Beth Riley – Vice President Investor Relations and Communications. Michael Lockhart – Chairman, Chief Executive Officer Nicholas Grasberger – Senior Vice President, Chief Financial Officer

John Baugh – Stifel Nicolaus Dennis McGill – Zelman & Associates Jim Barrett – C. L.

King [Maria Vilanovos – Longbow Research] [Andrew Fineman – Meridian]

Good morning and welcome. Please note that members of the media have been invited to this call and the call is being broadcast live on our website at armstrong.com.

With me this morning are Mike Lockhart, our Chairman and CEO and Nick Grasberger, current our Senior Vice President and CFO. Hopefully you've seen our press release this morning.

Both the release and the presentation that we will reference during this call are posted on our website in the investor relations section. In keeping with SEC requirements, I advise that during this call we will be making forward-looking statements that involve risks and uncertainties.

Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong, please review our SEC filings including the 10-K filed today.

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 GAAP measures is included in the press release and in the appendix of the presentation.

Both are available on our website. With that, I'd like to turn the call over to Mike.

Good morning everybody and thanks for taking the time to participate in the call. As you have no doubt repeatedly heard, the markets for building materials declined substantially in the fourth quarter of 2008.

Our residential and commercial orders contracted dramatically in the final weeks of the year and this is reflected in our results. Inventory reductions by retailers and distributors had a significant adverse affect of our sales.

In the fourth quarter, inventory adjustments reduced Armstrong floor products North American sales by over 10%. Excluding the benefit of foreign exchange, sales declined 14% for the quarter and 6% for the year.

Adjusted operating income was down more than 50% for the quarter and 14% for the year which is better than our peers. We continue to generate cash, a total of $140 million of free cash flow for the year and our balance sheet remains strong.

We are improving the factors within our control. We're improving product mix and price realization while reducing manufacturing and SG&A expenses.

I'd like to take a second just to talk about how we think about the downturn. The economic downturn in the fourth quarter hit America with an unanticipated savagery.

Sales collapsed and everyone's running hard to size their businesses for 2009 volume no one has confidence in. We're not different, except that we expect to be profitable and generate cash in 2009.

Here's how we're thinking about the downturn. First, it will be deeper and longer than people think.

Second, we have an opportunity to come out of the downturn substantially better positioned than when we went in. We can't do anything about the market, but we can work on price, volume, mix and cost.

In terms of price, first of all, we're covered inflation where we see it, particularly in building products where we are not seeing the kind of raw material price reductions you might expect. We won't initiate price reductions but we'll aggressively match competition when they do.

We're not going to give up share to competitors who want to compete on price. On volume, we'll continue to offer good quality and great service and we'll continue to invest in new product development albeit at lower levels.

We have and will manage production capacity down. We've closed several floor plants in the last few years.

We announced the closing of two more this year, and you can expect that we will reduce capacity in ceilings and in cabinets to bring our capacity utilization rates up to over 80% in those businesses. We will continue to invest in the plant we're keeping open, both in terms of capital and process improvement.

We have to continue to become more productive in our plants and our European problems are largely a result of underinvestment in plant infrastructure. We'll work to create in our SG&A functions the process improvement mentality which has enhances our manufacturing productivity.

We have and will reduce SG&A capacity as volume decreased where we've reduced recruiters, customer order service people. We'll also de-integrate where possible bring buying services by the drink where we need them.

e will continue to invest in new products, advertising and promotion to support the Armstrong brand as a safe haven for our customers. Let me return the year's results.

Building products, our ceilings business continues to perform well and delivered a record year in increasingly difficult markets. In the fourth quarter, declines in the U.S.

commercial markets accelerated. Western European markets slow and Eastern European and Asian markets faltered.

For both the quarter and the year, product mix improved and SG&A expenses were modestly reduced. Price realization offset inflation in energy and raw materials and Waves income increased for the year, but declined in the fourth quarter.

North American resilient sales declined about 16% in the fourth quarter. Residential volumes fell more than 20% and commercial declines were in the low double digits.

For the year, sales were down about 5% with 10% lower volume offsetting better price realization and improved product mix. For both the quarter and the year, the adverse of lower volume and raw material cost inflation on operating income significantly exceeded the benefits of price realization, lower manufacturing and SG&A costs.

In constant dollars, European resilient sales decline 5% for the quarter and were flat for the year. Both periods benefited from improved product mix and modest price increase.

Volume decline accelerated in the fourth quarter. For the year, lower sales and higher raw material costs increased the operating loss in European floor.

Fourth quarter operating results were flat compared to last year. Before I turn it over to Nick, I will take you through what we're going to do to turn the European floor business to profitability.

Wood flooring, which is almost an entirely a U.S. residential business saw 34% lower sales in the quarter and 21% lower sales for the year.

The margin effect of reduced volume more than offset lower manufacturing and SG&A costs, reducing income by more than 60% for the year. Cabinets is also a U.S.

residential business. It experienced sales declines in excess of 20% for both the fourth quarter and the year which resulted in operating losses in both periods.

2008 was an increasingly difficult year as our fourth quarter results demonstrate. 2009 will be even more challenging.

Nearly every key residential and commercial market around the world is expected to decline significantly. In the U.S.

housing markets, inventories of unsold homes are high. Home prices are falling.

Credit remains tight. Consumer confidence has plummeted.

Unemployment is growing and not surprising, no one is spending money. Our outlook assumes a further 30% decline in housing start and a low double digit decline in residential renovation.

Pessimistic perhaps, but there is a risk that conditions could be even worse than we expect. The weakness in domestic residential market is hardly news.

In 2009, that pressure on our results will be exacerbated by unprecedented declines in commercial markets. Rising vacancies, lack of credit availability, overextended state and local budget and the broad general business weakness have caused commercial projects to be cancelled or delayed and renovation spending to be drastically curtailed.

As a result, we estimate that our commercial ceilings market will decline 15% this year. That's about the total three year peak to trough decline of the past few downturns.

Western European markets are also expected to contract significantly and Asian markets are forecast to be mixed with significantly softer than this year. Despite the dire nature of the macro economic outlook, we will remain an industry leading profitable company.

Despite the record volume declines in this segment, we expect Armstrong Building Products to have attractive margins, generate cash and realize modes price and mix improvements. We've removed $55 million of cost from the business and we're not done.

Over the past few years, every one of our businesses have benefited from new product introductions and improved quality. We will not give up the momentum from these efforts that has led to improved market share in virtually every one of our businesses.

Our objective remains to emerge from the global economic downturn better positioned than when we went into it and to remain profitable throughout the period. To obtain this objective, we'll focus intensely on sustaining product innovation, investing in our brands, providing great customer service and industry leading quality, investing prudently in our manufacturing capabilities, generating and conserving cash and becoming more productive in all we do.

It's an uneasy time. As we navigate this downturn we're lucky to be working for an industry leading and profitable company with a conservative balance sheet.

We'll face significant challenges but if we stay focused, we can emerge from this a better company. Let me talk about Armstrong Floor Product Europe.

We bought the bulk of this business in 1998 and it's been a troubled business since we bought it. It was focused in Germany, a market which declined 5% a year from 1998 to 2005.

In 2004, we decided to transfer commercial sheet production from the U.S. to Europe.

The transfer was very successful. In the U.S., in 2008 we earned $27 million of margin on European products sold in the U.S.

The strategy therefore has to take this into account. In 2008 we lost a total of $25 million in Europe.

Counting commercial and residential products, we made $22 million in the U.S. on European products.

The problems in Europe are pretty simple. We have high cost production processes that add up to about 10 points of sales.

Their high cost because there are multiple steps and they have lower yields than integrated processes do. And, we have an under leveraged SG&A infrastructure, about 5 points of sales disadvantage to competition.

Over the past year, we corrected and made great progress against a variety of issues. We've improved our customer service by increasing inventory availability and reducing delivery times.

We've improved our product line competitiveness, particularly in luxury vinyl tile which is a vinyl base with a printed film layer put on top which is used in commercial applications, especially retail applications. We broadened our product line to be more competitive, and in 2008 we actually saw the volume in that particular product line increase 17% and thus far in a particularly weakened environment, orders for this product are flat.

Last four week orders for luxury vinyl tile were actually up 4% in Europe. In linoleum, the new linoleum products which are just being rolled out, we've re-colored the product line.

We feel very good about it. We've expanded the number of SKU's and we feel very good about its competitive position against [Floorboard] and have received good feedback from our customers both in Europe and the U.S.

We're in the middle of finalizing the development of a linoleum acoustic product which will be introduced later this year which has a particular application in Europe, and particularly in France and Scandinavia and we've begun intensive work on a linoleum tile product which we expect to introduce next year in the U.S. market and we're punching expertise that we have in the U.S.

to bear on solving this problem in Europe. The homogeneous and heterogeneous updates are next.

In both instances we expect to broaden our product portfolio, offer new color ranges and new visuals. Troubled businesses have three fixes.

You either fix it, close it or sell it. You may have heard that before.

And of course when we mean sell, we really mean sell, merge or joint venture. We've thoroughly explored all three options.

Strategy and financial considerations in the U.S. make closing the business unattractive with today's market outlook.

There are combinations of businesses in Europe which make strategic sense to us. Thus far however, we haven't found one that doable on terms that are superior to a go it alone option.

The strengths of Armstrong Floor Products Europe for linoleum, we're number two and we enjoy very good margins, and Central Europe where we're number one enjoy good market success, especially with our improved customer service, and in the fourth quarter, sales in Central Europe were actually up and so far this year, sales are actually down 2% in a market that's down double digits. Another strength for us is the linogram which is well known in the U.K.

residential flooring. Let me first set the T-side cushion vinyl plant and the European residential business aside for a moment.

Our residential business in Europe is expected by slightly profitable this year. This issue for this business really comes in 2010 when Lancaster, Pennsylvania, a state of the art cushion vinyl plant opens.

Then, our U.K. cushion vinyl plant will lose roughly half its volume and we may have to close it if new product initiatives don't replace the lost inner company margin.

The cash closing costs of T-side would be $11 million Euros which would be more than offset by cash generated from working capital liquidation and asset sales. We'll look again at this business towards the end of the year.

Our commercial business comprises three plants; Germany which is where we make linoleum, which I'll remind you, is a combination of linseed oil and cork dust. This is a plant in which we're investing to improve its power generating capability which will make us relatively cost comparable to [Floorboard], our leading competitor.

The other two plants are Holmsund Sweden where we make our homogeneous sheet vinyl and [Bettingheim] where we make both. I'm sorry, in Holmsund we made heterogeneous sheet vinyl and in [Bettingheim] we make homogeneous and luxury vinyl tile.

We spent several month analyzing the best way to reduce our product costs. Do we source or do we invest to create a state of the art production capability?

We looked first at heterogeneous because in heterogeneous we had an opportunity to close a plant and we found that the best option for heterogeneous closes our Holmsund plant and builds a state of the art heterogeneous capability at Bettingheim. We go from two process steps to one and increase our yield from the high 70's to the low 90's.

This would reduce direct costs by 7% to 10% of sales. This is the preferred option because we would also eliminate 5.6 million Euros of fixed costs in Holmsund offset somewhat by increased logistics costs and 1 million Euros of incremental manufacturing expense in Bettingheim.

This fixed gross savings is over 10% of sales, making our total savings on this project roughly 20% of the heterogeneous product. The cost is 14 million Euros at Bettingheim and 8 million Euros of cash to close Holmsund.

We're in the process of beginning discussions with our unions about implementing this plan. When heterogeneous investment is complete, we want to make an investment which would be in the middle of 2010; we want to make an investment to attain a comparable improvement in the cost of manufacture of homogeneous.

Direct and fixed cost savings in the homogeneous investment amount to nearly 7 million Euros annually which is 16% of sales for a capital investment of 15 million Euros. We can address the manufacturing cost problems.

We're in the process of addressing the SG&A problems. We have taken actions, both people reductions, moving work to our own facilities in Eastern Europe and outsourcing products that will reduce SG&A by 5 million Euros which is over two points of sales.

As I mentioned, we're investing in our linoleum plant to achieve an annual cost reduction of 2.5 million Euros. When we put all that together, by the second half of 2010, we should have a structure in Armstrong Floor Products Europe which is operating on a profitable basis and which will continue to improve when we complete this investment.

Nick will take you through the numbers, but before he does I should mention that we announced this morning that Nick is taking over the Armstrong Building Products business. Steve Sankowski, who has previously been head of it, has told us that 36 years is enough and he's decided to retire.

Steve led this business through a remarkable period of extraordinary performance. The best news for us is he's hanging around town so as Nick takes this over and we go through a much more difficult, Steve's there to help us if we want him to.

So we wish him well and we're excited that Nick is going to have the opportunity to run one of the world's really great businesses.

Good morning. My comments will refer to 10 charts that we have posted on the website.

I will move somewhat quickly through the commentary on the fourth quarter and full year of 2008 and spend a bit more time on the outlook for 2009. The first chart is simply a bridge of operating income for the fourth quarter from the reported loss of $7 million to our adjusted figure of $25 million, and the biggest adjustment here is that an impairment charge, non cash charge we took in the fourth quarter against the gross trademark in our wood business.

That was about $25 million. Moving to the next chart, these are the key metrics for the fourth quarter again, adjusted for non recurring items.

Mike mentioned that sales were down about 14% for the fourth quarter. The composition of that is as follows; unit volume was down about 18%, price was up about 2.5% and mix was up about 1.5%.

Operating income for the quarter was down about 50%. That is a fall through of about 23% so looking at Delta operating income divided by Delta sales, you get about a 23% ratio and you'll see in a minute that we took out a good bit of SG&A and manufacturing costs in the fourth quarter.

Earnings per share, on a normalize basis for the fourth quarter was $0.21. On an as reported basis, it's $0.46.

So in addition to the impairment on the wood business that I mentioned, we also took a charge of about $14 million, a non cash charge to increase the valuation allowance against some state tax NOL's. In terms of cash flow, cash flow was well down versus the fourth quarter a year ago, $65 million versus $250 million.

The principal difference there as you may recall, we received $180 million in a 10 year carry back tax refund in the fourth quarter of 2007. At year end, our debt net of U.S.

cash was about $300 million, an increase of about $124 million versus a year ago. We believe we have a strong liquidity position.

Our liquidity which we define as our U.S. cash plus available credit capacity in the U.S.

is about $450 million at year end. Per our bank covenant we are required to have $100 million of liquidity so we view our liquidity net of that covenant is about $350 million.

Let me just take a minute as well to walk you through our debt covenants and where we stand relative to those. We have two principal covenants.

The first one, debt to EBITDA, the covenant is 3.75 times. At the end of the year we were about 1.25 times.

On interest coverage, the covenant is not too far below three times and interest coverage was about 13 times in 2008. So we feel that our liquidity position is strong and we are in good shape relative to our financial covenants and the debt agreements.

Turning to the next chart, this is a bridge normalized or adjusted operating income for the fourth quarter of '07 to the fourth quarter of '08. You can see quite plainly the impact of volume offset in part by lower manufacturing and SG&A costs.

Our SG&A costs were down about 13% in the fourth quarter, and that was across every business unit including the corporate functions. Price basically offset the inflation in raw materials and energy.

Turning to the next chart, and Mike mentioned a few of these numbers. This is simply the sales change and the adjusted operating income change by segment in the fourth quarter.

In the left hand side in terms of sales, most of these numbers of course are driven by volume declines. We did see some price and mix gains in resilients and also in building products but the 34% and 27% declines in wood flooring and cabinets were all due to volume.

In turn of profit change, the consistent message across the categories here is that the impact of volume declines was more significant than the costs we were able to reduce. But again, every business both in manufacturing costs as well as SG&A costs reduced those costs to offset the impact of volume.

Turning to the full year results for 2008, the next chart simply shows the reconciliation of reported operating income figure of $211 million versus the adjusted figure of $262 million. The biggest components of that would be the impairment in the wood business of $25 million and severance and write offs that we've taken the full year of business throughout the year.

The next chart shows the key metrics for the full year. As Mike mentioned, sales declined about 6%.

Of that, volume comprised 10%. Operating income was down about 15%.

Again, that's about a 20% fall through. Earnings declined about $45 million.

Sales declined about $250 million so about a 20% fall through of earnings. Earnings per share were down $0.28.

The interest expense was down about $20 million year over year. It went from $40 million to $20 million.

The effective tax rate was about 50% and the simple bridge to that is domestic tax rates are about 40%, federal and state we have about a 4% penalty that we received given that we have losses abroad that are not deductible. And then we are continuing to accrue interest on our 10 year carry back refund and the valuation allowance that we took against state tax NOL's in the fourth quarter increased the rate by about six points.

So again, the rate for the year was about 50%. Cash flow Mike mentioned was about $140 million versus $500 million in 2007.

The largest component for that variance would be tax refunds of $200 million realized in 2007. We had extraordinary dividends from Wave in 2007 which were about $50 million higher than the dividends we received in 2008.

Cash from those profits was down about $50 million and working capital increased about $50 million. The next chart is the operating income bridge; adjusted operating income for the full year 2007 to 2008.

What you see here is a theme that's been consistent throughout the year which is that we for the most part have been able to recover inflation with price. We have a significant impact of volume decline then we get some of that back in reduction of profit due to lower cost and as Mike mentioned, on a full year basis, the Wave earnings were up about $10 million, or our portion of those earnings were up about $10 million.

So for the fully year, Wave's earnings were up about 30%. Next chart, this is the same chart for the quarter, looking at the full year, the change in sales, the change in adjusted operating income by segment.

Again, there's nothing new here. Volume declines drove the sales performance in wood and cabinets.

We did see in building products a volume decline across all businesses of about 4% but that was offset with positive contributions from price and mix. In terms of earnings, again a similar story here is for the quarter.

The volume declines had a significant negative impact on earnings and we did reduce costs to offset that, but only in part. I will skip over the next chart which is simply a cash flow reconciliation of the components in 2008 and 2007, and I mentioned those components just a minute ago.

Let's turn to some comments about 2009 beginning with sales growth. You've seen in the press release by market and Mike mentioned that as well.

That translates into a sales decline of 10% to 20% versus 2008. Of course some of that decline is driven by currency so four to five points of that decline is weaker foreign currencies.

Adjusted earnings, we expect to be less than 50% of the 2008 figure and when you translate the 2008 earnings at our budgeted rate for 2009, that figure is about $253 million. Let me just kind of step through the pluses and minuses of earnings in 2009.

Clearly volume is the big negative, but also Wave. We expect Wave earnings, or our portion of those earnings to be down $20 million to $30 million versus what they were in 2008.

On the positive side, we do expect to see sizable deflation in PVC costs and of course we also expect to continue to reduce costs in manufacturing and in SG&A. Mike mentioned a few of the plant actions that we've taken, and we may well take more.

So we do expect costs to be a good bit lower in 2009, specifically on SG&A. A little further down on the page, we expect SG&A to be down about $50 million year over year.

Certainly a chunk of that is currency but we also expect to more than cover inflation with the cost reductions. Not just inflation, we are seeing about a $10 million reduction in our pension credits which we need to cover with cost reduction as well, and we expect to do that.

In terms of free cash flow, again the figure for 2008 was $140 million. We would expect 2009 cash flow to be about half of that so even though cash earnings will be down, we expect the impact of that to be offset by lower working capital.

So what you're really left with in terms of Delta and free cash flow year over year are two thing; first, we expect about $35 million less in dividends in Wave than we received in 2008, and secondly we're investing about $30 million in restructuring programs in 2009 in excess of what we spent in 2008. That's principally the investment in the plant in Lancaster that Mike mentioned as well as the investment in our European floor business.

In terms of raw material, energy inflation when you add it all up, we expect a reduction year over year to be $25 million to $30 million. I mentioned a sizable decline in PVC costs, but we continue to expect inflation in ADP, in starch and mineral.

Productivity and manufacturing I think is best manifest if you look at the expected change in the gross margin, is only about a point. So despite the significant declines in volume, we expect the gross margin to remain relatively steady year over year.

And what's driving that is the lower PVC costs and also the reduction in fixed costs and some direct costs through some plant actions that we're taking. I mentioned Wave; I mentioned will be down $25 million to $30 million.

And the way we account for that you may recall, we don't have the sales of Wave consolidated in our top line, but we do have the equity and earnings that affects operating income. So on a year over year basis, we expect the decline in Wave earnings to reduce our operating margin by between 75 and 100 basis points.

In terms of cash, taxes and the effective tax rate, we expect cash taxes to remain quite low at about $5 million. The NOL in the U.S.

we expect now to continue to shelter earnings through 2011 and the net present value of that NOL today after having applied to 2006, 2007 and 2008 earnings is about $150 million. The effective tax rate for 2009 we expect to be in the range of 55% to 60% and that's really exacerbated by these unbenefited foreign losses that we have abroad.

Those actually increase the effective tax rate in 2009 by about 20 points. In terms of the phasing of sales and earnings throughout the year, we expect the first quarter to be a modest loss, but as we go to the fourth quarter and look at hopefully a much easier comparison, we would expect a fourth quarter in sales and earnings to be somewhat level with 2008.

In terms of capital spending, we're spending this year about $90 million on the core business. About two-thirds would be maintenance capital.

In addition, we're spending about $35 million on the restructuring programs in Lancaster and in the European floor business. And finally, the adjusted OI figure for 2009 will exclude about $20 million of costs for plant closings and severance, again mostly in the European floor business.

Nick at one point said that we have two debt covenants, and then he explained three. We actually have three, so not a big deal but we do have all of those debt covenants.

Working capital guidance for '09, did I miss that or could you just review that?

Working capital which was up about $60 million in 2008 we expect to be down at $60 million to $80 million in 2009. So we've been running at a working capital intensity or ratio to sales at about 20% and we expect that to move up to 212% or 22%.

Working capital will come down. And of course, on an average basis, working capital will come down more.

The figure I mentioned is kind of point to point because as you look at receivables in the fourth quarter, we hope if not expect that sales in Q4 of '09 will be somewhat similar to those in 2008. You wouldn't see a big decline in receivables as we're seeing now as we'll see through most of 2009.

So sources between $60 million and $80 million, and I guess that's offset to a degree by the severances, mostly cash. Is there a total cash out number for '09 in terms of all the severance, restructuring, etc.?

All of the restructuring together, including the capital spending and the P&L items that are cash will between $40 million and $50 million.

So you'll have a cash outflow in '09 of $40 million to $50 million which incorporates all the changes you're making and severance.

About $35 million of that would be investments in the plants and the balance would be cash severance.

A lot of detail there Mike on European flooring and I tried to follow as best I could and I'll review it in the transcript, but what is the bottom line from an EBIT perspective with the starting point being calendar '08 to kind of how you see it progressing in '09 and '10 with the steps you're taking?

We think that we will lose about $25 million. We lost about $25 million in '08 and we will lose somewhat more than that in 2009, but not significantly.

In 2010, in the second half of 2010, we'll begin to see the benefits that we expect in terms of the direct cost savings of the new heterogeneous plant and we should have high single digit profitability in 2011.

That $25 million loss in '08, is that a net number of this product you're selling and making money on to the U.S.?

That's gross. The right way to think about it, in the U.S., the $25 million is the loss in Europe and there's a big chunk of the business which is inter-company, and it varies by business.

But in cushion and vinyl, 40% of our volume goes to the U.S. and that's the high end, and at the low end, linoleum only about 11% of our volume goes to the U.S.

The U.S. margin is in addition to that and the margins we make on products, margins we make in the U.S.

on products we source from our European business is around $22 million.

What kind of revenue are we talking about in '08, '09 or '10 for the European piece only?

The trade sales will be 200 million Euros.

So when we're talking about losing $25 million U.S. dollars on roughly 200 million Euro trade and thinking about swinging to a high single digit margin on say that same volume a couple of years from now.

Is that correct?

Yes.

Help me on the flooring side, huge declines obviously in the fourth quarter, and you alluded to that, is there any way because you're selling for the most part in vinyl, and then more to distributors to differentiate between what you think the end market was actually consuming versus what you sold? In other words, how much of the decline was due to distributors or your primary customers chocking on inventory, just not wanting to take anything.

Any color or the end market was down 35% year over year in the fourth quarter.

Here's how we look at it. As I said, we have very good visibility on what happens to the inventories at the big box customers and of the distributors.

Where we don't have good visibility is what happens to inventories of independent retailers. So we don't have any visibility of that.

But I think the effect of that is relatively small compared to what's happened in big box and distributors. It varies by business but in the residential side, between 10% and 12% of sales was lost due to inventory reductions.

That says that year over year, the Delta inventory as a percent of prior year sales was 10% to 12%. In the commercial side of course, it's much less, and so the commercial inventory loss that we had was in the neighborhood of 3% to 6% of prior year sales.

And indeed, linoleum which tends to be a product which is benefiting inventories actually went up a little bit but if you think about it on the residential side, its 10% to 12% of sales effect and on the commercial side is kind of 3% to 6% to 7%. That's why when Nick said we expect fourth quarter sales of next year to be about the same, that's one of the factors in it.

We don't expect to see the same kind of big impact on our sales from an inventory adjustment in the fourth quarter of 2009. So if it sounded odd that we would expect sales to be flat, it's not a recovery in the market.

We don't expect to see the same kind of inventory reduction.

When during the year would be you best guess in terms of when you customers have more or less gotten their inventory closer to where you want them?

We're seeing some benefits of it today. So if I look at my rough sheet orders, my rough sheet orders are actually up 7% in the last four weeks because we're beginning to see orders as the big box customers and people kind of restore some inventory that they took out at year end.

So I think we're seeing an awful lot of that has already happened. We'll see.

I hate like hell to be optimistic in this environment, but clearly the last four weeks for us has been significantly better on a orders basis. It's still bad, but significantly better on an orders basis than it was in the fourth quarter as it was in January.

We hope that maybe we've had most of that behind us.

I was hoping to focus a little bit on the ceilings side of the business. Mike, I think in the prior discussion just thinking about where margins can kind of stabilize in a down market.

You alluded to the fact that the volumes you're seeing right now are probably already worse than the prior two downturns. Do you still feel good about being able to maintain profitability above the prior cycles given the volumes that are coming down and given the cost cuttings that you're making?

I do. I think obviously with the volumes lower than we thought they were going to be, the margins will be a little bit lower.

On the other hand we think we can sustain profitability versus the previous trough we had in '03. Our salaried employment in that business is below what it was in 2003 and as I said, we will announce next month some capacity reductions that I think will get us in better shape in terms of our production costs.

We feel pretty good about the business and we continue to be in a world where people want to make money and ceilings instead of just ceilings and that's helping everybody.

When you say capacity do you think it will come in the form of an entire facility or will you start with lines pulling back?

We've already started with line. The real question is can we close it.

The guys are in analysis. The advantage of closing an entire plant are substantial so it's hard for me to imaging that that isn't where we're going to come out.

I'd like to verify something I thought you said earlier. I thought you said you're not going to give volume share to those that want to compete on price but maybe I misheard you.

I think that's right. We worked to hard to get our share.

The point is we have very different industry structures in our ceilings and grid business. The industry structure is such that people tend not to compete on price which we think is a good idea.

Then obviously in the context of the floor business, intermittently we'll have somebody decide they're going to try to cut price and what we do, we respond to that pretty aggressively.

So that was more the flooring business as opposed to ceilings because you don't expect the price pressure on the ceilings.

To say we don't expect price pressure is wrong, because everybody competes on price. What we don't expect to see wholesale price reductions.

We have seen lower prices in the grid business already. That's one of the reasons that's driving grid prices down.

I think I said that we don't compete on price. That's not true.

We compete on price every day. It is not the principal form of competitive activity in that industry.

Have you seen pressure yet on the tile side of the ceilings business?

Mostly volume pressure than anything else at this point.

I wanted to kind of wrap up on some of the comments you were making on the inventory side. If I understood what you're going through, you're seeing some benefit as the inventory reductions weren't really rescaling to a new environment, but almost over correcting at year end so you are staring to get a little bit of a benefit here.

Do you feel like the customer base was adjusting to a new 2009 reality or you'll get a good chunk of that inventory back through?

I think that the big box guys may have over adjusted a little bit. The other distributors we're not going to see any benefit from that.

Honestly, I think the biggest problem is nobody knows what 2009 reality is so we want to believe that they've made an adjustment and order rates would suggest that they've made the adjustment fully, but we have to continue to see economic activity at these levels. If we see it go down, then I suspect we'll see further erosion.

But at the moment, we feel like we've seen most of the adjustment.

Just running some numbers on the map of that European restructuring, it seems like you've got to take out about $40 million or so of costs. Is that about right over the next two years?

No, not over the next two years. We said we could do that, we will do that.

The first comment was around heterogeneous where our sales are around 30 million Euros and the second comment was around homogeneous which is where our sales are around 45 million Euros. 20% is not on the total $200 million of trade sales.

Just to be clear, we would expect the cost savings on a full run basis to be about $20 million a year. So for us to get to break even in 2011 like Mike mentioned, or a slight profit, we will need some recovery from the market.

We can't at least at this point; we don't have plans to erase the entire $25 million with cost reduction. We do need some recovery.

You did mention grids and tiles in terms of the current pricing environment. Have you see any evidence specifically currently in wood flooring or resilient flooring that competitors are getting more aggressive on the price front, or cabinets?

We've seen some price aggressiveness on the wood flooring in January which we had to react to. We saw some aggressiveness which we had to react to.

On the sheet, on the residential side of the vinyl business, we never saw prices go up, so all we're doing with the raw material cost reductions is offsetting some amount of the pressure that's coming from volume. So we haven't seen a lot of price pressure there.

I think everybody was in tough shape last year because of the lack of the ability to pass through prices. The answer in wood, we've seen a little bit of it.

Some of that is going to be due, we have slightly better raw material costs and some of it is we've been blessed in the sense that we had 10 wood facilities so as the market came down we could close plants and respond to it. A lot of our competitors only had one facility and they have a heck of a time responding to the downturn in the market except through trying to keep that plant full with lower prices.

So as we said, we're going to continue, we're not going to give up the share we fought so hard to win based on price, and everybody ought to sit back and compete on product and quality.

Do you expect to see a significant consolidation in the wood flooring industry by the end of this downturn?

Yes.

Is your guidance for '09, does it implicitly reflect the current pricing pressures you're seeing that you've referenced over the last couple of minutes.

Yes.

How significant are ceilings, we're already anecdotally about half started building or not continuing to be constructed, how significant is that phenomenon world wide and where would your expectation be when the credit markets do thaw in terms of those buildings being restarted?

The importance of new construction varies dramatically based on where we are in world. In the developed markets, North America, Western Europe, new construction is a relatively small percentage of things, 20% to 25% of total volume goes into new construction.

When we get into markets like Russia, India and China, new construction is a substantially bigger piece of the pie and is almost what the pie is. We've seen at all three of those markets, we've seen significant dislocations as a result of economic downturn.

When is it going to turn around? It beats the heck out of me.

I don't know. I'm not smart enough to know.

I understand that, but typically is ceilings not a lagging phenomena compared to a rebound to residential construction?

It does. It lags anywhere from nine months to a year depending on what it is.

Why don't I make sure I understand your question before I keep rattling on?

You essentially answered it. It sounds like in Russia, India and China the market for ceilings may rebound faster than one would normally think simply because these buildings have already been partially constructed.

That's what my question really was.

There will be some of that. The question is when will those markets rebound and that's a much tougher question.

Did you comment on the economic stimulus package and how that might impact your businesses?

We didn't do that on purpose because I'm not sure we know. I think the short answer on that is, there was nothing in the economic stimulus package as it was passed that made us feel very optimistic about what it was going to do for us short term.

We do a lot in health care and education. Of course the education is largely driven by state budgets so to the extent there was at one point a proposal that would provide some money for states that could help in the school construction, that was something that was going to beneficial for us.

I think a combination of eliminated or diluted to the point where we don't see a lot in the economic stimulus bill for us except to the extent that it helps the overall economy.

In terms of your market share I was wondering as we face this down market where you feel like you can gain share?

I'm sorry, I didn't hear that.

In terms of your market share, as we're facing a down market, where do you think you might be able to gain share.

What we've done is we looked at the fourth quarter and said, here's where we think the market from macro indicators and here's what we know happened in terms of the inventory thing which kind of plugs you to share. And what we saw in that instance is we gained a little bit of share and virtually all of the forms of the floor business in North America.

If we do the same sort of thing in Europe where we feel good about, is we feel very good about what we've been able to achieve in Central Europe. So we think we should be able to pick up little bits of share.

It's not going to be tons of share unless one of the guys goes out of the business which we don't see happening short term. We do think that we do hope to benefit from a trend among retailers to reduce the number of suppliers they work with.

Again vinyl is a declining category for a retailer. It's gotten worse so there may be more of an opportunity for us to become the only supplier for that form of product and we've done some things in terms of displays and other things that will help facilitate that change for retailers that would like to do it.

Could you please tell me what net debt is at the end of the year?

At the end of 2008?

Yes.

Total debt is about $500 million. U.S.

cash was about $200 million. So the way we look at it, we call net debt $300 million, but we also have $150 million of cash in Canada and the U.K.

and a few other places. So if you look at the broader definition of cash net debt is about $150 million.

The taxes that you incurred for 2008?

I think it was about $25 million and we expect that to be only about $5 million in '09.

And the depreciation and amortization for this year and next year?

It's about $145 million, $150 million.

For both years?

Yes.

Can you also tell us, you said that pension income would be down by $10 million in 2009? How much is it in 2008?

The so called net period credit pension on the U.S. defined benefit plan was a credit of about $65 million, and we're thinking it will be around $55 million or so in 2009.

Sorry to bother you with these things but the only way you'll be able to answer the questions is if I ask them on the conference call because you can't tell me anything that you don't tell the whole world. And since this is the end of the year I know that 10-K probably won't be out for awhile.

It's being filed today.

You got your unallocated corporate expense down to $2.4 million this year. So that line includes pension income.

So we know that it's going to up at least $10 million next year, but then you also seem to have not taken bonuses or something so your compensation went way down in the fourth quarter. So I wondered if you could ball park how much that might be up in 2009 aside from the $10 million that we already know about.

Aside from the $10 million, I think you'd see that figure go up to about $15 million.

On interest, I know you don't count the foreign cash as cash, but because of your covenants and because you'd have to pay taxes to bring it back, but it's still cash so I include it, and net debt, you own it and it affects interest expense so I'm kind of trying to estimate interest expense for 2009. In the past you've had a lot of interest income too from having so much cash.

Could you possibly give some kind of a net number for what that might be in 2009?

I think it will be between $13 million and $15 million versus the $20 million in 2008. The net number will be between $13 million and $15 million.

Any update on the trust, any clarity or color on their cash needs?

We've said this before that the flow of information between us and the trust is really one directional and so the short answer is we don't really know what their cash needs are. We can't speak for them, so we didn't say anything about it.

We're not in a position to.

Thank you everybody for spending the time with us. This was more thorough than we usually get but we had a lot of information we thought it was important to impart.

I will be available as always for follow up calls. Have a good day.