February 4/11, 2019: Volume 34, Issue 18
Within the past five years, Armstrong Flooring has developed several strategic initiatives to strengthen the business. Among these moves included separating from the ceilings business, exiting the laminate segment, reconfiguring some of its distributor partnerships and alliances, and, more recently, selling its wood flooring operations to American Industrial Partners (AIP).
FCNews publisher Steve Feldman and Reginald Tucker, managing editor, sat down with Don Maier, Armstrong Flooring president and CEO, at Surfaces to talk about where the company stands today. Following are excerpts of that interview.
How would you describe Armstrong Flooring today?
We’re really excited about 2019 as we enter the market as a pure-play, resilient player. We’re doubling down our efforts to go after the LVT business in a big way. In wood, we’ve seen a continuation of solid products moving to engineered, but more engineered product has opened up markets to the Asian suppliers, creating price compression in that category. We’ve been struggling to really figure out that part of the market. In 2017, 40% of our revenue was wood but only 10% of our profits came from wood. The other piece of it is about 80% of my time was trying to fix wood. If I’m spending 80% of my time, guess what the rest of the organization is doing?
In AIP we have found a company that was interested in buying that asset from us, which has allowed us to really focus our efforts where we believe we can make a difference—in the resilient category. We generated about $90 million from the transaction, but more so our focus on really being able to go drive innovation and growth in our resilient portfolio with a goal to be a leader in LVT.
When you say leader in ‘LVT,’ is it LVT, WPC and SPC or primarily that SPC rigid board category?
LVT—the whole ball of wax. Obviously, not WPC given the patents that are out there, but we think our rigid board is a superior product. What makes it superior?
Well, its dimensional stability, we believe, is better. Its indentation characteristics are better and, of course, we believe we have better visuals. What is the product’s name?
It’s just Armstrong Rigid Core. We introduced it here three years ago. It’s still growing extremely well for us. Of course, it has morphed now into larger plank formats, same structure, and then of course the new technology that we brought with our Pryzm product. Are you a believer in these new products we are seeing—a rigid core with a 1.2mm wood veneer on top?
The performance of that product is different from LVT, which is more balanced. Given the environment that it’s going to be exposed to, warping, movement and buckling will become an issue. Armstrong strongly believes in making sure our products perform to our specifications. While that product will work well if the environment is consistently maintained, we don’t believe it is something that’s a real viable option. Can you provide a snapshot of what Armstrong Flooring’s business looks like today? How would you break down residential vs. commercial?
Our wood business was almost all residential. In selling the wood business, we went from 60% residential vs. 40% commercial to flipping that. We’re now 60% commercial and 40% residential. It’s important to note that doesn’t mean we are abandoning the residential business; it’s quite the contrary. Do you expect that ratio to be the same five years from now or would you rather see a 50/50 or 70/30 split?
By luck of the draw that’s where we’ve landed, and I think 60/40 is a healthy mix. There is a lot less volatility in the commercial business. Although, I like having exposure to the residential side of the equation. But in the end, I feel like 60/40 is a good mix for us. What comes to mind when I say VCT?
VCT is the largest in terms of square footage—about half of all hard surface commercial flooring that is installed is VCT. We have a full breadth of products, both PVC based and non-PVC based. Our scale allows us to have manufacturing across all of North America—a big component of which is shipping. So, by having that network of facilities it not only gives us a service capability that others don’t have, but a cost-favorable position as well. Is commercial sheet a declining business?
No. It’s growing slowly but consistently, thanks largely to the healthcare segment but not exclusively. We do sell a bit in transportation as well. It is the right product for a sterile environment. It has a unique value proposition out in the marketplace. Are you happy where you are in that category today?
I would love to see more hospitals being built, but that’s really what governs that business for us. The introduction of Diamond 10 technology has given us a differentiation story to tell out in the marketplace. What about commercial LVT?
It’s growing quickly, just not as fast as residential. Residential sheet?
I think it’s underappreciated. Is Armstrong’s sheet business growing both in dollars and square footage?
In total, yes. It’s still an important part of our portfolio, and it’s still a profitable part of our portfolio. It’s just not as significant as it used to be. Residential LVT?
Growing like crazy. Largely being driven by the rigid and SPC products. We’re still seeing good growth in the flexible formats as well. We see that part of the market still accelerating with no signs of slowing down. What is your feeling on the next timetable in terms of the tariffs? Do you think we’ll see some movement on that by the March deadline?
All we can really go by is what the government has said these past few months. I noted back in November that there might be a possibility where [the two sides] could work something out. There’s a tremendous amount of back pressure on China to resolve this issue, and obviously I think there’s a lot of pressure to do that from the U.S.’ standpoint as well. What has been the overall effect of that 10% tariff on your business?
For Armstrong, the 10% was pretty much a non-issue. It was a non-issue because there were a number of pieces of the overall supply chain that were able to absorb it, and each one of them took a little bit of a hit on that. Including the consumer? Did the end user feel it?
No, I don’t think it got to the consumer. Right off the bat, you saw a devaluation of the Chinese currency, which absorbed a good portion of it right there. There was a bit more flexibility and elasticity with the suppliers, there was a bit of elasticity with the distributors, then the retailers. I don’t think the end consumer saw it at that level.
But there’s no more stretch left, or not much. If there is another incremental 15% increase, I think it’s going to be one that will actually flow through to the consumer, and that has the potential to impact demand.
Early last year, you talked about leveraging the experience of your distributor partners to help market the brand. What specifically did that entail, and how has that worked out?
We basically moved the responsibility for merchandising displays and samples to our distributor partners for the residential business. This is already working out well as they’re able to be very targeted as to what their markets need. In many cases, they’re manufacturing those components themselves. They’re able to be faster, more responsive and I think more economical for the retailer, which is all good for them and the retailer.