Focus on Leadership - May 2011

Interview by Kemp Harr

Matt Espe came on board as Armstrong World Industries’ CEO and chairman in July 2010, replacing Michael Lockhart. Both Espe and Lockhart are General Electric (GE) alumni, students of Jack Welch’s school of business.

Espe spent 22 years with GE, working in a variety of capacities including sales, marketing, as director of commercial operations, as president of the European and Asian plastics division, and, finally, as president and CEO of GE Lighting. In 2002, Espe left GE and took over as CEO of IKON, an office solutions company. As CEO of Armstrong, he oversees a $2.766 billion company, 54% of which is flooring.

Q: How did your background with GE and subsequently with IKON and Ricoh prepare you for your role at Armstrong?
A: GE, Ricoh and Armstrong are very different businesses; however, all three are mature businesses in mature industries that have relatively slow growth. GE was a great training ground for me—enormous opportunity, world-class business processes, experienced employees and diversified businesses, a real wealth of experience to learn from. I started out in sales, learned about the importance of focusing on customer needs; learned about being a representative of the brand, but also the importance of connecting internally with people at all levels of the company. Through various leadership training programs, I was exposed to different philosophies about leadership, operations and growth. I moved through many functional areas: marketing, distribution and manufacturing and led businesses domestically and globally. GE gave me a solid foundation and skill set that translated to IKON and translates to Armstrong now.

With IKON and then Ricoh, there was a need for transformation. That included jumpstarting the business with successive growth programs that built global presence and shifted to higher end product portfolio and higher margin for the company.

Armstrong is also in a period of transformation and evolution. We need to streamline how we operate and simplify processes to better manage our overhead. We need to globalize our business and pursue growth markets like China. We need to focus on delivering a mix of products and services our customers want. Last but not least, we need to focus on organizational vitality, so we can build a world-class team.

Q: Where do you see Armstrong ten years from now? What changes or developments would you like to see?
A: In today’s world, ten years is pretty far out. I think working in three-year increments allows for a strategic approach to the business without a lot of wasted effort.

So over the next three years, first, we want to strengthen our core—our ceilings and flooring businesses. We’ll focus on building a competitive cost structure in North America and balance our corporate overhead to our business unit structure. We’ve just exited the residential flooring business in Europe, which was underperforming, and now we’ll focus on the commercial sector where we can take a leadership position.

We’ll also expand our core by increasing our global manufacturing footprint; creating demand in China and India; expanding our presence in Latin America and the Middle East; and developing targeted adjacencies or acquisitions as they make sense.

Q: Your financials show that the ceiling business is really the cash cow within your organization. Do you think the profitability of the flooring business will ever match the margins you make in ceilings?
A: Although the industry structure is very different between ceilings and flooring, we are excited about the profitable growth opportunity in flooring. We are at the low point of an historical downturn in residential construction, but through this downturn, we have continued to invest in products, relationships and capabilities that position us to benefit from the recovery. Combine that with the turnaround underway in our European flooring business and the exciting investments we are making in growth markets such as China, and our flooring business prospects are very bright.

Q: When it comes to brand recognition, Armstrong and Stainmaster are the two strongest brands (unaided recall) in the residential flooring sector. What is your strategy for maintaining or building on that brand awareness?
A: We continue to invest in our brand through targeted advertising and promotion, our retail footprint, our website and product literature. Our focus is to manage the business in a manner that delivers on our brand promises for our retail and commercial customers. We have opportunities to communicate the brand value, and to help our trade partners derive the full benefit of our brands.

By maintaining focus on our commitments to superior service and products, and successfully delivering, the retailers and installers who work with our floors and the homeowners that live with them keep coming back to us as a company they trust.

Q: Do you think manufacturing brands are as important today as they were 20 years ago?
A: Brands may be more important than ever before. There is so much competition for mind share that having a strong brand and a trusted name, particularly with a rich legacy like ours, helps people make decisions and feel good about them. But a brand can’t do it all; it’s critical to have the product and service quality and corporate reputation to back up what you claim in the marketplace.

Q: How is your relationship with TPG? Are they active partners?
A: As a private equity firm that has a 13% economic interest in Armstrong, TPG has two representatives on the board who are very engaged and supportive of where the management team wants to take the company. They’ve understood our overarching strategy for transformation and provided valuable guidance particularly in lean manufacturing and making investments to drive growth.

Q: Armstrong has been very public about its goal to reduce $150 million of annual expenses per year. What progress are you making toward achieving that goal?
A: It’s never easy to reduce overhead expenses at this level because it always involves cutting jobs. But we’re operating in a very competitive landscape in a very tough economy. We must be as efficient as possible, in our operations and in our corporate selling, general, and administrative (SG&A) cost structure. So making progress against that $150 million goal is a priority, and we have made progress. We are on target to reach our goal by 2012; by the end of 2011, we’ll be two-thirds of the way there.

Q: We made note that in 2010 alone, the company closed three resilient flooring plants and two previously idled wood flooring plants. Is your capacity now aligned with demand or are there more closings to come?
A: Yes, our capacity is now more aligned with demand. We don’t anticipate closing additional flooring plants, but we can’t predict what the future holds or how our business could be impacted by things we can’t control.

Q: What are your specific strategies for increasing the environmental sustainability of your vinyl products?
A: Environmental sustainability is very important to us as a corporate citizen and manufacturer of building products. We’ve been very successful in realizing reductions in energy and water usage at our manufacturing plants. We’re actively seeking reliable clean sources of recycled and renewable materials as part of our product development initiatives. And we are ramping up a reclamation program for vinyl.

Q: I see where you were a track and field athlete at the University of Idaho. Do you still run to keep your head clear and stay in shape?
A: Well, my pole vaulting days are behind me, but I work out daily to stay in shape.