Armstrong Flooring Inc (AFI) Q4 2018 Earnings Conference Call Transcript

AFI earnings call for the period ending December 31, 2018.

Motley Fool Transcribers
Motley Fool Transcribers
Mar 5, 2019 at 5:22PM
Other
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Armstrong Flooring Inc  (NYSE:AFI)
Q4 2018 Earnings Conference Call
March 05, 2019, 11:00 a.m. ET

Contents:

Prepared Remarks:

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 will now turn conference over to your host, Doug Bingham, Chief Financial Officer. Mr. Bingham, you may begin.

Doug Bingham -- Chief Financial Officer

Thank you for joining us today for Armstrong Flooring's fourth quarter and full year 2018 earnings conference call. I am joined by our Chief Executive Officer, Don Maier. We trust you've 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 armstrongflooring.com.

I refer you to Slide 2 of that presentation and advise you that during this call, we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied for a more detailed discussion of the risks and uncertainties that may affect Armstrong Flooring, please review our SEC filings.

Forward-looking statements speak only as of the date they are made and we undertake no obligation to update any forward-looking statements beyond what is required by applicable securities 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 a 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 -- Chief Executive Officer

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 3, 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, in part 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-month 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 cost, the positive evolution of our Company will be increasingly evident as we streamline processes, elevate operating performance, and deliver on strategic priorities.

Looking at the transformation of our business on Page 4, we are confident that fundamentals remain strong for future growth in Resilient, where we have spent the past several years enhancing our exposure to the right product categories and markets and channels. LVT is now our largest product category representing nearly 1/3 of 2018 sales.

Vinyl composition tile, which is primarily commercial represents just over 1/4 of our sales. Commercial and residential sheet together are also around 1/4 of our sales. With the mix of our business more heavily weighted toward LVT, we expect to better realize a significant growth in that category, which continues to take share from all other flooring categories.

Several actions have shifted our business toward 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 situates us for stronger and more predictable results.

Roughly 3/4 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 any users with exceptional service. Moving to our four strategic priorities on Page 5. 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 weekly's 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 Alterna 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 where 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 -- Chief Financial Officer

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 6. 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 7, 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 achieved 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 US 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 1, in response to the first round of 10% tariffs on Chinese imports. We also proactively announced further increases effective January 1 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 1 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 1. 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 8, during 2018, we generated operating cash flow of approximately $63 million consistent with prior year. The timing of net working 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 customary net working 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 that 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 9, 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 expect 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 headwind 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 toward 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 net working 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 softer 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 off 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 -- Chief Executive Officer

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.


Related Articles

Questions and Answers:

Operator

At this time , we'll be conducting a question-and-answer session. (Operator Instructions) Our first question comes from John Baugh, Stifel. Please proceed with your question.

John Allen Baugh -- Stifel, Nicolaus & Company, Incorporated -- Analyst

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 -- Chief Financial Officer

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, LVT at around 30%, VCT 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 Allen Baugh -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Okay. And then you mentioned, what, that residential sheet was down to 10% of the mix at the end of '18. Did I understand that correctly? And then what was it say at the beginning of the year?

Doug Bingham -- Chief Financial Officer

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 Allen Baugh -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Okay. And so if volumes for the year -- and I understand and appreciate anomalies in the fourth quarter, so if volumes for the year were down a couple percent and we assume that the LVT was up low to mid-teens or something at 30% of the mix, it would imply the other 70% of your sales on a volume basis were down around 10%, is that right, number one? And number two, one of the categories, is it VCT and sheet that are under continued pressure and how do you think the volume with LVT growth in '19 I'm sure projected yet continued declines in those categories, how does volume shake out in '19?

Doug Bingham -- Chief Financial Officer

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 a kind of category level, we see the same trends continuing on that we experienced in 2018. LVT expected to continue to grow very strongly, res sheet will continue to be challenged and other categories at greater or lesser extents will have similar patterns.

Don Maier -- Chief Executive Officer

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 Allen Baugh -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Thanks for that. And then my final question is around the inflation stat, I guess I'd love some details on what you are "seeing right now" in other words what are the raw material inflation you refer to is sort of in your inventory there and therefore yet to flow through your P&L versus maybe what you're buying raws for right now, or 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 -- Chief Financial Officer

Sure, yes. So just as a reminder, we saw inflation throughout 2018, which has 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 Allen Baugh -- Stifel, Nicolaus & Company, Incorporated -- Analyst

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

Doug Bingham -- Chief Financial Officer

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 1 are really geared toward trying to recover some of the inflationary headwinds that we've experienced.

John Allen Baugh -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Great, thanks. Good luck.

Doug Bingham -- Chief Financial Officer

Thanks, John.

Operator

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

Ryan Cohen -- Nomura Securities Co. Ltd. -- Analyst

This is Ryan Cohen on for Mike. Sounds like the inventory is go rectify itself by the middle of the year, can 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 -- Chief Executive Officer

Yes, it varies by category. But the Q3 activities were largely skewed toward 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 left 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 more normal levels. So we've seen the sell through work through on the buying activities that were done in advance of the price increase back in Q3.

Ryan Cohen -- Nomura Securities Co. Ltd. -- 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 -- Chief Executive Officer

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.

Ryan Cohen -- Nomura Securities Co. Ltd. -- Analyst

Thank you.

Doug Bingham -- Chief Financial Officer

Thanks, Ryan.

Operator

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

Doug Bingham -- Chief Financial Officer

Good morning, Alvaro.

Alvaro Lacayo -- G Research -- Analyst

Good morning, how are you guys?

Don Maier -- Chief Executive Officer

Good. Got real quick on your name there.

Alvaro Lacayo -- G Research -- Analyst

I know. Well, first, congrats, Doug on becoming CFO, Just to start us up there. And then I appreciate the commentary on the usage of capital, Now you've got 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's been any change in terms of how 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 -- Chief Executive Officer

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(ph), which is 1.5 to 2 times, is what we've said previously. Our term loan we are able to prepay that without penalty, both the revolver portion as well as the Term Loan A.

Alvaro Lacayo -- G Research -- Analyst

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 liability/pension liability that you have on the balance sheet?

Don Maier -- Chief Executive Officer

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 toward 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, it 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.

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 -- G Research -- Analyst

Should it be similar in 2019?

Don Maier -- Chief Executive Officer

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

Alvaro Lacayo -- G Research -- Analyst

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 seen?

Don Maier -- Chief Executive Officer

Yeah, 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 -- G Research -- Analyst

Great. Thank you very much, Doug, and I'm done.

Doug Bingham -- Chief Financial Officer

Thanks. Alvaro.

Operator

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

Justin Speer -- Zelman & Associates -- Analyst

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

Don Maier -- Chief Executive Officer

Yeah. 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 expected to be about $30 million and we came in relatively close on that.

Justin Speer -- Zelman & Associates -- Analyst

Got it, Okay, that makes sense. And then in terms of the repurposing of assets going forward toward more LVT. Can you help us 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?

Doug Bingham -- Chief Financial Officer

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 that 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 that news should be forthcoming.

Justin Speer -- Zelman & Associates -- Analyst

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 -- Chief Financial Officer

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

Justin Speer -- Zelman & Associates -- Analyst

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?

Doug Bingham -- Chief Financial Officer

So I think there's two things that you should consider when looking at that. Number one is, 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 mill 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 worked 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 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 -- Zelman & Associates -- Analyst

And all that, again, that's all within I guess I'm assuming that's all '19 but that's captured within your CapEx guidance. The idea of this repurposing effort is captured in the CapEx guidance for 2019?

Don Maier -- Chief Executive Officer

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

Justin Speer -- Zelman & Associates -- Analyst

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. You said transportation costs, I believe and 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 maybe 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 -- Chief Executive Officer

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 will 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 a bit here.

Justin Speer -- Zelman & Associates -- Analyst

Thank you, guys.

Don Maier -- Chief Executive Officer

Thank you, Justin.

Operator

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

Adam Baumgarten -- Macquarie Group. -- Analyst

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 and it's been out for a little bit, how has the adoption been? And two, do expect that to drive overall VCT volume growth in 2019?

Doug Bingham -- Chief Financial Officer

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 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 -- Macquarie Group. -- Analyst

Great. Thanks, guys.

Doug Bingham -- Chief Financial Officer

Thank you, Adam.

Operator

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

John Allen Baugh -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Yes. 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 but by the same token you have less overall volume with them. And I'm just curious how you can compare the discussion say pre-divestiture, post-divestiture with your big distributors? Thank you.

Don Maier -- Chief Executive Officer

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 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, it's 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 it is 10 weeks, I guess, into the into the transition, but so far it's gone 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 Allen Baugh -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Great, thanks. Good luck.

Don Maier -- Chief Executive Officer

Thank you. John.

Operator

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

Don Maier -- Chief Executive Officer

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.

Duration: 43 minutes

Call participants:

Doug Bingham -- Chief Financial Officer

Don Maier -- Chief Executive Officer

John Allen Baugh -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Ryan Cohen -- Nomura Securities Co. Ltd. -- Analyst

Alvaro Lacayo -- G Research -- Analyst

Justin Speer -- Zelman & Associates -- Analyst

Adam Baumgarten -- Macquarie Group. -- Analyst

More AFI analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.