Armstrong Flooring, Inc.
Q4 2018 Earnings Call Transcript

Published: 5 Mar 2019

[Operator:]

Greetings. Welcome to the Armstrong Flooring Incorporated Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now turn the conference over to your host, Doug Bingham, Chief Financial Officer. Mr. Bingham, you may begin.

[Doug Bingham:]

Thank you for joining us today for Armstrong Flooring's fourth quarter 2018 earnings conference call. I'm joined by our Chief Executive Officer, Don Maier. 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 two 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 laws. In addition, our discussion of operating performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures to the most directly comparable GAAP measures is included in the press release and in the appendix of this presentation. As a reminder, in December we completed the sale of our Wood Flooring business. As of the fourth quarter 2018, the Wood Flooring business is now classified as the discontinued operation amounts for the prior periods have been reclassified to conform to this presentation. The discussion of our results and business updates will be focused on our continuing operations, which is entirely resilient. 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 fourth quarter and full year 2018 earnings call. Today, I will discuss our operating highlights and business activity. Doug, 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. I'd ask that you turn to page three, which provides some key highlights and updates. Full year 2018 results reflect our many initiatives to innovate new products, manage costs, drive productivity and enhance our portfolio. During the year, we grew sales 3.4% on strong volume growth in Luxury Vinyl Tile, or LVT as well as higher selling prices across many product categories. On this growth, we delivered an adjusted EBITDA margin of 7.9% in the face of significant inflationary pressure, which continues to impact the industry. We delivered another year of positive free cash flow impart helped by the timing of working capital investments and CapEx spend. In December, we completed the sale of our Wood Flooring business at an attractive value, representing 7.2 times that former segment's trailing 12 months EBITDA and generating net proceeds of $90 million. We are pleased to now be operating as a focused resilient flooring company. We have a strong portfolio of award winning products, which provide us with a more attractive growth trajectory and a stronger margin profile. Our team is committed to becoming the leader in this attractive area of the flooring industry. We ended the year with a strong balance sheet that increases our flexibility to invest in growing our resilient categories that have seen solid returns on our investments in innovation, capacity enhancements, service and go to market capabilities. Combined with our focus on rationalizing costs, the positive evolution of our company would the increasingly evident as we streamline processes, elevate operating performance and deliver on strategic priorities. Looking at the transformation of our business on page four, we are confident that fundamentals remain strong for future growth and resilient, where we have spent the past several years enhancing our exposure to the right product categories, end markets and channels. LVT is now our largest product category, representing nearly a third of 2018 sales. Vinyl composition tile, which is primarily commercial represents just over one quarter of our sales. Commercial and residential sheet together are also around a quarter of our sales. With the mix of our business more heavily weighted towards LVT, we expect to better realize the significant growth in that category, which continues to take share from all other flooring categories. Several actions have shifted our business towards commercial in recent years, including the purchase of additional VCT assets in 2017 and a realignment of our sales and marketing efforts to focus more heavily on commercial and national accounts in 2018. With the completion of the Wood sale, our sales are now approximately 60% commercial, where our margins are generally better. We believe our current end market mix is not only more balanced, but situate us for stronger and more predictable results. Roughly three quarters of our sales are for renovation projects, which provides a less cyclical and more stable growth dynamic. Additionally, approximately 75% of our 2018 sales were through distribution, where we are able to leverage the local expertise of our distribution partners to get the right products in front of end users with exceptional service. Moving to our four strategic priorities on page five, all of these attributes I just described are aligned with our goal of gaining leadership in LVT, supported by our growth strategies to drive innovation across our entire product portfolio, strengthen our distribution partnerships, particularly in commercial categories and leverage our strong position in other commercial categories. In LVT, we achieved double-digit growth for the full year and fourth quarter helped by our new innovative products that have allowed us to grow faster than the market. Following recent tariff developments we believe there are meaningful opportunities to increase output of our domestically produced LVT, primarily through investing in and repurposing existing assets. In combination with our strategic sourcing initiatives, we are poised to continue taking share in LVT. The Armstrong Flooring LVT portfolio was recognized by floor covering weeklies, ReCo Market Intelligence Report, as number one in retail, residential brand recognition, and by the Spec Star Award by Designer pages as the top specified brand by architects in commercial applications. These independent recognitions validate our investments in innovation and support our growth objectives in this attractive category. Innovation remains key to our success in all of our flooring categories, including advances in design, durability, installation, maintenance and material composition. Our proprietary award winning Diamond 10 Technology continues to have good traction with customers, in LVT, VCT and vinyl sheet. Three categories which represent collectively about 85% of our sales. At the International Surfaces Event in January, we debuted several new products in LVT, including larger format alternative plank with Diamond 10 Technology and exciting new designs across our Rigid Core portfolio. In addition, we highlighted our domestic VCT with Diamond 10 Technology, which reduces total cost of ownership by 40%. Beyond these products, we have an exciting pipeline and we plan to continue to invest in our broad and compelling portfolio of high demand products. In distribution, in 2018, we completed our go to market pivot, which has allowed us to allocate more of our marketing and sales efforts on commercial and national accounts. But we believe we can better leverage our scale. We anticipate that our increased exposure to commercial through our exclusive focus on resilient will amplify the benefits of this strategy. On the residential side, the transition has been smooth and our distributors are in a position to provide the merchandising support for the retail customers customized to their local needs. Not only will this increase the efficiency of our sales ecosystem, but it will also better serve local customers. We look forward to gaining additional share of wallet and aligning ourselves with partners who are best positioned to support our growth strategy. The shift in distribution is directly aligned with our strategic objective to leverage our strong position in commercial, which represents a significant portion of our LVT products and the majority of our traditional categories. Our team is dedicated to improving our performance in commercial categories through innovation and cost efficiencies to more effectively grow our market presence. Overall, we are actively augmenting our business across our products, channels and operations to drive better performance. We have simplified our business, improved our financial profile and strengthened our balance sheet to take advantage of significant opportunities ahead. We are committed to investing in our business to strengthen our position as a leader in resilient flooring. I will now turn the call over to Doug to walk through the details of our financial performance.

[Doug Bingham:]

Thank you, Don and good morning to those on the call today. I'll begin with the review of our full year results on page six. As a reminder, our results reflect our continuing operations, which are purely resilient. For the full year 2018 net sales improved 3.4% to $728 million as compared to $704 million in the prior year. The improvement in net sales was due to favorable mix and overall higher selling prices in response to inflationary pressure. LVT grew double-digits, helped by new products, market gains and the growing popularity of that category. Overall volume was lower due to softer shipments in traditional categories, especially residential sheet, which is now roughly 10% of our total sales. Full year 2018 adjusted EBITDA improved 3.3% to $57.5 million as compared to $55.7 million in the prior year. The increase in adjusted EBITDA was primarily due to higher net sales, improved productivity and lower SG&A spending, which more than offset significant input cost inflation pressure. Excluding adjustments in connection with the Wood Flooring business divestiture adjusted EBITDA under our prior basis of presentation was $59 million in 2018. Now looking at our fourth quarter results on slide seven, in the fourth quarter net sales decreased 3.5% to $154 million as compared to $159 million in the fourth quarter of 2017. The decrease in net sales was primarily attributable to lower volumes partly offset by improved mix and overall higher selling prices in response to inflationary pressure. While LVT achieve double-digit growth in the fourth quarter, our overall volume was impacted by two macro factors, particularly into year-end. We experienced soft end market demand, which was further compounded by a departure from normal seasonal trends and the timing of customer purchases. This was due to ongoing uncertainty regarding the eventual outcome of U.S. tariff negotiations on Chinese imports. To explain that a bit more, in the third quarter of 2018, we announced price increases on imported product, effective October 1st, in response to the first round of 10% tariffs on Chinese imports. We also proactively announced further increases effective January 1st with the expectation that tariffs would increase to 25% as previously announced by the administration. The tariffs had a large impact on customer buying behavior across the overall market. In the middle of the fourth quarter, the January 1st tariff increase was called into question and eventually delayed by the administration. This created an air pocket in demand in the fourth quarter as a result of significant customer purchases pulled forward in the third quarter of 2018 ahead of price increases implemented in October. This was followed by muted pre-buy activity in the fourth quarter due to the delay of our tariff related price increase originally scheduled for January 1st. Therefore, we experienced elevated inventory levels in the distributor channel during the fourth quarter. Lower sales and increased input cost inflation were the primary drag on adjusted EBITDA performance for the fourth quarter, partially offset by improved productivity and cost savings. Turning to our free cash flow and liquidity on slide eight, during 2018, we generated operating cash flow of approximately $63 million consistent with prior year. The timing of networking capital movements in Q4 was a favorable factor in this performance. For the full year, we invested $35 million on CapEx, which for a third straight year was below our run rate depreciation. Overall, we were pleased with our free cash flow performance of $27 million for the year. In December 2018, we received net proceeds of approximately $90 million upon completing the sale of our Wood business. As a reminder, these proceeds remain subject to a customer in networking capital true-up in the first quarter. In combination with cash generated by operations, we ended 2018 with a strong balance sheet and net cash position. We have significant resources to invest in ongoing initiatives and pursue additional growth opportunities. Our capital allocation objectives remain unchanged with our focus on funding internal growth initiatives, and pursuing M&A opportunities to support our growth strategy. In addition, we expect to return a portion of the proceeds from the sale of the Wood business to investors in a time and manner to be determined by the board. Turning to our full year outlook on slide nine, with our resilient focus, simplified business and refined strategic objectives, we are positioned to improve the performance and profitability of our company. We expect to continue to grow sales at or above the market rates of growth within each of our respective categories. For the full year 2019, we expected adjusted EBITDA to be in the range of $58 million to $66 million. We continue to experience cost increases in energy, transportation, raw materials and operating costs, which we expect will be a headline for 2019. We have implemented additional price increases of 4% to 6% based on inflation and freight in select commercial and residential products, effective on April 1. Our team has done a great job in anticipating and overcoming the challenges presented by inflation. We expect the impact of these pricing actions, combined with additional productivity gains and other cost savings will help to offset continuing inflationary pressures. With this in mind, we expect EBITDA to be weaker in the first quarter year-on-year. We anticipate full year EBITDA growth to be heavily weighted towards the second half of 2019 as the market strengthens and elevated inventory levels in the channel are worked down. On the P&L our effective tax rate could change significantly quarter-to-quarter, but we expect our tax rate to be approximately 25% in 2019. In regards to cash flow, we expect capital expenditures to be in the range of $30 million to $35 million. Maintenance CapEx should continue to approximate 2% to 3% of sales, with the balance of the spending budget for high return investments. As I mentioned earlier, our networking capital at year-end was better than expected, primarily due to the timing of working capital flows, particularly receivable collections. In addition, the timing and uncertainty around the second tariff increase led to software sales in the latter part of the quarter, which resulted in fewer outstanding receivables at year end. With this in mind, in the first quarter we expect operating cash flow to be significantly negative as we both rebuild working capital of year-end lows and also experience normal seasonality of first quarter cash usage. While we are not providing a full year 2019 free cash flow outlook, we expect to build cash as we move past the first quarter. With that, I will now hand the call back to Don for closing comments.

[Don Maier:]

Thanks, Doug. I’d ask you to turn to slide 10, please. We are encouraged by our entire team's performance during 2018, along with our brighter prospects of our simplified resilient business. We are focused on LVT leadership, supported by our strategic priorities to enhance innovation across our award winning portfolio, strengthen our distribution partnerships and leverage our number one position in traditional commercial categories. Combined with ongoing cost savings initiatives, we believe we are well situated to generate improved results and drive further returns for our shareholders in 2019 and years to come. Operator, we are now ready to take questions.

[Operator:]

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from John Baugh, Stifel. Please proceed with your question.

[John Baugh:]

Good morning and thanks for taking my questions. Maybe Doug, you could clarify again the product mix of sales in 2018, I guess, 30% for LVT, 25% for VCT. And then I kind of missed the rest, could you clarify that again?

[Doug Bingham:]

Sure. Yes, so 25% is for sheet products, including residential and commercial, that breaks out to be about 15% commercial 10% residential. And then those three categories that, you mentioned, LVP at around 30%, BCT around 25% and sheet at 25%.Those round numbers kind of add up to be about 85%. So the remaining 15% are installation tools, adhesives kind of all the other stuff.

[John Baugh:]

Okay. And then you mentioned, what residential sheet was down 10% of the mix at the end of 2018. Did I understand that correctly? And then, what was it say at the beginning of the year?

[Doug Bingham:]

Yes, so what we've said before was that in 2017 it was less than 10% of the total sales when we're about $1.1 billion and now we're saying it's about 10% of resilient only.

[John Baugh:]

Okay. And so if volumes for the year and I understand and appreciate anomalies in the fourth quarter. So volumes for the year were down a couple of percent and we assume that the LVT was up low to mid-teens or something at 30% of the mix, what imply the other 70% of your sales on the volume basis were down around 10%, is that right? Number one and number two, one of the categories is VCT and sheet that are under continued pressure and how do you think the volume with LVT growth in 2019 I'm sure projected yet continued declines in those categories. How does volume shake out in 2019?

[Doug Bingham:]

Yes, so roughly speaking, we did see declines in volume in residential sheet. That's been a consistent theme for a number of years. And then as you mentioned, we had the offset in LVT. And there were a few other kind of puts and takes in other product categories. As we look into 2019 at kind of category level, we see the same trends continuing on that we experienced in 2018. LVT expected to continue to grow very strongly, ratio continue to be challenged and other categories at greater or lesser extents will have similar patterns.

[Don Maier:]

Yes, John, this is Don. I think the other piece -- so I think your math I’ll have to work through it is about right on the volume piece that was offset by improvements in price and mix really across I think almost all the categories. So that netted out to the 3.4% growth for the year.

[John Baugh:]

Thanks for that. And then my final question is around the inflation stat, I guess, I’d love some details on what's your seeing right now in other words what are the raw material inflation you refer to is sort of in your inventory. And therefore you had to flow through your P&L versus maybe what you're buying raws for right now, what you're buying transportation for or energy for? Are we not going to see some relief on that number, at least sequentially if not year-over-year at some point in 2019. Thank you.

[Doug Bingham:]

Sure, yes. So just as a reminder, we saw inflation throughout 2018, which is created these year-on-your headwinds as we come into 2019. Because of that dynamic, it's going to be more pronounced the inflationary pressure in the first half. And our expectation is that our actions around price mix and productivity should more than offset those.

[John Baugh:]

So are we seeing any stabilization of overall materials or transportation costs right now?

[Doug Bingham:]

We've seen in some of the -- I think we purchased now we've also come out with a 4% to 6% price increase effective April 1st really geared towards trying to recover some of the inflationary headwinds that we've experienced.

[John Baugh:]

Great. Thanks, good luck.

[Doug Bingham:]

Thanks, John.

[Operator:]

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

[Unidentified Analyst:]

This is Ronnie Core [ph] on for Mike. Sounds like the inventory is go rectify itself by the middle of the year, could you just talk about maybe is there elevated inventory outside of LVT or is it almost exclusively related to LVT ahead of these tariffs and price increases?

[Don Maier:]

Yes, it varies by category. But the Q3 activities were largely skewed towards LVT given the tariff impact and then a general price increase. We saw softer end markets then through the fourth quarter in which -- so it didn't sell through at the rates we had anticipated in Q4. And so that's what's a bit of a hangover as we entered into Q1. A couple of our other categories in particular VCT, I would say inventory levels have returned to a normal levels. So we’ve seen the sell through work through any of the buying activities that were done in advance of the price increase back in Q3.

[Unidentified Analyst:]

Okay. And then just a follow up there, was there any industry LVT price weakness related to this pre-buy or was it merely a volume related drag?

[Don Maier:]

Yes, it was really more of a volume related drag and LVT prices in general, we haven't seen significant changes in the trends there other than for the tariff related impacts.

[Unidentified Analyst:]

Thank you.

[Don Maier:]

Thanks, Ryan.

[Operator:]

Our next question comes from Alvaro Lacayo, G Research. Please proceed with your question.

[Don Maier:]

Good morning, Alvaro.

[Alvaro Lacayo:]

Good morning, guys, how are you guys?

[Don Maier:]

Good? Got real quick on your name there.

[Alvaro Lacayo:]

I know. Well, first, congrats, Doug on becoming CFO. Just to start us up there. And then I just -- I appreciate the commentary on the usage of capital. Now you've gotten this big net cash position on the balance sheet. Maybe can you refresh us on how you're thinking about your leverage target ratios? And if there been any change in terms of you think about that? And then secondly, on the term loan portion of the debt outstanding that you guys had at the end of the year, would there be any prepayment penalties if you decided to pay off your debt in full?

[Don Maier:]

Good questions, let me tackle the leverage question first. We have not announced any change to our kind of target leverage ratio. I'll tell you a little bit at this point with essentially $75 million of net cash. It's a little bit of an academic question for the moment. In terms of our ratio 1.5 to 2 times, is what we’ve said previously.

[Doug Bingham:]

Our term loan we are able to prepay that without penalty, both the revolver portion as well as the term loan A.

[Alvaro Lacayo:]

Great. And then with regards to free cash, can you maybe talk to us a little bit about -- provide some color around the growth investments, you're making the growth portion of the CapEx? Can you maybe walk us through how we should be thinking about working cap as a percent of sales now that you're 100% resilient focused business? And then what kind of cash requirements are you going to have with regarding the post retirement liabilities / pension liability that you have on the balance sheet?

[Don Maier:]

Sure, so maybe let's start with the CapEx. So as we’ve talked about before, we tend to have about 2% to 3% of our capital spending is really geared towards maintenance CapEx. The remainder of that is geared for growth initiatives, capabilities and capacity things where we expect to generate a return. Working capital, I think you'll be able to see in our financials now that we've stripped out the Wood business. Working capital is much cleaner than it was before lower levels of working capital. And then I will just mention again, I mentioned this in the prepared comments that we ended Q4 at kind of a low point was a little odd with the receivables. If you look at our AR balance year-on-year it's down about $15 million. And so that kind of gives you a sense of the magnitude of that one. But going forward, we would expect that working capital would grow roughly in line with sales, although we always look for opportunities to efficiencies on that one.

[Doug Bingham:]

Other cash flow items, the retiree medical that liability primarily stayed with the resilient company after the separation we did not attribute very much of that to Wood. And in 2018, I think the cash outlay on that one was about $8 million.

[Alvaro Lacayo:]

Should have been similar in 2019?

[Doug Bingham:]

It will be similar. I think it may come down a little bit. There was a small portion attributable to this Wood business.

[Alvaro Lacayo:]

Okay. So I guess when you look at the EBITDA guide, and I know you guys didn't provide directionally what free cash flow will be. But I guess what would be the items you would highlight that would change dramatically the EBITDA to free cash conversion you guys have historically seeing?

[Don Maier:]

Yes, so, the CapEx and I think we've talked about that one net working capital, which again, I think we've addressed that with maybe a bit of an anomaly in Q1 of this year, but then should behave more normally. Cash taxes we expected those will be minimal until we burn through the $14 million NOL that we have in place. And then our new debt facility with a interest rate of just under 5% is what we're paying at current rates on $100 million and you could model that out, how interest rates go from here.

[Alvaro Lacayo:]

Great, thank you very much, Doug, and Don.

[Don Maier:]

Thanks, Alvaro.

[Operator:]

Our next question comes from Justin Speer, Zelman & Associates. Please proceed with your question.

[Justin Speer:]

Thanks and good morning. Thank you for taking the time. In terms of your CapEx it was about $5 million below I think what we were -- what you expressed last quarter in the fourth quarter? And your guidance on CapEx a little bit lower than what we were thinking? Just wanted to get some characterization on if that's A, if that's correct and B why?

[Don Maier:]

So, yes, so what we had said last quarter was that we'd be about $40 million as a combined Wood and resilient business. I think where we came in was pretty close to that it was a little -- we saved a little bit on the resilient side and saved a little bit on the Wood side. Resilient specifically last quarter, we said would we expect it to be about $30 million and we came in relatively close on that.

[Justin Speer:]

Got it, Okay, that makes sense. And then in terms of the repurposing of assets going forward towards more LVT. Can you help us to understand the mechanics there? How much maybe dollar capacity you have or manufacturing capacity you have for LVT purposes? And where you can take that by repurposing existing assets?

[Don Maier:]

Sure. Justin, look forward to sharing more probably here again in the next subsequent calls. But what we have announced is that we are wanting to add capabilities to produce domestic Rigid Core products but we believe that we can do that with repurposing some existing assets that we have, which should shorten the time to implement and obviously reduce the capital requirements. And that we have a fairly large engineering team that's been working on this project along with the product to make sure that we are entering the market with a differentiated offering. So I'm encouraged by the progress that has been made. We really don't have anything to announce at this point other than news should be forthcoming.

[Justin Speer:]

So you source most if not all of this right from Asia, and if we were to assume a no tariff scenario, do you think based on what you can’t communicate, but I'm guessing the fact that you're proceeding means that you believe that you can compete with that on a fully -- with Chinese imports on a fully landed basis excluding tariffs?

[Doug Bingham:]

Yes, we believe that we would not only have a competitive advantage from a differentiated polymer and product performance, but also at a an attractive cost basis.

[Justin Speer:]

And, we've seen a couple of competitors who have gone forth with some of their own proprietary approaches to Rigid Core production in large plants, large facilities. What distinguishes you from them? And do you think that you would see the same kind of like near-term setbacks that we've seen from some of your competitors with rigid production processes in terms of ramping? Do you expect that your approach will be different?

[Don Maier:]

So I think there's two things that you should consider when looking at that. Number one is we're -- we've been making resilient hard surface flooring for decades. And so our core capabilities center around the processes related to that. I would give you a different answer if we were trying to go build a carpet now somewhere where we don't have a lot of competency. Number two is as we demonstrated with the Stillwater Oklahoma repurposing a third benefit to the reduced capital and the reduced time is that you have a significantly lower amount of new processes that need to be tuned in and debugged and work through. So the more repurposing you can do, the less troubleshooting and ramp up time that is required. With the Rigid Core, it's not going to be as -- I think as simple and as quick as the as the Stillwater repurposing, but certainly is not at the other end of the spectrum as far as a greenfield site and all the challenges that you have with that.

[Justin Speer:]

And all that again and that's all within I guess I'm assuming that's all 2019 but that's captured within your CapEx guidance. The idea of this repurposing effort is captured in the CapEx guidance for 2019?

[Doug Bingham:]

Yes, so just to be clear, on the $30 million to $35 million of CapEx guidance that we’ve provided. That covers smaller investments, if we were to do something large, we would disclose and talk about that separately.

[Justin Speer:]

Got it. Okay, perfect. And in terms of the 4% to 6% price increase -- my last question. The price increase in April is associated with if you could relay that again for us. I think you said transportation costs, I believe in something else. And then, a follow up on that is maybe help us understand the high end and the low end of your guidance range. What, from a macro standpoint and from a -- maybe from a -- from this price increase standpoint, has to happen or not happen in order to get to the high end or the low end of that range?

[Don Maier:]

Yes, so the drivers that we saw throughout the course of 2018 remained the same drivers as Doug mentioned they’ve abated a bit, but are continuing to increase really in three areas, transportation and the shortage of transportation is continuing to drive that dynamic. Raw materials inflation and then energy. So those were the real three drivers that we saw, those are continuing. We are really looking just to offset the inflation with our pricing actions. And so to the extent that we see further reductions in inflation that we’ll take pressure off there. And obviously, it's all dependent upon that what happens in the competitive arena that we participate in. So we're obviously focused on letting the market set price and adjusting accordingly. So we're looking to offset those costs as we did in 2018 and 2019.And hopefully we'll see a continuation of the trend of inflation tapering off of a bit here.

[Justin Speer:]

Thank you, guys.

[Don Maier:]

Thank you, Justin.

[Operator:]

Our next question comes from Adam Baumgarten, Macquarie Group. Please proceed with your question.

[Adam Baumgarten:]

Thanks guys. Just on VCT, I know it's been kind of a tough road for volumes given share gains from other materials. And I guess now that you have the Diamond 10 VCT line out it's been out for a little bit. How is -- one, how is the adoption been? And two, do expect that to drive overall VCT volume growth in 2019?

[Don Maier:]

Yes, so we're pretty excited about the Diamond 10 story on VCT. The largest impact to VCT has really been staying concrete, not the LVT conversion you see in other categories. And with the addition of the Diamond 10 Technology, it's changing the overall cost of ownership of that flooring solution by 40%. And in essence positions it as a cost advantage now rather than cost disadvantage to stay in concrete. So that's been received and is being received extremely well, in particular, we're seeing on specifications coming in on the larger projects. Something that maybe was not fully contemplated that another positive is that you do see VCT going into a lot of main street applications, which are smaller square footage installations. And as such, the cost and the effort to go in with the all of the polishing equipment and what have you on the initial install is fairly disruptive. And this Diamond 10 Technology has created a VCT product that doesn't require those processes and as a result is increasing its appeal in the main street applications as well.

[Adam Baumgarten:]

Great, thanks guys.

[Don Maier:]

Thank you, Adam.

[Operator:]

Our next question comes from John Baugh, Stifel. Please proceed with your question.

[John Baugh:]

Thanks for allowing me. Just one quick follow up, I was curious Don, how conversations now that you have divested Wood have perhaps changed with your distributor customers. You're certainly more focused that I have seen talking to you have less overall volume with them. And I'm just curious how if you compare the discussion say pre-divestiture, post investor with your big distributors. Thank you.

[Don Maier:]

Great question, John. And I'm sure you'll follow up with the distributors directly as well. But it's gone extremely well, frankly. I think they all understand the move that we made. In most cases the distributors had alternative wood sources, but as well it's been business as usual frankly, in the transition of the Wood business. So we've really done everything we can. And I continue to do that through providing the transitional service elements to the Wood business to really make this as pain free as possible. And then on the plus side is really allowing us to double down our focus and attention on the areas that we can really add value to our distributors, driving that commercial business for them where we have a significant capability with our dedicated sales force, and then obviously bringing innovation so that they have a differentiated offering in LVT and all of the other product categories. So we were -- it is 10 weeks I guess into the into the transition, but so far it's gone going extremely well. And I think is a real credit to all of the work that the team put in advance of this to make sure that we didn't have any drop balls in handing this business off to AIP.

[John Baugh:]

Great, thanks. Good luck.

[Don Maier:]

Thank you, John.

[Operator:]

We have reached the end of the question-and-answer session. Now I would like to turn the call back over to Don Maier for closing remarks.

[Don Maier:]

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

[Operator:]

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