Steelcase Inc (SCS) 2004 Q2 法說會逐字稿

Good day everyone and welcome to the Steelcase's second-quarter earnings conference call.

As a reminder, today's call is being recorded.

For opening remarks and introductions, I would like to turn the conference call over to Mr. Terry Lenhardt, Vice President Corporate Strategy and Investor Relations.

Thank you, Justin, and good morning, everyone.

Thank you for joining us.

I'm pleased to join our recap for the second quarter and fiscal year 2004 year-to-date results.

Here with me today are Jim Hackett, our President and Chief Executive Officer;

Mark Mossing, Vice President and Corporate Controller; and Jim Keane, our Chief Financial Officer.

You should have received and hopefully have read our second quarter earnings release dated Wednesday, September 24, 2003, which crossed the wires yesterday afternoon.

That same release is posted to and is now accessible on our website.

The conference call is being webcast.

A replay will be available at our investor relation sections of Steelcase.com shortly after this event concludes.

Presentation slides that accompany this webcast are also available on our website.

In addition to our prepared remarks today, we will respond to questions from investors and analysts.

At this time, we are incorporating by reference to (ph) this conference call and any subsequent transcript the text of our Safe Harbor statement as incorporated in last night's release.

Certain statements made within the release and during this conference call constitute forward-looking statements.

There are risks associated with the use of this information for investment decision-making purposes.

For more details on these risks, please refer to our last night's release and form 8-K, the Company's Form 10-K for the year ended February 28, 2003, and our other filings with the Securities and Exchange Commission.

Finally, the webcast of this call is a copyrighted production of Steelcase Inc.

Any reproduction, publication or rebroadcast without the expressed consent permission of Steelcase is prohibited, copyright 2003 Steelcase Inc.

With those formalities out of the way, I will turn the call over to our President and Chief Executive Officer, Jim Hackett.

Thank you, Terry, and hello to everyone.

I want to highlight my comments this morning around three topics.

The first is the environment we're in; second, our progress within that environment; and third, areas of future focus.

The environment -- the warlike economy, the U.S.

Presidential election looms ahead, Sarbanes-Oxley is being resolved and instituted across corporations, and yes, there is 100 candidates for governor in California.

This environment is not unlike things that you have heard in previous calls.

And it is showing subtle signs of improvement.

I actually suspect the subtlety is enhanced because we had such a radical and negative effect hit our industry.

Fortune reports in its latest issue that it now looks like we lost 2.7 million jobs since March 2001.

This number dropped an additional -- or, excuse me, was worse by an additional 93,000 in August.

At first glance, of course I wonder what percentage is white- versus blue-collar.

So last night, I polled the Internet for articles that were written around Labor Day, which is the time in which employment is reviewed, and various U.S. cities and their perspectives on the decline in employment.

It is interesting that most of the cities report a harsher impact in their respective economies on their white-collar employment -- cities like Pittsburgh, Chicago, Buffalo.

So, it is clear that our target segment shrunk, and I'm going to address later in the future how important jobs are to our recovery.

No doubt you also have seen a poll this morning regarding the American consciousness of its poor economic state.

Polls are beginning to show that the economy is moving at least at parallel if not ahead in terms of the minds of voters regarding the upcoming election.

Our industry obviously participated in the early decline of this recession, also, the scraping along the proverbial bottom, and now what I believe is a likely recovery.

We do know that corporate profits are improving, and we know that is good for our industry and business in general.

We would wish that much of the cash that companies hold found its way back in the economy; hence our advocacy for capital investment tax credit.

Much of the gains in the economy are productivity improvements, which is leading to this jobless recovery.

We need to make the new job needle move to get enthused about the forces that make a true revival.

But in the face of all of that, we are quite optimistic.

Our progress inside of this environment has been good -- some might say amazing.

I have wondered out loud with my team about how many Fortune 500 companies essentially took their employment down almost 50 present into 2 to 2.5 years and then sit on the highest cash level, lowest debt after that period, which is the case you'll find Steelcase in today.

We have also found that in addition to cutting employment, and doing it for the right reasons, and stabilizing after that, that our lean manufacturing improvements continue to be profound because we started with, on an absolute basis, enough square footage of production to build the whole industry's capacity right now.

So, we have been smartly trimming that down and gaining enhancements without -- and I repeat without -- stressing our commitment to our customers.

However, I am not satisfied that any of the cost improvements are where they need to be.

I am trying to avoid haircut reductions.

So moves like the Attwood decision is a consequence of an attitude that I laid out in a previous call, that after the first waves of reductions were done, that more of the strategic cost-cutting had to follow.

And Attwood is an example of substantial reengineering.

I am also finding that our strategy in the face of this kind of decline proves to be an important aspect of the Steelcase recovery.

Anecdotally, some of our larger dealers have begun to stress how important the strategy of integrating furniture with architecture and technology has been to their recent success.

It's an interesting dichotomy, because at that same time, we note that the market and the share of lower-cost providers has increased as products get substituted in and out of that story.

We see some of our competitors making acquisitions to round out architectural elements in their offering.

Yes, it is a real dichotomy in a market that has shrunk.

But I am confident that we're addressing this, and we look forward to demonstrating results to you that our strategy is working, our attention to our dealers is paying off, and our awareness of what our large customer needs will pay dividends.

Going forward, we're putting additional emphasis on the solid profitability of our business.

Much of our work during this recession has not only reduced costs, but made the purity and the quality of our economics more precise.

Frankly, we've gotten a lot of the garbage out.

Essentially, we are more focused too, and I expect our investment in areas like international and SDP will prove to be prophetic when one sees the growth of business process outsourcing in areas like Eastern Europe and India, and the growth of parallel markets to the office, like education and health care, which the SDP companies have helped us penetrate.

So in those three areas, I feel pretty good.

I feel good about our awareness of the environment.

I'm happy with the progress today, although unsatisfied with where we are today.

And I know what we need to focus on.

All in all, I want our employees to have a sense of pride and confidence and to actually feel good about this quarter's performance, and to know we're not where we will be, but we have made progress.

Progress is good.

So at this point, I would like Jim Keane, our CFO, to share with you more of the detailed numbers and then we will take questions after Jim's discussion.

Thank you, Jim.

Yesterday we reported a second-quarter profit of $18 million or 12 cents per share.

That includes the gain on the sale of Attwood and other items that I will cover in more detail.

We are reporting Attwood as a discontinued operation.

That means the sales and operating profit information I describe, both for this quarter and prior periods, will exclude Attwood.

Net income is not affected.

There is a chart on our website and in our webcast presentation slide that shows sales and operating income for each of the last 10 quarters restated to exclude Attwood.

So, revenue from continuing operations was $612 million in the quarter.

That's a 5 percent decline from the same period last year, but a 10 percent increase from the first quarter.

That 10 percent increase in sales is consistent with the outlook we shared with you three months ago.

Our North American segment grew sales 17 percent from the first quarter and we are very pleased with that top-line performance.

As we expected, the sales growth was fueled by strong backlog as we entered the quarter.

North America order rates for the second quarter were slightly higher than the first quarter.

International sales were 3 percent higher than the prior year, but excluding the currency translation effect, sales would have been 11 percent lower than the prior year.

International sales were down 7 percent from the first quarter, both as reported and in constant dollars.

As we have been saying, the international markets are clearly not yet showing signs of recovery.

The Steelcase Design Partnership grew sales almost 10 percent from the first quarter.

Now I will talk about profitability.

Again, our policy is to give you plenty of information about the factors affecting our profitability.

You can use that information as you wish, but we are not providing pro forma earnings or earnings per share.

We sold our Attwood Marine division for cash proceeds of $48 million plus the assumption of certain liabilities.

We've booked a pre-tax gain of $32 million.

Attwood has been part of Steelcase since 1964.

In addition to the Marine Parts business, Attwood was a key supplier of injection molded parts to Steelcase.

Over the last two years, we have outsourced that operation and captured some cost savings.

So today, Attwood is really focused on the Marine business.

Although the management team did a great job running that business and it is quite profitable, marine parts are not related to Steelcase's core strategy.

When Brunswick approached us, we realized we would be able to sell the business for full value, and since Brunswick is a strategic buyer, it would be good for the employees as well.

For the full fiscal year 2003, Attwood sales were $57 million and pre-tax operating profit was $8 million.

Back on the topic of profitability, there were two items charged to non-operating income, so they don't hit the segment profitability.

The first nonoperating item relates to the sale of a property in the UK for net cash proceeds of $11.5 million and a pre-tax nonoperating gain of $7 million.

The facility has been idle for about three years as a result of prior restructuring work.

The second nonoperating item is a pre-tax charge of $6.1 million related to an international dealer transition investment originally made in 1999.

We took over full ownership of this dealer during the quarter and reduced the carrying value of the investments to the book value of the underlying tangible assets.

We incurred restructuring costs during the quarter related to severance and asset impairment charges totaling $7.4 million pre-tax. $4.9 million relates to the closing of a plant in the UK and $2.5 million relates to plant consolidation activity in North America.

The impact of the Attwood sale, the two nonoperating items, and the restructuring charges totals a pre-tax gain of $25.4 million.

On an after-tax basis, that is a gain of about $16 million.

Beyond those items, we experienced some labor and overhead inefficiencies this quarter related to plant consolidation activities in North America.

These inefficiencies are expected to continue in the third quarter.

Our operating expenses were $169.5 million in the quarter, down more than $30 million, or 17 percent, from a year ago.

Operating expenses as a percent of sales were also down versus a year ago.

Next I will talk about the balance sheet and cash flow.

We increased cash and decreased debt in the quarter.

Our cash balance was $173 million at the end of the quarter, a $81 million increase from the first quarter.

We reduced debt by $14 million to a quarter-end balance of $315 (ph) million.

That is the most cash and the lowest amount of debt we have had in four years.

Debt, net of cash, is now $143 million.

We generated $61 million of cash flow through the sale of assets such as Attwood and other properties. $34 million was generated from the rest of our activities, and we used $14 million to reduce debt.

Capital expenditures were $8 million in the quarter compared to $34 million in depreciation.

We plan on maintaining a healthy cash balance.

In the short run, it helps us keep a strong balance sheet, and in the medium-term it will help fund the working capital we will need as sales begin to grow.

We have no plans to buy back stock at this time.

Now I will discuss the operating results for each of our segments, starting with North America.

In North America, sales were $346 million in the quarter, down 8 percent from the prior year and up 17 percent from the first quarter.

North America returned to profitability in the quarter.

The increase in North America sales from the first quarter was spread fairly evenly across our customer base.

We saw an increase in day-to-day business in our large global accounts and an increase in project business among smaller customers.

Discounts and dealer incentives were slightly higher, reducing North America margins by about 1.4 points versus the first quarter.

Both project business and continuing business had higher discounts.

The mix of project business, which is normally more discounted, was up only slightly.

North America gross margins of 24 percent were improved more than 3 points over the first quarter, primarily because of higher volumes.

Second quarter gross margins continue to be negatively affected by inefficiencies related to plant consolidation activity.

Although consolidation activity will continue, we expect North America gross margins will continue to improve in the third and fourth quarters.

Operating expenses were down about 15 percent versus the prior year, and were flat versus the first quarter, even though the first quarter included the benefit of a one-week shutdown.

North America operating expenses were 23 percent of sales.

North America had operating income of $3.4 million for the second quarter.

That compares to the loss in the same quarter of last year, despite higher volume in that quarter.

SDP sales were $73 million in the quarter, a 2 percent decrease compared to the prior year and a 10 percent increase versus the first quarter.

SDP gross margins of 38 percent were fairly consistent with the first quarter and remain the strongest of the three segments.

SDP operating expenses were $23 million, or 31.5 percent of sales.

This represents a slight dollar increase from the first quarter, but a significant improvement as a percent of sales.

SDP profitability improved both in absolute dollars and as a percent of sales versus the first quarter.

SDP operating profit margin was 6.3 percent of sales in the second quarter.

International sales were $121 million in the quarter, a 3 percent increase compared with prior year, but an 11 percent decrease in constant dollars.

Sales were down 7 percent from the first quarter, both as reported and in constant dollars, and that follows normal seasonal patterns.

International gross margins were 23 percent, including the $4.9 million in restructuring charges discussed earlier.

Gross margins remain under pressure due to lower volumes.

International operating expenses were higher compared to the first quarter, in part because of $1 million in charges for increased credit reserves.

International reported an operating loss of $11.2 million in the quarter.

Now I will review our order trends and outlook for the next two quarters.

Orders in North America were up slightly from the first quarter, but were quite volatile throughout the second quarter.

On average, orders weakened slightly in July and then strengthened slightly in late August.

Orders remain volatile, with no clear trend through mid-September.

We believe order rates will strengthen gradually in the second half of the year.

We believe this in part because we have already won several large jobs scheduled to ship in the second half which have not yet been entered as orders.

We also believe this because there are signs of an increase in business confidence and in increase in business capital spending.

In fact, the Bureau of Economic Analysis report on U.S. non-residential fixed investment shows that in the second quarter of this calendar year, business spending increased 8 percent on an annualized basis.

That is the second increase in the last three quarters and the single largest increase in 11 quarters.

So, we are seeing positive signs that a recovery in capital spending is underway, but historically, the office furniture industry has lagged other industries in a recovery.

That's why we believe order rates will strengthen, but only gradually, in the second half of this fiscal year.

We expect international sales in the third quarter to follow their normal seasonal pattern and improve relative to the summer months, in part due to large projects in backlog.

In addition, benefits will continue to accrue from our actions taken to consolidate manufacturing in France, close our plants in Portugal, Brazil, and the UK, better leverage our manufacturing capabilities in Malaysia, and simplify our business processes.

Accordingly, we expect margins and profits to improve.

For Steelcase Inc., we are estimating second half sales to be slightly higher than the first half.

Third quarter sales are expected to be flat to slightly up from the second quarter.

With the volatility comes uncertainty, so there is both downside risk and upside opportunity in these numbers.

As we think about second half profitability, we expect to see ongoing pricing pressure in North America, and continued short-term margin pressure in international.

In the third quarter, we are anticipating pretax restructuring charges of 5 to $7 million.

We believe we will continue to capture efficiency gains in operations, so gross margins should improve slightly and we will continue to control our spending.

Including all of these factors, we expect to report earnings just about breakeven in the third quarter.

We expect to be profitable for the year.

Now we will turn it over for questions.

Ladies and gentlemen, the floor is now open for questions. (OPERATOR INSTRUCTIONS) Margaret Whelan.

Good morning, guys.

It's UBS Warburg.

Just some quick feedback.

If you could give us more detail than the press release going forward, like the share count and the break out of these costs, it would be really helpful, because I think a lot of people just don't understand what you have just reported.

In terms of over the long-term, what is your kind of target margin or (indiscernible) SG&A, given the (indiscernible) you've taken out on a more normalized sales level?

First I want to come out to the breakout of costs, because I think if you are referring to the various restructuring charges and so forth, we provided on a slide that is in our webcast presentation slides that are on the website.

So, we break that out in terms of business unit, first of all, by segment, and then we show it -- the items that had operating and non-operating, and you can get that information from there.

So we're trying to be a little less detailed on the call and provide that information to you on the slide.

Yes, but if you would put it out with the press release, that would be the best idea, because that way everybody has it.

Okay.

I see.

The question on margins is, gross margin targets long-term for us are still in the mid-30s, so I would say 35 percent.

And we want our operating expenses to be at or below 25 percent.

So, that is our long-term targets and that is what we expressed before and they are still valid today.

All of the work we're doing is trying to move from where we are today to those risks (ph) and margins.

So that is an even margin of about 10 percent?

That's about right.

That is an operating profit margin of about 10 percent.

If you'd look, say '97, you did $2.5 billion in revenue and it was a 36 percent gross margin, about 25 percent SG&A.

And given the amount of cost you are taking out here, there's something that's working against you that is not going to allow you to exceed that level?

If you look back in history, I think you will find that this industry continues to become more competitive.

And so we continue to take costs out and part of that is simply to become more competitive.

Our competitors are very good at that as well.

So we will continue to see price pressure in our industry, and we have to keep getting better -- we have to get better just to hold our ground, and we have to get better than that in order to rebuild our margins and operating expense ratios.

Okay.

Where are you with your restructuring program?

Is this going to be the last quarter?

If you're referring to -- the restructuring work that we're doing both internationally and in North America is really a three-year plan to get back to that margin target I described before.

Where are we in the plan?

We're probably at the end of -- moving towards the end of the first year of those three years.

But the nature of the activity changes as time goes by, so there's restructuring charges and so forth that are being incurred today.

The nature of the effort may shift as we get into the second and third year to be more about full implementation or lean manufacturing, full implementation of some of the sourcing initiatives we have underway.

So that the charges may not track at the same rate as the restructuring effort, but we see it as a three-year plan.

In terms of the divestiture of Attwood, I guess you said -- Jim said in his prepared comments that it was something that was planned, but then I guess the buyer approached you.

So which was it and what should we expect going forward?

Are you going to be divesting other businesses?

The situation with Attwood is that we recognized as we stopped doing the plastic injection molding that Attwood was now a marine parts business with less connection to our core strategy.

And at the same time -- and therefore, was an asset that was salable -- it's not strategically connected.

At about that same time, Brunswick approached us.

So both are true.

As we look towards the future, we don't have any specific plans for a divestiture of other businesses at this point, but we continue to evaluate our strategy and make sure that the assets that we have are core to the direction of the Company.

Okay.

And then just a final question.

Can you give us a little bit of idea on the traffic and the color of the customers you're getting in at the moment, please?

That is a little bit, Margaret, of the dichotomy, is that there's as many large headquarter projects of repute that I can remember in the last decade.

If you thought about major corporations in the United States building new headquarters in the last decade, there really was not a lot of that, partially because the vacancy rates inside of cities made it much more feasible for them to take over space, and partly because there was not as much growth that was prompting it.

However, a lot of mergers and acquisitions, a lot of decisions to separate grids and telephone networks because of 9/11, various things like that I would say that are new caused a growth in major projects.

So, as Jim highlighted in his comments, there is some awards that have not entered our order system yet, but they have already designated who they were going to pick.

These are great what I would call AFP (ph) kind of projects.

They are projects where the new planning principles are being applied, the products that we have been touting are being accepted.

On the dichotomous side, I know from one of our competitors that the box store sales are pretty high, and we don't participate in that market and consequently, those kinds of customers have not been at Steelcase's door.

But the flavor at the end that we do serve has been much more optimistic.

We also have indicators like the people come here for factory visits and kind of engagements; on that end, everything is up.

The number of mockups that we ship for evaluations are up.

Reservations for orders are up.

And yet, just to caution the news, they are subtle kind of changes and they don't signal that the market is back to '97 by any stretch of the imagination.

But in our shoes, you would have to say this is all of the kind of indicators you want to see with a positive arrow, and I can report to you today that is the case.

Okay.

Thank you very much.

Budd Bugatch.

Raymond James.

Good morning, Jim and Jim and Terry.

A couple of questions.

Let me try and go down my list.

The capacity today, Jim Hackett, you made a comment that you have had enough capacity at the beginning of this to furnish the entire industry.

Are you talking about the domestic industry, the world industry?

I was thinking the North American capacity was enough for the North American industry.

12 billion at that time or 8 billion now?

I would say both.

And part of the basis for the comment was a little cute on my part, but in essence, to share with you the nature of what we face to get lined up here is that not only the capacity a function of the demand that we came from, but is also the modernizing of the techniques, and lean production has returned tremendous amounts of floorspace in our system and our competitors'.

So, what it takes to produce the industry's demand is down versus what it had been five years ago.

But if I do my math right, you may be this year somewhere between $1.5 billion worth of revenue, and the industry's volume this year will be 8 billion or somewhere in that range.

You're operating at 20 percent capacity -- is that feasible?

That can't be right.

What am I doing wrong?

The 8.5 billion translates across a lot of product categories.

If I am tracking with you, I would start with you on the systems business at-large first, and say, what is the systems industry like and what kind of capacity do we have there (ph)?

You're talking about a third of the industry, right?

Yes.

I would say that when we went into this thing, we thought we had 30 to 40 percent more capacity than we needed.

Now, with the lean manufacturing projects that we have embraced and the kind of results we have seen, that number would have gotten bigger without the change in the industry.

So, imagine this double force hitting us.

If your 20 percent sounds startling, just say that the industry shrunk 50 percent in three years, and you see the startling nature of the capacity problem.

I understand.

I'm trying to get to what Jim said.

I don't think the industry is leveled at what its full demand is going to be, so that is another reason to not just draw a line in the sand right now.

But it just shares -- I'm trying to share with you the degree to which we are attacking that problem.

I would rather not get so precise about the absolute number on this call, but I would just say to you -- I want to prove to you that we have a conscience about it and we're not going to let it sit there.

Well, there are two things.

One, what level of capacity are you operating at now?

I would have thought it would have been somewhat closer to 50 or 60 percent of capacity?

Number two, to get to Jim Keane's mid-30s percent gross margin, what level of capacity utilization do you need to be at?

If you're just talking about North America, we think that right now, after having done a lot of rationalization work and having closed some plants and consolidated some plants, we still think after all that rationalization work that we could double our current revenue in North America without having to make any significant (multiple speakers) expenditures for capacity.

Okay, that's --

Basically, the volume could come back to where it was at peak (indiscernible) doubling from today.

So you are at 50 percent, and the bricks and mortar and the equipment give you 50 percent to do it -- you have to add direct labor, but --

You have to add direct labor and if you launch new products, you add tooling and things to those products.

But in terms of capacity -- and you said bricks and mortar and floorspace, we would have that.

And as time goes by, as Jim says, we continue as we do strategic outsourcing, as we do lean manufacturing, we are going to capture more efficiencies per square foot, so that stuff continues to happen.

The point then becomes what is the operating contribution of an X dollars worth of sales in North America.

Is it 35 percent, is it 45 percent, what is that relevant number?

I think as we grow out of the downturn, if you're thinking about this for the sake of building models and so forth, I would assume at the ink level that a contribution margin between 35 and 40 percent.

SDP would have a bigger contribution margin because they have a higher gross margin, right, and same thing for the other category?

That is true, although I would say the variable and fixed cost components of the different segments is also a factor.

So, North America is going to have -- has a lower gross margin today, but fixed (ph) costs are a bigger part of their cost structure.

So, I would use 35 to 40 percent at the ink level, and it's probably hard to figure it out at the division level.

Order pacing activity -- weekly orders, order rates and related to shipments.

If I did my math right, the weekly pacing on at least North America's shipments were about -- under $27 million a week for Q3.

What are you seeing in terms of orders?

Are you seeing orders at that rate, better than that rate now, and how consistent are they?

We said that the order rates that we received in the second quarter were sufficient -- for those sales in the second quarter without any material change in backlog for North America.

So if you kind of go back with me now six months, in the first quarter, we saw order rates for a certain amount.

Our backlog grew so our shipments were not keeping track with the order rates.

In the second quarter, orders came in slightly higher than the first quarter, backlog did not increase significantly, and our sales did.

So, sales are basically catching up to the order rate.

As we go out into the second half, what we have been saying is a slight or modest increase in order rates expected in the second half versus the first half.

So you can -- and backlog will continue to move up and down based on production.

Backlog has got to then deteriorate a little bit in the second half.

You have to ship that backlog.

Is it about seven weeks' worth of orders in the backlog?

The backlog that we had at the end of the first quarter is the same as -- basically the same as we have at the end of the second quarter.

So, it's not as if the first quarter backlog was not sustainable.

We sustained it in the second quarter.

If orders continue to come in slightly higher and we expect shipments to be slightly higher, there is no assumption in there really related to backlog.

So it is customer-related for their timing then to build the backlog, as opposed to the normal flow of business?

That's right.

And it's also just increased order activity.

Our business is bigger now than it was back in December and January.

As your business grows, your orders grow, your backlog grows and your shipments grow.

You're thinking about a made-to-stock business, Budd, and you would be right.

But in made-to-order, the backlog is a good indicator of recovery.

I understand that, Jim.

I was just thinking about the fact that a lot of times the backlog, though, is a relationship of the customers, when they need the merchandise, when they need the products, as opposed to when you want to ship your normal --

That is why it is a good indicator of some healthy improvement.

Okay.

Two other quick questions or a couple of other quick questions.

Restructuring by segment in your forecast, you gave the total number.

Where is the restructuring activity going to be -- in which segments?

It's kind of split between international and North America.

Half and half, Mark?

Roughly. (indiscernible) exactly.

It's about in that range, half and half.

In your business how much of the revenues are dealer transition revenues this quarter?

Revenues related to consolidated dealers, is that what you mean?

We will try to get that number for you here in a second.

Thank you.

I'll let somebody else talk.

Oh, one last question.

Breakeven, last quarter you told us that breakeven was 610 milliion.

I think it had moved up about $20 million, partly for Euro, partly for other investment that you had to make.

Is it still about 610?

Breakeven kind of moves -- it depends if you count Attwood and it depends on how you think about international currency translations.

But, basically what we're saying now is, as we look out for the third and fourth quarter on volume that's about the same as what we just had, maybe slightly higher, that we're going to be just above breakeven.

So you can use those numbers as a current breakeven.

So it's about the same.

Maybe use a few tweaks.

The tricky part, too, for me in communicating breakeven is that in the past, a year ago, when we talked about those numbers, they were all prior to restructuring charges, back in the days when we used to refer to those as nonrecurring items.

The breakeven numbers I'm talking about for the third quarter -- where we said possibly slightly above breakeven -- includes restructuring charges.

So, you've got to kind of do the math now and figure out what breakeven would be without those.

We understand the requirements of Reg G. Thank you very much.

Budd, just to give you -- to answer your question on dealer transitions, it's in the $20 million range in the quarter, and that is after we eliminate our intercompany type of activity, obviously.

That is incremental sales coming from dealer transitions.

James Leeda (ph).

Good morning.

This is Merrill Lynch.

I just wanted to ask if you have had any recent discussions with the rating agencies, Moody's in particular?

And do you think that the progress that you guys made in the quarter was the type of progress that the rating agencies were looking for to help ease some of the ratings pressures?

We haven't had any recent conversations with them.

The plan that they have is to wait until this quarterly earnings release came out.

Then we expect over the next few days we will be having conversations with them to help them understand, as we're doing here, what happened this quarter and the economics of the business.

I cannot speculate on what decision they will make.

We feel pretty good about where we are from a balance sheet perspective.

Again, in terms of cash position and debt position, we think the balance sheet is certainly stronger than it has been during this downturn and from a cash and debt perspective, in a better position than we have been in four years.

So we feel pretty good about the work we've done, but again, I cannot speculate on how Moody's will interpret that.

You had mentioned that pricing was weak I think in some segments.

Could you expand a little bit more on that, because I got the sense that among a hodgepodge of issues, that was one of the things that the rating agencies were looking for?

On pricing, what I was referring to specifically was actually the discount in the North America segment.

And when we say that word, it includes a number of things.

It includes product discounts, which is literally pricing.

It can also include rebates, incentives to go through the channel, other things like that that are not literally pricing.

Sometimes you see increases in those things simply because you are winning a greater share of your orders.

If you're more successful in winning orders that you discounted, you can sometimes see that increase.

In terms of where we're seeing those increases, the typical thing you look for is if your project business mix is increasing versus your day-to-day mix.

And although we have seen some increase in project business over day-to-day, it is not enough to really explain that driver.

What we're really seeing is just a slight increase in the combination of product discount rebate incentive, both for large customers and for small customers, spread across project business and continuing business -- kind of across the board.

I would also add, the agencies, as they reported looking at our finances along with the competitors', have been more explicit about the economy.

I have not felt from their reviews that they are worried about the economics of our business.

They have not talked about pricing pressures or supply issues or anything like that.

They have been more worried about this jobless recovery and how far was the economy going to kind of tank and what would we be planning.

I think some of the indicators economically that are beginning to show recovery are going to be as important to their view of our industry as any single metric.

Okay.

I think that's great.

Thank you.

(OPERATOR INSTRUCTIONS) Budd Bugatch.

Sorry to be so long-winded.

On the discount issue, I wanted to make sure.

You said, Jim, if I was right, 140 basis points of gross margin impact?

Is that the way I should read that?

Yes, we believe that the increase in discounts represent a 1.4 percent --

How did that compare to Q1 and how did it compare to last year?

That is the increase amount.

Okay.

That is the increase versus Q--?

Versus the prior quarter.

Versus the first quarter of this year or the second quarter of last year?

First quarter of this year.

Okay.

And do you know what it was versus first quarter of last year?

No, but we have been monitoring it.

What we've said in the past is that there has been for years a general increase in discounts in our industry.

That general pattern has continued in good times and it continued during the downturn.

There is some speculation by industry observers that you might see more price competition or deeper discounts during the downturn.

And we just saw the continuation of that general trend, nothing specific.

It wasn't until this quarter that we thought that we saw something that was noteworthy.

But again, I want to be careful that you don't attribute it all to price.

Price is one part of it, but there's these other factors that are in there that are marketing incentives and channel incentives that are also part of that.

Have you taken a price increase?

I don't believe we have announced a price increase at this time.

Okay.

All righty.

Thanks.

Jim Norris (ph).

Cooke and Bieler.

My question has to do with marketshare, and I was wondering if you could give us a little bit of detail to the extent that you have it regarding marketshare trends, and specifically if you could get into some detail about where you might be gaining share and where you might be losing share and why?

This is a closely-watched topic.

Budd Bugatch, who is on the call, has written some fine articles about marketshare in the industry.

We have seen in this last quarter is our North America entity outperform the market.

SDP was a little below.

If you look at the backlogs and then things shipped, you start to see that maybe really -- really the needle didn't move too much in total.

There is not an international number that is reported, so when we talk about marketshare we are generally talking about the North American market.

So, our instincts are that -- have been through this whole thing that our customers, our large customers, were the ones who pulled back first, and consequently, the lower end of the market was buying more; we lost some share.

As our customers start to come back, we expect and we're starting to believe that the data will prove out, that Steelcase is gaining share.

It is my conscience to watch it and to also caution everyone to not overreact in a recession about that detail.

Our industry (indiscernible) is notorious for coming in and adjusting the data now.

The denominator will likely be adjusted, I think, in August.

So, we may see a more positive result than I'm suggesting today.

But we just don't know yet.

It is still too early.

My instincts are that we're holding our own.

Thank you.

Sir, there appears to be no further questions in queue.

Do you have any closing comments you would like to finish with?

Yes, I would.

Thank you.

I think when we end these calls, we always want to make sure we answered all your questions, so I want to reaffirm that people should call us if there's things you need to know about the business, or come and see us -- we encourage that.

But I also want to take a moment to suggest at the end of this call how important the Attwood organization was to our success.

In 1964, this was a supplier that helped us make chair bases.

And you have to think of how many chairs Steelcase has sold in its history since then, and it's an incredible amount.

They gravitated into plastics and then eventually the marine business.

And so they have done a great job.

It was a great little company, one that we were quite proud of.

And we're happy about their evolution to Brunswick because we think that is a really good company as well.

So I just want to thank all of the people that were involved in that transaction, as well as the management that stuck with keeping their business on target and performing well, even in the face of all this.

They have been a great group and I want to thank them at the close of this call.

Thank you all.

Thank you, ladies and gentlemen.

This does conclude today's conference call.

You may disconnect your phone lines at this time, and have a wonderful day.

Thank you for your participation.