We're not giving any firm timing on that. However, it is something that we hope to have done in kind of the same timelines of our Stillwater project. So much more work to be done there. And we, hopefully, we'll be able to give you some more firm timing next quarter.

[Keith Hughes:]

Okay. And then final one on LVT. Pricing is -- how is pricing then? Have you seen the degradation in pricing to be solid core or the flexible material?

[Don Maier:]

Yes, I would say the dynamic has remained unchanged from what we've discussed in the past. Clearly, on the opening price point areas where there are -- there's little product differentiation in a larger number of brokers and other folks out there with the product, I would say we're seeing more pressure. Our strategy, really, while we have products to serve, that part of the offering is really to focus on the differentiated products and moving into not only innovations like the Diamond 10 coating, but also into the SPC categories as we see the category migrating and evolving in that direction.

[Keith Hughes:]

Okay. And you've called out LVT and VCT as big growers for you. I know you don't like to break out the percentage of resilient by products, but are we -- do you have any kind of estimate? Or do you see any kind of feel that those two products are going to be the majority your revenue, it kind of tip the scales here to get the segment growing, again, on a bigger, more consistent basis?

[Don Maier:]

Yes. So we have talked an awful lot about the need to get top line growth and we've have been enjoying nice growth in LVT, as we discussed. It's exciting to be able to talk about another category with VCT this quarter. As Ron indicated, a large part of that was associated with the acquisition of Mannington's VCT assets. Having said that, on a forward look, as I indicated, we're very excited about now getting the Diamond 10 Technology on to VCT as this provides a lot of benefits and a rather meaningful change in the overall cost of ownership to, I believe, make it a much more desirable avenue to go down versus some of the alternatives such as stain and concrete.

[Keith Hughes:]

Yes. Thank you.

[Don Maier:]

Thank you, Keith.

[Operator:]

Our next question comes from the line of Michael Wood from Nomura Instinet. Please proceed with your question.

[Michael Wood:]

Hi, good morning. Thanks for taking my question. First, just another follow-up on those customer reimbursements. Can you just clarify how much do you typically put in your annual guidance? And was this $4.3 million unusual now, was that already embedded into your guidance for this year?

[Ron Ford:]

Yes, it was. We did, in fact, consider it and while we may have not known precisely the timing, we anticipated some level of reimbursement and included it in our guidance.

[Michael Wood:]

Great. And then so I'm curious, that being said, you called out the cost inflation that was a little worse than you anticipated since last quarter's call. I'm curious what the offset to that was that enabled you to maintain your guidance? Is it an anticipation of price success or was there other cost savings that you were able to generate?

[Don Maier:]

Yes. So as we indicated last quarter, as we played out the building blocks that had been announced, we had included a fairly significant consideration in our guidance for inflation. What Ron has indicated is that we are seeing levels accelerating there. And as such, we have come up with additional productivity efforts to offset those costs. But as well announced the pricing actions which, in a fact, basically I'll took a fact here last week. So a combination of all of the normal levers you would expect

[Michael Wood:]

Great. And could you also update us on where your plant optimization is with regard to LVT? Are you at a point yet where your productivity has enabled you to surpass the sourced margins with LVT?

[Don Maier:]

So yes, I think you're referring to the Lancaster facility that we opened a number of years ago. And it is fully functional and operating and has had all of the financial benefits that we envision when we made that investment to provide us with a lower cost than sourced products.

[Michael Wood:]

Great. And just finally, if I could ask one on your shift to mid marketing with your distribution base. I'm just curious if you can give an update on how that's going so far? What you're doing just to make sure you're protecting or safeguarding your brand? And how that progress has been on that initiative? Thank you.

[Don Maier:]

Yes, so I would say we are on track as we had planned. And that includes really not having the full turnover of these responsibilities taking place until the end of this year with a number of items ramping up in Q3 of this year. So we are still managing and maintaining all of those activities while this transition takes place. So there is – that there is no risks at the current time. We've been working very closely with our distributors who by the way, are very excited, and this is something that they really been seeking as it gives them, I think, a competitive advantage in the marketplace as well. And so good progress there. And we have all of the things that you would expect to manage this moving forward, including rigorous brand standards to make sure that the branding is consistent across all regions. Performance criteria, to make sure that the investments are being made in the marketplace and the natural remedies that you would expect should those – should we get misaligned in a particular case. So we feel very good about it. I think our distributors feel very good about it, and we continue to work collaboratively with them, looking to have the keys turned over to them at the end of the year.

[Michael Wood:]

Great. Thank you.

[Don Maier:]

Thank you, Mike. And I guess one other piece as well that's important here is. At the same time, we're increasing our focus on our commercial business and the specifications there as well as the national retailers, which is where I think we can bring real value to our distributors by increasing our investments and focus there.

[Operator:]

Our next question comes from the line of Scott Rednor from Zelman & Associates. Please proceed with your question.

[Scott Rednor:]

Hi, good morning.

[Don Maier:]

Good morning, Scott.

[Scott Rednor:]

Within volume for the Q is down about 7% year-over-year on 1Q, and you noted some of the issues that you guided to, Don. Within the low-single digit growth expectation in guidance, what’s the assumption for volume, Don?

[Don Maier:]

Yes, so volume will be a part of that mix we indicated last quarter, that, that's largely a second half impact with all of the product activities and ramping up of a number of other initiatives like the VCT volume. So volume will be a much bigger impact in the second half. In the quarter, we – as we indicated, had a little bit higher distributor inventory levels as we exited 2017 that were a factor if you're looking at a quarter-on-quarter comparison. And on the Wood business, there was a large part of our solid business is in the Northeast region, and there was considerable weather disruption there. So not probably a factor in the overall total, but certainly impacted the solid Wood business in the quarter there.

[Scott Rednor:]

Great. That's helpful. And are you, guys, when you talk about LVT, are you seeing materially different growth rates between the flexible, the old product versus SPC or Rigid or WPC right now? Or is that evident in your business?

[Don Maier:]

Absolutely. Yes, the growth in our rigid products is meaningful.

[Scott Rednor:]

And then maybe just lastly, Don, when you think about solid wood or even the high-end engineered wood. Just curious what kind of your guys' consumer – customer research is seeing just recognizing LVT is growing so fast, but is there still kind of value, does the consumer -- higher end consumer still want that product?

[Don Maier:]

Yes, we have confirmed that, and now there's a number of independent pieces of work out there that would indicate the same. Having said that, your position that it is being dampened by the rapid increase in LVT is, I think, very much good as well. So I think we would see market growth rates much higher [indiscernible] for the impact of LVT.

[Scott Rednor:]

Okay, thank you very much.

[Don Maier:]

Thank you.

[Operator:]

Our next question comes from the line of Alvaro Lacayo from Gabelli & Company. Please proceed with your question.

[Alvaro Lacayo:]

Good morning guys.

[Don Maier:]

Hi, Alvaro.

[Alvaro Lacayo:]

So just wanted to start off the question with just overall mix on the Resilient side. I want to make sure that capture everything that’s driving the improved mix. And it's mostly just the higher growth rates in both LVT and VCT. Just want to make sure that is correct. And then on VCT, maybe you could just talk about organic growth, not including the acquisition. And in the past, you described this business as a kind of flattish volume with a little bit of price kind of segment. Just wondering if those trends would be in line with what's been said in the past? And what are the expectations for the rest of the year?

[Don Maier:]

So first of all, yes, the Resilient category was driven by the double-digit gains in VCT and in LVT, offset by the legacy products, largely residential sheet. So to answer your first part of your question, that's correct. The market in VCT, I would say, has not changed. It's still low single-digit declines. We've talked about 3% to 4% pretty much for the past numerous years. So having double-digit growth in there clearly is a great improvement for us, largely driven by the acquisition of the Mannington assets, but as well as an area that our team and our distributor partners have really focused on. And in the process as well we've seen a nice improvement in the mix within the category as well. Kind of the forward-looking view and the excitement that I have around the Diamond 10 technology on VCT would be as that changes the cost curve and the benefits that the owner is able to realize, we think that that's going to hopefully change that overall market trend, because it is a much – now much more competitive product versus the alternatives like stained concrete.

[Alvaro Lacayo:]

Got you, okay. And then just, I know it's early on, but the licensing on the laminate business, if you could maybe add a little bit in terms of how you think that's progressing. And then does that strengthen the belief that you'll be able to successfully do that with a lower-end engineered wood product business? And then maybe just, I don't know if I've got this in the past or not, but if you could size the opportunity for the engineered wood. I know you said it's larger than the laminate, but just wondering how much of that could get migrated to that kind of a licensing model.

[Don Maier:]

Yes. So first of all, on the laminate, the licensing is working out just as we had anticipated. We have not run into any issues or problems, which was an important part was to gain some learning here as we look to expand this into the engineered wood category. So things are progressing although, albeit still relatively early, but no reasons for concerns there. On the engineered wood side, we don't have anything to disclose today. However, I can say we've made meaningful progress in that endeavor and hopefully can have something to announce when appropriate. The size of that is really going to be a function of the process of negotiating that arrangement. So it will be more meaningful but hard to quantify for you right now as the details are still being finalized.

[Alvaro Lacayo:]

Okay, got it. And just with the -- on the wood side, the inventory build that had an impact on Q1, I mean, have we seen all the effects of that inventory have been cleared out? And then just the other thing you called out with regards to limited, I think it was wooden material availability and what kind of an impact -- will the Q2 impact be similar to what we saw in Q1? Or how would you sort of quantify how that will impact the second quarter?

[Don Maier:]

Sure. So, first of all, the inventory piece has worked through. So that was a result for the quarter. The callout on wood availability, the same weather issues that we referred to on the Northeast in the selling side also impacted the ability to get logs out of the forest. And so log inventory is fairly tight right now. Obviously, we're now entering more climate that is conducive to logging. So we see that issue being worked through. We wanted to call it out as we don't believe, at this point in time, it's going to have a material impact. However, we did want to call out that it's a potential risk if, for some reason, the lumber levels don't return, availability could impact the quarter towards the tail end.

[Alvaro Lacayo:]

Thank you very much.

[Don Maier:]

Thank you.

[Operator:]

Our next question comes from the line of John Baugh from Stifel. Please proceed with your question.

[John Baugh:]

Thank you, good morning Don, Ron and Doug. Most has been asked but, I guess, two things left. You mentioned trying to turn your solid wood business. Could you maybe give us two or three things you're working on to make that happen?

[Don Maier:]

John, could you be a little more specific when you said turn?

[John Baugh:]

Well, you mentioned that the solid volumes were down. I'm sure some of that might have been the Texas inventory. But you mentioned you're working hard to try to turn that negative trend and I'm just curious what the two or three initiatives might be there.

[Don Maier:]

Yes. So the two impacts in the quarter, as we discussed, were the higher levels of inventory as we exited 2017. And then on solid, the primary solid market is in the Northeast, which, as you know, personally so had to have quite a few interesting storms that impacted sales and ability, even for folks to get out of their houses. So that's behind us. The new products that we've introduced are beginning to get traction and as you know, that's not only a volume play for us but also is a margin play. In particular the two collections that we launched last quarter with the Diamond 10 technology are encouraging. And we have a number of other initiatives as well what on the product side. So we continue to, I think, see nice opportunities both for volume and mix improvements within the solid business.

[John Baugh:]

Okay. And then kind of the April price increase on Resilient, I cannot believe that was just on commercial products and you’ve – in the past, have relatively good success there. Am I mistaken on that? Any update on that? And how do you think the May solid increase is going to go?

[Don Maier:]

Yes, so I'll comment and then I guess, Ron, if you have anything to tag on then that would be fine. But I would say, so far, we've been very close to our distributors. And obviously, there is -- these inflationary pressures that we're seeing are not unique to Armstrong, they span the entire industry. And at the same time, we want to make sure that we're not getting our price out in front of us competitively and seeing the share impacts. So thus far, way too early probably to make a comment, but we feel working closely with our distributors that we're going to be able to get that right mix of achieving the price increases and realizing that to offset some of the inflation that we're seeing. Ron, would you like to add?

[Ron Ford:]

I would echo that. This is an industry-wide challenge, in fact, it's a business-wide challenge in the country right now, among them freight, for example. You're hearing them on every earnings call you listen to. We're not unique in that regard. And so the market is fully aware of the fact that this is necessary. And our customers are fully aware that this, in no way, is sort of a margin grab on our part, it is merely a matter of trying to recover these costs and also, as Don mentioned, stay competitive. So our confidence is reasonably high and our ability to -- to the conditions are right for us to achieve price realization.

[John Baugh:]

Thanks for that. And then my last question is on the distributor change. Is there, I guess, the few context we've made, it sounds like the larger distributors are excited about this change but some of the smaller ones might struggle a little to take on some of the processes that you were doing for them. And I guess my simple question is there might be some pluses and minuses [indiscernible] plus. But are there any distributors who are pushing back? And if so, how do you deal with that?

[Don Maier:]

Yes. So no distributors are pushing back. As I indicated in my comments, we are working through a lot of the details with them as we speak. And we have a couple of quarters here to get ourselves fully ready for the transition. I would say that the capabilities of our distributor are all very good. Some of them are excellent. And so we are working to get everybody to that excellent capability standpoint.

[John Baugh:]

Great. Thanks for answer my questions and good luck.

[Don Maier:]

Thanks, John.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Don Maier for closing remarks.

[Don Maier:]

Thank you, operator. And thank you everyone for joining us today. We appreciate your interest in Armstrong Flooring, and we look forward to updating you on future calls. Have a great day.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.