Armstrong poised to deliver on its leadership position

Home Inside FCNews Armstrong poised to deliver on its leadership position

 January 20/27, 2014; Volume 27/Number 19

Tom Mangas, Armstrong’s executive vice president and CEO, Floor Products Worldwide, has been on the job for two months after his promotion from CFO to replace the retired Frank Ready. Mangas arrived in Lancaster, Pa., four years ago after nearly 20 years at Procter & Gamble, where he served as vice president and CFO of the Beauty and Grooming Division, a $28 billion business that includes brands like Gillette and Head & Shoulders, and the $17 billion Fabric Care Global Business Unit, which includes brands such as Tide, Bounce and Downey. Together with Kevin Biedermann, senior vice president, Armstrong Residential Floor Products-N.A., the pair is poised to lead Armstrong through a recovering landscape. FCNews publisher Steven Feldman recently spoke with Mangas and Biedermann in a wide-ranging interview.

Tom, you’ve been in your new role for nearly two months. Initial thoughts?

Mangas: This is a great business. I’m honored and pleased to lead it globally. The Armstrong brand has a terrific heritage, great products and great customers. Right now I’m still in the honeymoon phase. I’m in Germany now, China last week and India a couple of weeks ago.

What attracted you to Armstrong four years ago?

Mangas: I wanted to be the CFO of a public company. I thought there was an opportunity to drive a substantial operational turnaround. The timing was great and I had the skills they wanted. In addition, the role offered the opportunity to gain experience in areas where I had little, like investor relations, providing me the chance to further develop my skill set.

What’s been the greatest challenge to this point?

Mangas: The challenge is to learn the products and key business drivers of the flooring business. I have been participating on the strategy development side over the last few years, which included plant expansions. Now I’m in listening mode, gathering information, listening to people’s points of view.

Have you set any long- or short-term goals?

Mangas: I’ve certainly learned the strength of this business is founded on quality, service and innovation. That’s something I will look to build on in the years ahead. I will also look to build on our long-term customer relations. I believe in our go-to-market model we have been pursuing and will try to figure out ways to get closer to our customers in the years ahead. But overall, my goal is to lead a recovery in America and worldwide.

Give me one or two ways in which your overall view of the industry and Armstrong may differ from that of your predecessor.

Mangas: First, I think Frank Ready was a terrific business leader who left a strong legacy. I think one of the opportunities for our flooring business is to act more globally, tie together the innovation stream so we can move innovation across the world. I believe a key is to service customers and deliver a stronger cost profile. The other thing I want to work on with the team is putting this organization in a posture of growth and accelerating that growth. Unfortunately, the whole industry has had the burden of a significant market downturn since 2006. So, we have been in retrenchment mode. We closed more plants than we built, and that reflected declining sales. I’m thinking with the investments we have made in Asia, we can be a more aggressive company.

You’ve been spending a lot of time abroad. What have you been doing?

Mangas: I was in China last week spending time at our two flooring plants that produce product for the local markets and just opened in 2013. I spent one day learning about their challenges, and the other day was spent on the commercial side. What is our selling organization capability? Do we have the right product portfolio? Primarily making sure we are prepared to deliver on our commitments in emerging markets.

What are these emerging markets?

Mangas: Emerging markets include China, Russia, India, Southeast Asia and the Middle East.

It’s no secret your third-quarter earnings were not on par with some of the other flooring companies. What contributed to that?

Mangas: I think we blew it out of the water on the top line. Unit growth on wood was up 20%. But, the bottom line was clearly a cost story and a price mix story. Unfortunately, we have had to talk about it two quarters in a row where we got behind the eight ball in green lumber. We did not have enough confidence in first quarter 2013 volume. In fourth quarter 2012 we had negative volume, and we didn’t get our inventory volumes right. We were found short on green lumber, which drove pricing higher, and we couldn’t catch up fast enough with pricing for the next three quarters. We also had to ramp up crewing; we had to hire 400 people to staff the wood plants, so that was a productivity drag. We took three price increases starting in December 2012, but there is always a period of a learning curve.

If you look specifically, the resilient segment over the first three quarters was strong on the bottom line despite weak worldwide sales. The big disappointment was wood. However, we think our wood results are as good or better than any other company. Compared to the carpet company that also sells hard surface, their percentage of wood to the overall business was not as impactful. Most of the direct wood companies are privately held and don’t disclose anything. We really don’t have a comparative of a public wood company.

Could you have done anything differently?

Mangas: We could have bought more wood at the end of 2012. The story line is truly that the industry grew much faster than anyone expected. Still, we had a lot of crews working, maintained quality and moved through those costs. When lumber stops going up, we hope we will see a better balance between sales growth and earnings growth.

Biedermann: I think it is a terrific business. I don’t want anyone to get the impression something is structurally wrong.

There are rumors that Armstrong was locked into some pricing situations with large builders, retailers and the big boxes. Any truth to that?

Biedermann: No. We do have agreements that allow us to secure volumes, but they also allow for price increases. We have a diverse business and initiated price increases across all channels as appropriate given the raw material increases already discussed.

Do you see any abatement in lumber prices this year? What can Armstrong do to ensure profitability returns to this category?

Biedermann: Lumber continues to go up. It did every month last year and is still going up. Until it stabilizes we, like everyone else, will be behind the curve.

Mangas: Obviously a high priority is to restore wood profitability, and Wall Street anticipates that.

Biedermann: What can be done? Tried and true practices. It’s all about the products. Nothing has fundamentally changed in the industry. It’s about educating retailers and inspiring consumers.

Back to the rumor mill. We heard Armstrong is going to de-emphasize glass-backed sheet and instead focus more on StrataMax. True?

Biedermann: No. I think people might have been talking about a statement we made about StrataMax in property management because of its superior rip-tear-gouge performance. It’s a terrific product for that. Across all segments, we like our entire residential vinyl and commercial portfolio. We are heavily invested in felt products, we are invested in glass here in Lancaster, and we are bringing out some great designs at Surfaces. We don’t see one product as better or worse.

Can Armstrong still make money with glass given how some companies are selling at a low price point?

Biedermann: We like the category, and we think we can be successful selling it. Like anything else, if you just focus on commodity products, it’s a tough business. There is a wide range of products we and others offer with compelling features and benefits. We have a portfolio that’s successful, good retail partners that work with us and make money on the product and consumers love it. We believe glass is not a commodity market. The CushionStep products we are rolling out in the mid- to upper-end are beautiful and have compelling performance. The important thing is to be able to talk about features and benefits, inspire, educate and successfully close the end user.

Shaw recently announced it would be the fourth company to build an LVT plant stateside. When will yours be up and running? Will you still import some LVT?

Biedermann: We are planning to be operational around second quarter of 2015. We are envisioning that we will still have a need [to source] some products. We will retain our relationships with our strategic partners. While there are some products we are not planning to produce in the plant, the bulk of the products will be produced here. It is an insourcing strategy. Hopefully the plant will be full very quickly, and then we can think about manufacturing more or sourcing. We will have to look at the market opportunities at that time.

It seems every other minute another company is getting in the LVT game. Does the category risk commoditization, like laminate has in many cases?

Biedermann: I don’t see that. Sheet has been around forever. You have product that’s very inexpensive and product that’s $4 or $5 a foot. It depends on your ability to innovate and how you differentiate from everyone else. I don’t view LVT as commodity at all; it depends how you market, how you differentiate and how you promote why consumers may not want commodity products. We think there is room to grow.

LVT is a lot different than laminate. Laminate is wholly dependent on HDF production. A lot of the manufacturing cost is based on the HDF board. The market for HDF board is non-flooring; it’s furniture. The vertically integrated companies in Europe can make a great deal of HDF, which can be sold inexpensively. LVT doesn’t have that scale hurdle. There are fundamental differences globally in laminate and LVT.

How has Armstrong’s ownership changed over the last couple of years, and has it been for the better?

Mangas: When I came here, 65% of the shares were concentrated between the asbestos trust and [private equity firm] TPG Capital. Since the fourth quarter of 2012, these two shareholders had three sale events, where they  reduced their ownership to 53% in November 2012, 36% in August 2013 and 25% in November 2013. Armstrong repurchased $260 million of stock as part of the August sale. We are now 75% public. TPG always treated us as a public company and its support and involvement on our board provided the fuel to help drive our emerging market strategy.

What do you see as the challenges heading into 2014?

Biedermann: We think the challenges and opportunities will include being ready with a fully integrated, vibrant line when remodel comes back. We haven’t seen that much growth of remodel, although we believe there is pent-up demand out there. Having products for different construction types, different  needs and different design tastes is a key to winning in the market. The challenge  is in educating consumers and helping them understand the full value of their options. We want to make sure they get the best product to meet their needs and are comfortable making what can be a significant, discretionary purchase.

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