Steelcase Inc (SCS) 0 Q0 法說會逐字稿

Good day, everyone.

Welcome to Steelcase's fourth quarter earnings release conference call.

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

For opening remarks and introductions, I would like to turn the call over to Mr. Terry Linhardt (sp), Vice President Corporate Strategy Investor Relations.

Sir, you may go ahead.

Thank you, Pete.

Good morning, everyone.

Thank you for joining us for the recap of our fourth quarter and fiscal year 2005 financial results.

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

Jim Keane, our Chief Financial Officer;

Mark Baker, our Senior Vice President and Global Operations Officer; and Mark Mossing (sp), Vice President and Corporate Controller.

Our fourth quarter and fiscal 2005 earnings release dated March 30, 2005 crossed the wire early this morning.

That same release is accessible on our website.

This conference call is being webcast.

Presentations by the Company that's webcast are available on Steelcase.com.

A replay of this call is also, will also be posted to that site later today.

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

And at this time, we are incorporating by reference into this conference call and subsequent transcript the text of our Safe Harbor Statement as was incorporated in this morning's press 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 this morning's release and form 8-K, the Company's form 10-K ended February 27, 2004 and our other filings with the Securities and Exchange Commission.

This webcast is a copyright production of Steelcase Inc..

Any reproduction, publication, or rebroadcast without the express written permission of Steelcase is prohibited.

Copyright 2005, Steelcase, Inc..

And with those formalities out of the way, I would like to turn the call over to our President and CEO, Jim Hackett.

Jim?

Thanks, Terry.

And good morning and thank you for joining us.

Today we're reporting on the results of our fiscal year 2005 and I'm proud to report that we ended the year with a third consecutive quarter of profitable growth.

The year signaled a complete turnaround with the net profit improvement we are reporting today.

This was a year that saw a rebound in sales growth from our large customers around the world.

And as we have stated before, much of our share performances depended on this segment and as such, we believe we grew our overall share in the industry during the last fiscal year.

Today if you are one of these large customers, you can turn to Steelcase for all -- for all of your needs.

Here's a sampling.

Imagine you've been asked by the CEO of your company to imagine a new working environment to help build a more innovative culture.

You hire a Steelcase consultant to help you work through a number of group exercises to imagine linking your engineers and industrial designers in a new collegial setting.

As part of this process, you're evaluating seating products and you've read that ergonomic performance is a potential area of future liability.

You find out that the Leap chair just won a blind test by the Wall Street Journal against all the other competitors and they note in that journal article the ergonomic science in Leap distinguished the chair's performance.

By the way, you know that sustain -- sustainability is part of your corporate values and you're delighted to hear that another chair by Steelcase just won an environmental award from the French government.

The first ever given for a furniture item by the French government.

Further, you've learned that your people are spending more and more time in meetings.

You're finding more time in 'we' spaces versus 'I' spaces.

You're delighted to hear that the Steelcase science has moved beyond the chair itself and is being used in the meeting spaces of the future.

Tables that help integrate technology into the room, and vertical display boards to plug into the web.

Polyvision is a brand for this experience.

Polyvision was just awarded the most innovative product award in 2005 by the Atlanta Business Journal, out ranging -- out ranking other entries from Coca-Cola and Home Depot.

The innovation surprises don't stop there because your business has its own retail concepts and you realize that Steelcase owns a majority interest in IDO, the world's best innovation firm.

IDO is brought in to help you imagine a number of new products for your store and they are also helping you change the total experience.

Well, time today won't permit me to go further with my role play, but this scenario actually happened last year with a fortune 500 company.

We do this every day and we believe our rhythm of results is beginning to confirm our potential in this segment.

Additionally, we want to emphasize our aggressiveness in two other areas.

First, we need to embolden our Turnstone brand to continue to target the large mid-market segment.

Turnstone consistently out performed the overall market during the industry downturn.

In fact, since the peak in 2001, Turnstone has enjoyed solid double-digit growth on compounded annual growth rate basis.

Our investment in this important brand continues.

Second, our commitment to lean principals has allowed us to mindfully transform our manufacturing footprint.

Steelcase has always configured its' supply system around exceeding customer performance expectations and we jealously guarded our supply configuration to insure that performance.

This will explain why we consistently rank number one, in customer surveys, as the highest quality manufacturer.

Going forward, we will still obsess about the support of our customers.

However, due to the combined impact of the growing enterprise computer systems that are being installed, the reliability of supply systems that are linked to the web, and the growth of capable component suppliers, coupled with the frictionless trade policies, we can take advantage of further lean principles.

Simply put, we can continue to change the footprint and reduce the size and complexity of our operations.

We were deliberate about starting this three years ago and we've made tremendous progress.

Our employees kept their focus on the customer even as we reduced almost half of our manufacturing place.

We continue to learn that there's much more we can do.

This week we announced some significant actions that you can read about separately that lock in the savings we have created and move us more-- excuse me -- move us toward our long-term plan of 35% gross margins.

Frankly, I'm confident that you can count on this management team for delivering what we said we'd do.

And while we -- and while we aren't going to give a verbatim forecast for the coming year, we expect to continue our renewal and progress against those long-term plans.

Now I'd like to turn the call over to Jim Keane, our Chief Financial Officer, who will detail our Q4 results and full year results.

Jim?

Thank you, Jim.

Today we reported a full year profit of $12.7 million, or $0.09 per share on sales of $2.6 billion.

That compares to a loss last year of $23.8 million.

Compared to the prior years, sales increased $258 million, or 11.4 %.

Current year sales benefited from $80 million in revenue from dealers consolidated this year and $41 million from currency translation effects.

Operating income of $18.2 million compares to an operating loss in the prior year of $74.4 million.

We're very pleased with the progress made in each of our businesses over the last year.

Each of our segments saw annual sales growth and substantial improvements in profitability.

North America returned to profitability after a significant loss in the prior year and SDP more than doubled its profitability versus the prior year.

Operating income includes the impact of approximately $40 million of additional pretax accrued variable compensation expense versus the prior year, which relates to a number of bonus and incentive plans throughout the company.

For example, most employees in North America are eligible for a bonus based on EVA and many international employees are eligible for a bonus based on other performance factors.

The current year amount is not unusual and bonuses are a normal part of our compensation expense, but it does represent a significant increase from the prior year in which some of the larger plans paid no bonus at all because of poor profitability.

About 60% of the $40 million increase in variable compensation expense applies to operating expenses and the rest is included in cost of goods sold.

Variable compensation expense includes many different plans, each with their own performance metrics.

In aggregate, the expense is primarily driven by annual profitability and growth in profitability.

This year's increase was primarily driven by growth.

If pre-bonus operating income doubled next year, the total variable compensation expense would be about the same as this year.

If pre-bonus operating income was the same next year as this year-- the variable compensation expense would decline by 15 to $20 million, which means reported operating income would be higher.

The actual calculations for each plan vary and include factors like EVA assets and lots of other performance metrics that will cause actual results to vary, and the scenario as I've described are not meant to be a forecast, just a way of roughly indicating the sensitivity in our variable compensation expense.

So variable compensation expense was $40 million higher while pretax restructuring charges were about $40 million less than in the prior year.

As a reminder, we show pretax restructuring costs on our consolidated statement of operations as two separate line items, charges related to operations are shown under the cost of goods sold line and other restructuring charges are shown under a separate line under the operating expense line.

As you analyze the reported $92.6 million improvement in operating income, remember that the reduction in pretax restructuring costs was offset by the increase in variable compensation expense.

So the improvement in operating income is a function of higher sales and better margins.

The margins are better even though we still had negative effects from steel inflation and we were experiencing disruptions related to plant moves.

The operating income margin is still far below our target and we have a lot of work ahead of us, but we are very pleased with the progress we made in a single year.

Our cost of sales, which is reported separately from restructuring charges, improved to 71.2 %, versus 72 % in the prior year.

The benefits realized from lean initiatives and prior restructuring efforts were partially offset by increases in commodity prices, higher discounts, increases in variable compensation expense, and disruptions from prime consolidations, which occurred this year.

Gross margins of 28.5 % in 2005 improved from 26.2 % in fiscal 2004 because of lower restructuring costs in the current year and the factors I just mentioned, which reduced costs of goods sold.

In the first quarter of fiscal 2005, we implemented a steel surcharge in North America to cover the arising price of steel.

Our revenues included $26 million related to the surcharge and we estimate our steel costs were $35 million higher during the year because of higher steel prices.

The combined effect of the steel surcharge and the higher steel prices reduced gross margin by 0.7 % of sales.

Operating expenses of $722.3 million were 27.6 % of sales compared to 28.9 % of sales in the prior year.

This improvement reflects ongoing cost controls and higher sales volume.

When comparing actual dollars to the prior year, consider that dealers consolidated in the current year added $29 million and currency translation added $12.6 million to operating expenses.

Included in current year net income is an $8.2 million reduction in a specific tax reserve.

This reserve relates to a deduction that we took in fiscal 1997.

During the third quarter, the tax court ruled favorably on a case similar to ours and we reversed the reserve by $6.5 million.

In the fourth quarter, we finalized a settlement agreement with the IRS and we were able to reverse the remaining reserve of $1.7 million.

One more thing on income taxes, we calculated our tax expense for the year using a 30 % rate and then adjusted it for the $8.2 million favorable reserve reduction, which results in the $6.7 million tax benefit reported for the year.

We believe our longer term rate is still about 37 to 38 %.

As discussed in the earnings release and the form 8-K filed earlier this morning, the Company completed a review of its lease accounting policies at the end of the fourth quarter.

The chief accountant of the SEC issued a public letter last month, emphasizing certain aspects of lease accounting.

In the weeks that followed, many companies announced corrections in restatements related to this topic.

We had historically expensed operating leases as paid.

However, when an operating lease has a scheduled annual rent increase over its term, it is appropriate to add up all the lease payments and divide by the number of years to determine annual expense.

The impact of using this straight line approach increases expense in the early years of a lease and reduces expenses in the later years, as compared to the approach we've used.

The more appropriate way to correct this is by -- is by restating prior periods rather than booking a catchup adjustment in the current year.

The impact of the correction is immaterial to the balance sheet and immaterial to earnings in any particular period.

In fact, because of rounding, earnings per share in fiscal 2003 and 2004 is the same as originally reported.

Earnings per share in fiscal 2005 was also uneffected by the change, again, because of rounding.

The restated amounts will be incorporated in the 10-K we file in a few weeks.

Now I'll talk about the fourth quarter.

We were profitable in the fourth quarter with net income of $1 million, or $0.01 per share on sales of $691 million.

We had previously estimated that we would break even in the fourth quarter so the small profit is in line with our estimate.

After tax restructuring costs of $3.2 million were also in the range we had estimated.

Included in fourth quarter income was a $1.7 million reduction in a specific tax reserve, which I discussed previously.

The $1 million profit we earned this quarter compares to a net loss of $19 million in the prior year fourth quarter.

Sales of $691 million represent an increase of 22.6 % over the prior year fourth quarter.

We had previously estimated a 20 % year-over-year increase, so sales were a little stronger than we expected.

Current year sales benefited from $23.4 million in revenue from dealers consolidated earlier this year and $8.8 million from currency translation effects.

Operating income in the fourth quarter was just above break-even compared to the a loss of $41.3 million in the prior year quarter.

Pretax restructuring charges were about $20 million less, $20 million less in the current year quarter than in the prior year quarter, so the rest of the $41.6 million improvement in operating income is due to stronger sales and operating performance.

I'll finish this section on the fourth quarter by covering gross margins and operating expenses.

Gross margins of 28.2 % were up from 23.9 % in the prior year quarter primarily because of lower restructuring costs in the current quarter.

We did see benefits from previous restructuring efforts, which were partially offset by higher variable compensation expense and material inflation.

Operating expenses of $191.7 million were 27.7 % of sales compared to 30.5 % of sales in the prior year.

When comparing actual dollars to the prior year, consider that newly consolidated dealers added $8 million to operating expenses and currency translation added $2.7 million.

Next I'll talk about the balance sheet and cash flow.

The combination of our cash and short-term investments was $348 million at the end of the year, an $86 million increase from the prior year end.

The increase was driven by a number of items, depreciation and amortization for the year was about $128 million and capital expenditures were $49 million.

The difference in these amounts represents a source of cash.

We reclassified our investments in auction rate securities as short-term investments for both fiscal 2005 and 2004.

Previously these investments were included in cash.

These investments are typically held for 30 days and in fact, all investments held as of year end have since been converted to cash.

The reclassification has no effect on our debt covenants.

We reduced debt by $28 million in the current year to a year end balance of $326 million.

We expect to use some of our cash to retire approximately $49 million of debt, which matures during the first quarter.

We have completed our evaluation of internal controls and we are very pleased by work done by many people in the company to get us to the certification stage.

We will sign our certification on the effectiveness of our internal controls, which will be included in our form 10-K.

Our independent auditors have also completed their testing of our internal controls and they have informed us that their testing procedures did not identify any material weaknesses in our internal controls over financial reporting.

We estimate that our total cost of complying with 404 including internal costs was approximately $3 million, or 0.12 % of sales.

We believe that it's comparable with other public companies based on published benchmark data.

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

In North America, sales were $1.44 billion for the year.

That's an increase of $159 million, or 12.4 % from the prior year.

The current year revenue included $57 million from newly consolidated dealers.

Full year operating income was $5.5 million, an improvement of $52.4 million from the prior year.

Compared to the prior year, variable compensation expense was $33 million higher and pretax restructuring costs were $18 million lower.

Pretax restructuring costs for North America were $8.8 million for the current year versus $27 million in the prior year.

North America's fourth quarter sales were $376.9 million, an increase of 25 % from $301.8 million in the prior year quarter.

Fourth quarter sales include $13.1 million from newly consolidated dealers.

That's the highest year-over-year growth in a single quarter for this segment in more than four years.

North America revenue growth continues to be primarily supported by sales to our larger customers.

This segment of customers grew in excess of 25 % year-over-year.

And that's true for both the quarter and the fiscal year.

Although North America reported an operating loss of $0.8 million for the quarter, results were significantly improved over the loss of $28.7 million in the prior year quarter.

Compared to the prior year quarter, variable compensation expense was $11 million higher and restructuring costs were about $16 million lower.

So, again, we're seeing good momentum, although we are not yet where we need to be.

North America gross margins of 24 % for the quarter improved 5.8 percentage points compared to the prior year, primarily due to lower restructuring costs in the current year.

Restructuring costs included in gross margins were $0.6 million in the current quarter, versus $13.4 million in the prior year quarter.

North America gross margins continue to be negatively impacted by high commodity costs.

For the quarter, the increase in steel costs exceeded the steel surcharge by about $4 million.

We also continued to experience disruption costs related to this consolidation of our wood plants.

North America implemented an annual price increase for orders received after mid January, but the impact on the fourth quarter was immaterial.

Implementation of the price increases is going as planned and we'll begin to see a modest impact in the first quarter.

North America operating expenses were $24.2 % of sales in the fourth quarter, down significantly from 27.7 % in the prior year.

Compared to the prior year, current year operating expenses included $4 million from newly consolidated dealers.

Restructuring costs related to operating expenses in the prior year fourth quarter were $2.9 million and there were no restructuring costs in the current year quarter.

SDP sales were $322 million for the year, an increase of 16.9% from the prior year sales of $275.6 million.

Sales for the fourth quarter were $88.1 million, a 35.7 % increase compared to the prior year and the highest growth rate of any of our segments.

Each of the brands within SDP reported significant sales growth for the year and growth was strong across several different product categories.

SDP fourth quarter gross margins of 37.5 %were slightly better than 37.1 % in the prior year.

The impact of higher volume was partially offset by higher material costs.

SDP continues to have the highest gross margins of any segment.

SDP operating expenses were $25.6 million for the quarter, or 29.1 % of sales.

This represents a significant improvement over 33.6 % in the prior year despite higher variable compensation expense.

SDP reported $26.2 million in operating profits for the year, more than double the operating income of $12.8 million in the prior year.

For the fourth quarter, operating profit was $7.4 million compared to $2.3 million in the prior year.

International sales were $590.5 million for the year, an increase from $539.2 million in the prior year.

Current year sales included $23.1 million from newly consolidated dealers and $41.3 million from favorable currency effects.

For the fourth quarter, international sales were $168.9 million, a 20 % increase compared with the prior year.

Current quarter revenue benefited by $8.8 million in favorable currency effects and $10.3 million from newly consolidated dealers.

Some key international markets reported year-over-year growth this quarter: as we've said before, the industry is recovering more slowly in international markets, but we are pleased to see growth beginning to pick up.

International reported an operating loss of $5.4 million for the year, an improvement over the prior year, primarily because of lower restructuring costs in the current year.

International operating loss was $0.1 million for the first quarter, an improvement from a loss of $9.5 million in the prior year quarter.

In this case, lower restructuring costs only explain $3.1 million of the improvement for the combination of growth and improved operating performance are the primary reasons for the improvement in operating income for the quarter.

Gross margins for the fourth quarter were 30.3 %, an improvement of 6 % over the prior year quarter.

The improvement is largely due to lower restructuring costs, but benefits from previous actions also had a significant impact.

Fourth quarter operating expenses were $51.3 million, an increase from $43.7 million in the prior year quarter, about $4 million of the increase in operating expenses is related to dealers consolidated this year and $2.7 million is related to currency translation.

Operating expenses as a percent of sales are 30.4 % in the current year quarter, down from 31.1 % a year ago.

Restructuring costs included in operating expenses were $2.9 million for the quarter compared to $0.5 million in the prior year quarter.

Next I'm going to talk about our outlook.

Our first quarter estimates include continued sales growth in improved profitability, but I'll start this section by going through some information about the restructuring actions we announced in North America on Monday of this week.

Specifically we will close three plants in the Grand Rapids area, totaling $2.6 million, I'm sorry, totaling 2.6 million square feet and for the most part, will move production to other plants in the Grand Rapids other area and other locations in North America.

Today we have two major manufacturing campuses in the Grand Rapids area and these moves will eliminate the oldest of these campuses.

That helps us to reduce freight between your campuses and other redundant activities.

Now that we've made this announcement, we can begin exploring options for selling or redeveloping property that will no longer be needed in our business.

There will likely be more than one year and could be several years before the property is sold.

The book value of all the land and buildings that could be sold is between 30 and $35 million at the end of fiscal 2005 and could be less by the time the properties are sold.

A preliminary rough estimate of market value for the real estate indicates that no current charge for impairment is necessary in the first quarter.

To put these plant closings in perspective, back in fiscal 2000, we had about 12.9 million square feet of production space related to the North America segment.

The moves we've previously announced reduced that to about 7.6 million square feet.

After the moves we announced this week, we will have 5 million square feet of production space related to the North America segment.

That's a total reduction of about 60 %.

We believe we will still have plenty of capacity at 5 million feet and as sales increase, we expect to add additional shifts as necessary, benefits and continued reduction in complexity, and in some cases, rely more on our suppliers.

In fact, we believe our industrial model will be able to deliver more volume using 5 million square feet than we delivered back in fiscal 2000.

Clearly, there are risks as we continue to redefine our industrial system, but these actions are necessary to improve our competitiveness and achieve our longer term gross margin targets.

Over the last four years, the Company has taken charges to change the North American industrial model, the international industrial model, and to reduce the salaried work force when the industry recession was under way.

We've said before that most of the major restructuring was behind us, but we weren't finished.

From fiscal 2002 through fiscal 2005, we have booked a total of $178 million in pretax restructuring charges, so those are behind us.

What's ahead are estimated pretax restructuring charges of 29 to $37 million for fiscal 2006 with 21 to $26 million related to the consolidation we announced this week.

The after-tax amounts are shown in the earnings release.

The charges for the North America consolidation will include severance, accident impairment charges and equipment relocation costs.

We expect disruption costs to be 4 to $7 million over the next two years as we move lines to new locations and experience learning curve effects.

These disruption costs flow through our normal costs of goods sold and are not included in restructuring cost estimates.

These actions will reduce net head count by 600 positions over the two years.

Jobs added in some locations will partially offset jobs eliminated in other locations.

We are taking these actions to help Steelcase remain a strong competitor in North America and create opportunities for future growth.

But we are very aware of the immediate impact of these moves on the individuals whose jobs will be eliminated and their families.

We've chosen to offer early retirement and to pay severance to hourly workers affected by these moves.

The estimated cost of severance is quite significant and is included this charge estimates we've provided.

Although this may be seen as unusual, it is consistent with the approach we used when we closed other plants in North America last year.

More importantly, we think it's the right approach and considers the loyalty of these long-term employees to the Company over many years of service.

Although we will see some cost savings beginning in the second quarter, we don't expect cost savings to be significant until fiscal 2007.

Once this two-year project is completed, we expect incremental pretax savings to be 35 to $45 million annually.

The cash payback of the project is about 12 months.

Now I'll review our order trends and outlook for the first quarter.

Orders in North America followed the normal seasonal pattern of softening during the fourth quarter and then strengthening again in March.

Q4 orders were much stronger than in the prior year.

Our North America and SDP backlog is also significantly higher than at this time last year.

We expect first quarter sales will be 10 to 15 % higher than in the prior year.

We estimate we will record 8 to $11 million of after tax restructuring costs in the first quarter, with about 6 to $8 million of these costs related to the actions announced earlier this week.

About 80 % of the restructuring costs will relate to cost of goods sold, with the rest related to operating expenses.

We estimate reported earnings per share will be between breakeven and $0.05 per share in the first quarter of fiscal 2006 after these charges.

Again that, would be an improvement over the loss we recorded in the first quarter of fiscal 2005, despite significantly higher restructuring charges in Q1 of 2006.

We're not you providing any estimates of full year revenue or earnings.

We did provide a full year estimate of restructuring charges this one time because the first quarter charges are so significant, but we are not planning on updating this estimate each quarter.

So that's it for the financials.

Again, we are very pleased with the growth in sales and the improved profitability for the year and for the quarter.

We can see the benefits of the actions we've taken in the past, although we continue to have a lot of difficult work ahead of us to reach our longer-term goals.

We're pleased with the momentum in our business and are encouraged that our estimates for the first quarter show a significant improvement in sales and profits over the prior year quarter.

Now I'll turn it over for questions.

Pete, we'll take questions at this time, please.

Thank you.

Ladies and gentlemen, the floor is now open for questions.

If you have any questions or comments, please press the numbers one followed by four on your touch-tone phone at this time.

Pressing one for a second time will remove you from the queue should your question be answered.

Lastly, we do ask while posing your question that you please pick up your handset if listening on speaker phone for optimum sound quality.

Please hold while we poll for questions.

Thank you.

Your first question is coming from Susan Maklari at UBS.

You may go ahead.

Good morning.

Good morning.

Good morning, Susan.

Congratulations on a good quarter.

Thank you.

Can you just kind of go through, I think that the SG&A expense was a bit higher than we were expecting and I know you talked about the variable comp and how that works some, but going forward, can you talk a little bit about how we should be thinking about some of the other items that may fall in there?

Well, we released operating expenses, couple things to consider.

First of all, when you look at comparisons to the prior year, you should consider, again, the dealers that are consolidated in the current year that added $29 million to operating expenses and then currency translation, which added $12.6 million, again, versus the prior year.

In general, as it relates to cost controls, we've been very pleased with our ability to grow the business as much as we have on the top line and yet keep our operating expenses relatively well controlled.

Much of the increase in operating expenses relates to those two items, plus the variable compensation expense.

We do often seasonally see a little bit of an increase in fourth quarter operating expenses related to things like a dealer conference that we hold in North America this year.

Again, we believe those kinds of events are well worth it and help us grow our top line.

But we're -- we're working on things like implementing lean principles in our offices that will also help us, we believe, lock in these savings and avoid seeing operating expenses grow as sales grow.

Okay.

So if we look kind of back historically at your SG&A margin and it kind of seems like it bottomed at a little over 24 % and peaked at maybe 29 % or so, how do we think about that in the future?

I know you've talked a lot about the gross margin, but any sense on the operating side?

Yes.

Our ink level target for operating expense longer term is 25 % of sales.

So, the long-term targets again in summary are, 35 % target for gross margin, 25 % target for operating expenses and 10 % target for operating income as a percent of sales.

Okay.

And then I know that longer term you're thinking of your tax rate going back to that 36 or 37 %, but as we model out for the next four quarters or so, when do you expect the tax benefit that you've realized to -- to kind of roll off and the rates to kind of come up some?

The-- as we're doing our own internal forecast for the coming year, we're using that 37 to 38 % tax rate.

We think it's appropriate to use that for now and as things change, we will let you know about that.

But I think that's really the right rate, someplace between 37 and 38 % is what we see as our longer term rate.

And that's the rate we're use fog this coming year.

Okay.

That's fine.

Then one last question.

Can you just give us an update on the -- the price increases that you put through in January.

Do you have any sense of how much you expect that to contribute in the next quarter or two?

I don't have an estimate of the dollar amount here, but I do believe that we had almost no impact of it in the fourth quarter.

We'll see some impact in the first quarter, but it's just going to begin to roll in gradually.

As we get out to the second and third quarter, we might be able to give some sense of what the impact is.

Okay.

All right.

Thank you.

Thank you.

Thank you, Susan.

Thank you.

Your next question is coming from Budd Bugatch at Raymond James.

Good morning, you may go ahead.

Good morning, Jim and Jim, and Terry and everyone else that's there.

Hi, Budd.

Hi, Budd.

Budd.

I'd like to go back to your longer term goals, when you think you can get there, kind of revisit that.

I think you all have done just a ,an incredible job and I know how hard this period has been and I feel for, you know, the management, but also for your associates obviously.

If you get to that 10 % operating goal, what's the timeframe, Jim, to get there?

When do you think that happens now?

The 35 % gross margin goal, the 25 % operating expense goal and the 10 % operating income goal came out of the plans process that we go through each year in December and in this-- and it's really a planning process this loose out three years and the intent is not trying to lock it down to any particular quarter, but more to say what do we think is achievable in our business.

That's really the way to think about that.

And sustainable, I hope.

Yes.

And, and that's believed to be sustainable.

And then we, we-- in building it up, we're also careful not to load in just really high sales growth estimates because these kinds of goals are easy to achieve if sales grow at rapid levels, but to load in something that's more modest,--

Define a rapid level, or define a modest level.

What, what are you looking at?

Well this, is not an outlook for what we think growth will be, but in modeling the business, we generally are going use numbers, even in this kind of a period that are at or below 10 %.

Okay.

That's where I would be.

And that's, again, not meant to be our outlook for what the business will grow by, but rather we put that number in there so that it drives us to make the kinds of operating changes and other decisions that we need to make to be sure that we can hit these goals even if growth is more modest.

So then we make sure that the actions we have in mind and the plans we have will get us there.

So if you were to grow at 7 % for three years, that would get you to about $3.2 billion in sales and get you to about a $320 million-- let's say it's a three-year target.

A $320 million operating profit.

That the right way to think about it?

Is that a reasonable timeframe, three years?

We're smiling, Bud, because you're so good at this.

We can't give you a sales growth estimate to use, you know, all I've done is said that the numbers we're using are in that 10 or less range and based on that, we set up our plans for our long-term profitability, but really, you know, we've learned a few things over the last ten years in this business, which is, no matter what you think the sales growth might be, it could be quite different, it could be much higher it could be much lower, and which we plan our business, we need to consider different scenarios and have different plans for different scenarios.

So, I'm not going to confirm the number you said because it is based on just one of many scenarios that could occur.

Okay.

I'm just trying, but I'm -- you know, obviously what we have to do is try to figure out how to help our clients value what the, what the art of the possible is here.

Yeah.

What the company and what the valuation of the ultimate security will be if -- if we're going make a good investment or a rational investment.

And that's kind of where I'm trying to help people get to and that's-- I, you know, unless you have a different solution, that's kind of where I think we have to do.

Well, again, I think the 10 % operating income is the goal we V it's based on, as I said modest growth, probably 10 % or less as we modeled it.

And you know, I think that will help you, you know, then decide what you think the right growth number is and you can use those numbers as you wish.

Okay.

Let me just a couple of other niche.

The variable compensation in the fourth quarter, I got the $11 million for North America.

I don't know whether there was additional variable compensation elsewhere, I -- you were going through it pretty quickly and I don't think that numbers are either in the press release or in the 8-K.

Help us.

What was the total variable comp with the 40 delta in Q4?

The, the total-- I'll give you a way to figure it out.

Okay.

So the total that we said for variable compensation in North America was $33 million.

That was the increase versus the prior year.

And at the ink level the total increase was $40 million.

Okay.

Right.

In the fourth quarter, the increase in variable compensation expense was 11 million higher than the prior year so you can kind of gross that up and you can get a sense of what it was for the total comp.

I'm close enough.

I got the way there.

What about steel surcharge and steel costs in Q4?

Did you give us that overall?

Yeah, the-- I gave you the difference.

The difference between the steel costs and the steel surcharge was $4 million.

[inaudible]Okay.

All right, Jim.

Thanks.

Thanks much.

And congratulations on getting through a tough year and, you know, much good luck, hopefully to your associates in Northern Michigan.

Budd, thanks for that.

Thanks very much, Bud.

Thank you.

Your next question is coming from Matthew McCall of BB&T Capital Markets.

You may go ahead.

Thanks, good morning.

Good morning.

Good morning.

Hi, Matt.

Let's see, you mentioned, you discussed the price increases.

I can mark that off.

But I think last quarter you talked a little bit about the impact of discounting.

And I know you mentioned discounting, but I didn't hear any numbers along with it.

Can you talk about how discounting impacted maybe versus the prior year quarter?

I don't have the specific numbers as relates to the prior year quarter.

I will comment a little bit on the trend.

We did see-- I'll speak about the North America segment here.

We did see some signs, as we said before, that discounts were moderating.

You know, where the rate of discounts versus-- in the fourth quarter versus the prior quarter, the third quarter.

We're showing signs of moderating maybe even reversing quarters slightly, just a slight improvement from our perspective, reduction in discount.

And that is consistent with things we have said before.

We were seeing those, the rate of increase in discounts beginning to slow down and in this quarter we saw that, I'll say at least flat, if not a slight reversal the other way.

I don't have discount information for the fourth quarter versus the prior year here and I don't have it at the ink levels.

So I'm really talking about North America.

Okay.

For an outlook in the Q1, you see signs that these trends of moderation and possibly reversing course are continuing?

Well, we got to be careful, Matt, because we can't forecast pricing effects going forward, but we can tell you in looking backwards, that, you know, the recession has this kind of effect historically and they begin to moderate as you come out of recessions.

Okay.

Well, I think last quarter you talked about your backlog was a little healthier, similar-- does it continue to-- improvement--

Yeah, that persists.

Okay, okay.

Okay.

You talked about the impact of steel with the price of oil have you seen much of an impact from some of your oil derivatives on profitability and if so, could you quantify those?

We're going let Mark Baker answer that question.

Yes, this is Mark Baker, and we aren't in a position to necessarily quantify that, but there's no question that really starting in the third and fourth quarter we started to see non-steel inflationary pressure, principally tied to those oil derivative products, both at the material level in terms of plastics and then also significant pressure on the freight side because of fuel surcharges as well.

Okay.

The price increases that you expect to take full effect, I guess you said in Q2, given what steel has done, given what oil derivatives are doing, do you still expect to be able to recoup most of those increases?

Well, we don't think that the price increases will take full effect in Q2.

They-- the way it works in the way these contracts roll and so forth is it takes several quarters before we begin to see whatever effects we're going to see and you may never actually see the full effect of the price increase.

Right.

Right.

We do know that the steel surcharge we put in place was really just for steel.

These other cost increases, I didn't quantify today, but they are also effecting our gross margins.

The price increase that is coming through will help to offset some of that, but like the steel surcharge it, will probably lag here a little bit for a few quarters before we start getting a meaningful offset to those higher material costs.

Okay.

Let's see, the guidance, you're looking at 10 to 15 % top line.

And if I exclude these charges, and I'm getting to an operating number of about 6 to $0.12 , the, the profitability, or the profit improvement implied from margin expansion and you have addressed this a little bit, but can you talk a little bit-- I'm sorry for the siren, if you can hear that.

Something's going on here.

Are you looking for more improvement, cost of goods, more improvement in SG&A?

What should we look at when we're balancing out in that operating number and make these numbers make sense?

Yeah, we're, we're thinking we're going have improvement across both of these in the coming years, so, and in the coming quarters.

So the higher sales volume first of all helps us spread our fixed costs both in operating expenses and in our cost of goods sold, so you get a fixed cost rating factor just because of that.

We're continuing to see improved operating performance related to some of the restructuring actions we took last year.

So we mentioned the wood consolidation, for example.

And I'll let mark add to that.

But, we would expect incoming quarter that a lot of that disruption will be behind us and we should see some improvements.

And we're also going to begin to see the effects of the price increase that we mentioned before and there's other -- other factors that we think will help us reduce costs, some of the actions we announced earlier will begin to have an impact in the first quarter, although the impact will be larger, out further.

Mark, do you want to add anything about the disruptions?

No.

I think there's no question that our fourth quarter had some disruption impacts that, particularly in North America, impacted some of our gross margin performance and as we've gotten now some stability from -- that move has now been completed, we should start to see some of that, those disruption costs move away from us as we move into the first and second quarter.

Okay.

Okay.

I think I've got that.

Let's see, talked about that one.

The only last question I had was the other income line, there was about $3.5 million.

Can you tell us what that was?

The other income is influenced by higher interest income, the higher cash balances are driving higher interest income.

That goes on other, okay.

And then in addition, we had income from our joint ventures in the fourth quarter that were significantly higher in an the prior year.

And last year had a couple of charges primarily related to foreign exchange that didn't occur this year, so quarter on quarter, those are the main drivers.

Okay, and going forward, the last two quarters have been in the 4.33-4.5 range.

Is that a better number going forward looking at the income from the JV included?

I can't forecast that particular income going forward.

You got to break it generally into two pieces, interest expense, which is the more significant negative, or charge item, and the other item does include a number of items including interest income, income from ventures, foreign exchange, et cetera.

So that number is not as easily forecasted.

Okay.

Okay.

Thanks a lot, guys.

Good luck.

Thank you.

Thanks, Matt.

Thank you.

Your next question is a follow up question from Bud Bugatch.

Sir, your line is live.

Yeah, I just had a question on the portfolio.

Is there any rationalization of the portfolio that you're thinking about?

You were fairly aquizative (sp) over the last seven years or so.

Jim, what's the thought process?

Well, Bud, I actually was going make this comment at the end, but I'll just accelerate it.

When you back up and think about the economic improvement that the company was about, we face this recession, we first had to shrink quickly and that happened, you know, that's kind of a horrible event, but we -- we got through that.

We got-- we had to shrink the size of the company.

Then we began an effort secondly to enhance key processes.

That's much more mindful work and it's difficult because it takes some time and you're re-engineering key processes across the company.

I think the third phase, which we're in now, is what I'm calling business and economic rationalization, and what it is is where you're tipping the table right now, is you're looking at the substance of the company and asking questions of saying why do you have the configurations the way you do, and what's the basis for them to improve?

And we're being, as we have in these past efforts, quite thorough and strategic, I would say, in our thinking, being very aggressive about being a better competitor and out of this is things like we announced this week where there's some facility rationalization.

We're looking at brand structure in the company and there's a lot of ideas there.

And businesses that weren't performing, you know, or weren't core.

Some were performing quite well, but weren't core to our efforts, you know, we did take action in those areas.

But I want to underscore something that you're implying, which is is there a, you know, is there a strict discipline to get after that?

And there is, because that's now at the point where the new economic performance comes from because we did all of the fast and deep things and now it's about really making this business robust.

So that's how I would respond to that.

There's nothing specific, you know, in the, in the future that I can talk about.

Okay.

And the JV improvement over last year, where-- can you tell us where that happened?

Which JVs .

Work stage was the primarily one, Bud.

We did our JV in Saudi was profitable this year, but work stage would bet more significant of the numbers.

Okay, and, Jim Keane, use of cash, or Jim Hackett, too, the use of cash going forward, what's the, what's the utilization now?

You're generating cash and no longer have it used by the finance operation and debt seems quite manageable.

Yeah.

We're going your as I said, about $49d million of the cash to pay off debt in this coming quarter.

That's a piece of debt that is going to mature in the quarter, so we -- we'll use some of it for that.

We'll also be using cash, as we said before, for the restructuring actions that we announced this week over two years that's about 20 to $25 million in cash.

So those are two uses.

We don't mind carrying a healthy cash balance.

We have a history of doing that and we like the fact that we've got a very strong balance sheet.

So when we have a large cash balance, we don't feel a need to go spend it on things right away.

It is good to have it because it keeps your options open and the Board of Directors has options about his how to use that cash to return values to shareholders that they continue to consider and then we also have options of looking at acquisitions and other things if we have strategies that require that.

So we like having the strong cash balance because it keeps those options open.

I guess we probably like that somewhat less.

I mean we want you to generate cash and we want you to then either use it to grow the business in an outsized way or to return it to your stake holders, to your equity stake holders in either dividends, or dividend growth or share repurchase.

And I would say, Bud, if you look backwards, the Company's had a good attitude towards dividends, as the profits sustained, you know, at the level where we know they should.

We-- we have been good about paying dividend rate, 30 to 35 % of that, and our board is motivated to support a dividend process, but we got to do that at the right time.

And we're being very conservative.

We want to get this ship continued to improve and level and then, you know, then we can start talking about some of those things.

Last question.

Can you talk a little bit about EBA, EBA improvement, what maybe the targets are and how you all have measured it, maybe what your note pad versus capital looks like, or do you--

Well, I would say that Jim can give you the details.

Later today, we announce to our employees, some of the bonuses that are layered in those numbers you saw, and one proud moment will be today to remind the employees that those bonuses come from EVA improvement and so I just want to set that up, Jim, as you explain the actual improvement.

Well, the EVA obviously has two parts.

The numerator, which is driven by profitability and we're very pleased with the progress we've made as we said before on that, and we have every intention to continue to improve it.

The numbers you were working up before, Bud, you know, as we get closer to their proceeding numbers of 10 %, that operating income will drive the numerator higher.

On the other side of the EVA calculation, we have managed to maintain a very low level of capital expenditures compared to our history, but not necessarily low compared to what we think we -- we'll need as we continue to grow with this industrial model.

We think 75 to $100 million of capital expenditures annually is a very manageable number and it's not because we're starving the business from capital.

It's really because the model we're moving towards is a less capital intensive model than the model we had ten years or 20 years ago.

So that's one aspect.

We're also pleased that during this year we were able to improve a lot of our working capital metrics, improving our receivables, our inventories, and so forth.

And we have plans in place to continue to improve those, again, the inventories begin to improve as we fully implement SAP and we move to a lean, a leaner manufacturing model and we also have initiatives under way related to receivables.

Mark, do you want to just talk for a minute about capital and the capital intensity of the model as we look forward.

Yeah.

As Jim said, if you were to go back 15 or 20 years, we were quite aggressive in our utilization of capital and it's not to say that we don't still see capital as part of our industrial model, but we tried to be smarter about the use of that capital and to make it where it's appropriate and not just throw it at every single operation and the result of that, as you said, is that, you know, a 75 to 100 million sort of number on a go-forward basis will allow us to continue to sustain and improve the processes that we've -- that we've got.

The other obvious piece to that is when you've got, you know, less square footage, you know, your capital appetite is smaller just, you don't have as many buildings to maintain, and that sort of thing.

Now, that capital expenditures, is that still about $40 million below depreciation or that depreciation level will fall?

I guess, as you've taken some of those facilities out?

Over time, the depreciation will fall, but then the profit drips and so you get the benefit of that either way.

I understand that.

This next year's depreciation level, is it about 125 million?

I don't have an estimate for it right here.

We might be able to provide that in a future call.

We'll give you a sense in the first quarter what our depreciation rate was in the first quarter versus say a year ago once we get to that call.

Great.

Thank you, guys.

Thanks, Budd.

Um-umm.

Thank you.

Thank you.

Your next question is a follow up question from Susan Maklari.

Ma'am, you may go ahead.

Can you talk a little bit about what you're seeing in terms of demand.

I know that you said some of your larger customers are coming back into the market, but in terms of maybe geographically speaking or different types of industries, just give us some color?

Sure.

I would say that the, what we call the fire category, which is finance, insurance, real estate businesses, have been quite healthy, which means that New York and the east coast continues to -- to be the upward area, but we've also noticed areas that were hit hard by the dot com boom and bust, like Northern California, have steadily improved.

Business in Europe is actually, we've had -- we've had rebound there relative to demand.

They didn't seem like they receded as far as we did here in the United States.

Germany and France, particularly are areas that were noting increase in activity and business.

And I would say that the notion that we laid out, Susan, maybe six to ten months ago, which was that corporations had amassed a large amount of cash and had reduced capital expenditures and we thought that they would begin to alleviate some of that hold and let funds flow.

That has begun to happen across businesses, which is, means that some of the core industries, even in automotive companies, you know, right now are still buying furniture, and so I'm encouraged by the stability across the segment in terms of demand.

I don't see as much volatility as I would have talked to you about a year ago.

Okay.

And with all this kind of optimism, can you talk a little bit about NeoCon, some of your new plans for product introduction or what you're thinking of going into that?

Well, you know that, trade show is the North American trade show and Steelcase each year looks at that as an opportunity to really tell a story about the strength of our company.

It was a little bit why I walked you through the role play because there's so many great things coming.

So I don't want to preempt it too much, but I will tell you that every year there is something brand new and there will be this year and we just reviewed the designs of the facility where we display that and I'm very excited about what they are going to be showing.

Okay.

We will look forward to seeing it.

Yeah.

Thank you.

Once again, if there will be any remaining questions or comments, please indicate now by pressing one-four on your touch-tone phone.

Sir, there appear to be no further questions in the queue.

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

I do.

I just want to thank everyone for your attention today and point out that this has been difficult three-year period, you know, for our employees and this week's news effected a smaller group than had news than has been in the past, but still just as important to us and so I want to assure you that the management of the Company in doing the right things for the business, also is taking care to handle appropriately all the issues that surround changes like this and we appreciate that in a time like this when we've got really to work hard to create performance, it's also important to think about the people that are effected by the decisions.

So we're confident we can balance both of those issues.

Thanks for your attention today.

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.