Steelcase Inc (SCS) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to Steelcase's third-quarter 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 North American Finance and Corporate Strategy.

Good morning, everyone.

Thank you for joining us for the recap of our third-quarter fiscal-year 2007 financial results.

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

Dave Sylvester, our Chief Financial Officer; and Mark Mossing, Vice President Finance and Corporate Controller.

Our third-quarter release dated December 18, 2006, crossed the wire early this morning and is accessible on our website.

This conference call is being webcast.

Presentation slides that accompany this webcast are available on steelcase.com.

A replay of this call will also be posted to the site later today.

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

Our discussion today will include references to non-GAAP financial measures.

These measures are presented because management uses this information to monitor and evaluate financial results and trends.

Therefore management believes this information is also useful for investors.

Reconciliations to most-comparable GAAP measures are included in the webcast slides and earnings release.

At this time we are incorporating by reference into this conference call and subsequent transcript the text of our Safe Harbor statement included in this morning's release.

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

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

For more details on these risks please refer to this morning's release and Form 8-K, the Company's 10-K for the year ended February 24, 2006, and our other filings with the Securities and Exchange Commission.

This webcast is a copyrighted production of Steelcase Inc.

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

Thank you, Terry.

Good morning to everyone and thank you for your time today.

There are three key areas for my comments -- one, international performance; two, what the Company is doing with regard to working on continuing challenges; and three, a comment or two on our recent organizational changes.

Regarding international performance this quarter, our third quarter was a very important quarter for us, because it shows that the industrial changes we have made are enhancing our margin improvements in the business as the volume grew.

This is no more apparent than in our international segment.

I want to acknowledge the strong performance of that segment this quarter.

Revenue increased 19.2%, and its operating income rate was the largest in six years.

We continue to believe this segment has significant potential in the future.

In fact you'll recall our investment discussion in international was part of the Q&A in our last quarterly call.

I want to make sure that I am clear that I believe the nature of the European Union and its emphasis on social welfare means that businesses from many industries look at the costs of entry and exit with different horizons there than they do in other countries.

It is on that relative basis for our shareholders that I believe Steelcase being there and doing as well as we did this past quarter suggests we are doing a good job in running our businesses overseas.

While it is true that the Asian business on the top line is growing faster than the rest of the world, the bulk of improvement this quarter came from the performance in Western Europe.

Steelcase Inc. clearly benefits in a world where the global customers need our assistance, and it is why we are proud of our global leadership position.

With regard to working on the challenges in our business, let's face it -- we have made tremendous progress.

This is our best quarter in the last six years.

In business today the celebration can last a day or two; and then we are on to the challenges and opportunities.

As we enter our holiday period, I'm making it clear to our employees that we are very proud of them and the job they have done.

They deserve to celebrate the improvement.

With that said, there are two businesses that are underperforming our expectations.

Let me comment on them.

The first is PolyVision.

This is an entity we acquired and have continued to invest in.

The majority of our investments have been in the digital product category.

It was our belief that the power of the Web, layered in offices and in panels and architecture, would be as important as the specialized fabric that we historically offered.

We were right about that, as the digital segment is growing well.

The, challenge, frankly is in the static whiteboard business, the analog portion.

Without sharing more than is prudent, I would say it's supply chain related; and we are on it.

We have experience in recasting this type of problem, and I'm confident that we can get this turned around.

We believe our promise of a better work experience can make PolyVision's presence in our portfolio logical.

Now what we have to do is improve our return to shareholders.

The second area of challenge in our business is the wood business.

The source of the problems in this business are more complicated, but it is my job to make it clear to you.

The issues surround taking what is a natural product and making it work on a reliable basis day in and day out.

I am pleased to tell you that when you hear about the literal economics later in today's call of the wood business, I want to note that it has responded extremely well to the focus on improvement initiatives our people have started.

It is true that from adversity comes advantage; as not only are we now figuring out what are the back-end issues that destroy value but, as importantly, we are seeing the potential to realize more value in the marketplace, what I would call the front-end.

For example one of our newest products that we launched in the wood business is performing ahead of both volume and margin plans at this time.

Regarding the changes that I announced organizationally after our last call, since that call we announced a series of organizational changes that allow us to further clarify and focus our efforts on key parts of the market.

In straightforward terms, the Company had grown the success of its Steelcase brand to include a very broad array of products, from furniture to technology.

The Steelcase brand spans a powerful set of experiences, each in their own way attractive for further growth and investment on our part.

The challenge is to take care in not growing the brand's essence too far.

The reason is that its complexity can then mask what is really important about the brand or the brand essence.

At the same time while we were thinking about the Steelcase brand, we saw the seed of an idea in Turnstone grow into a meaningful brand to support a very key segment.

It has begun to move beyond its startup adolescent stage, and we are counting on it to do more for us.

I am particularly proud of Turnstone coming from a startup to the fastest-growing brand in its segment over a decade later.

The Steelcase and Turnstone brands are not all that we are.

There is a design specific brand that build on the intersection between work and lifestyle.

These three brands give us the most complete offering in the whole industry.

Each have a distinct market target, all sharing the insight that comes from the core work done at the Inc. research level.

This brand structure gives us the opportunity to continue and clarify and simplify our offering, while also integrating them as a single experience for those customers who are likely to need all three brands from us.

In making these changes, frankly I was blessed to have the capable people already here.

It just meant a few shifts and we would have it.

The first thing I did is I asked Frank Merlotti to lead a new effort as the design group division.

Frank arrived at Steelcase for the second time four years ago, at the depth of the industry recession.

He brought to us at that time just what we needed, which was frankly to enhance the trust and commitment of employees during a rocky time.

Simply put, he did a fabulous job of leadership at a very difficult time.

Now I am asking him to invent something new that builds on a very strong foundation of the Steelcase design partnership.

You need to be patient with me, because its plans are emerging; so there is not much more I can say about its evolution.

But to confirm to you today that its purpose is broader than just having well-designed products, we see some emerging trends that we think are adjacent opportunities for expansion.

Secondly, I named Jim Keane as the President of the Steelcase Group.

Its focus is on large companies and their performance-related expectations.

I would like to publicly thank Jim Keane for nearly six years' service as Chief Financial Officer.

He did an outstanding job during the tough downturn in our industry, and he helped build all our global financial systems.

Those of you that know Jim realize he has a great skill in building, tweaking, and inventing business models.

Both Frank and Jim remind me, as I ask how it's going, that they've literally been in these jobs less than 30 days, so it is early in our report of progress.

With Jim Keane's change, I'm proud to introduce to you our new CFO, Dave Sylvester.

Dave has been with Steelcase for almost 12 years and most recently was the financial executive in our global operations group.

Not only has Dave spent time living in Europe, but his travel globally has been extensive -- he tells me almost seven of the 12 years that he has been here.

It is by no coincidence that Dave's experience as CFO for the international group, and later his role as head of finance for global operations, that he is well suited for the global nature of our business.

Now he will continue the tradition of telling it like it is, dealing with an absolute commitment to integrity in our financial reporting, and being open to good questions.

Now it is my pleasure to turn over the meeting to Dave Sylvester, our Chief Financial Officer.

Thank you, Jim.

Today were reported a third-quarter profit of $32.8 million or $0.22 per share.

This is the highest quarterly profit in six years and represents a 72% improvement over the prior-year profit of $19.1 million or $0.13 per share.

The improvement was primarily driven by an increase in international and North America operating income; favorable nonoperating items; and the reduction in the year-to-date effective tax rate.

These results were above the range of $0.14 to $0.19 per share we estimated last quarter.

Restructuring charges of $3.6 million after-tax, which mainly related to continued consolidation of our manufacturing activities in North America, were within the range of our estimate of $2 million to $6 million after-tax.

Revenue was $802 million in the quarter, a 6.8% increase over the prior year and within the estimated range of 5% to 9% sales growth we provided last quarter.

Our international segment led the way this quarter, posting 19.2% of sales growth over the prior year.

Current quarter revenue included $9.8 million of revenue from net acquisitions completed within the last 12 months, and $9.9 million of favorable currency effects versus the same quarter last year.

Operating income of $40.5 million compares to $32.7 million in the prior year.

The improvement was primarily due to better performance in our international and North America segments and lower restructuring charges.

Included in our operating income were pretax restructuring charges of $5.7 million compared to $7.3 million last year.

Operating income excluding restructuring charges was $46.2 million compared to $40 million in the prior year.

As a percent of sales, operating income excluding restructuring charges improved to 5.7% in the current year versus 5.4% in the prior year.

Cost of sales, which does not include restructuring charges, was 68.5% of sales compared to 69.4% in the prior year.

International reduced this cost of sales percent by 2.9 percentage points versus the prior year; and North America also saw an improvement of 1.7 percentage points in its cost of sales.

These improvements were offset in part by increases in cost of sales as a percent of revenue in SDP and PolyVision.

Steelcase Inc. gross margin of 30.8% was up from 29.8% in the prior-year quarter due to improved gross margins for international and North America.

Operating expenses, which do not include restructuring costs, were 25.8% of sales, up from 25.2% in the prior year.

Operating expenses increased by $17 million.

The increase was driven by several factors including $7.5 million of increased variable compensation expense, $3.4 million for investments in growth initiatives, $3.3 million related to acquired businesses, and $2.5 million in unfavorable currency translation effects as compared to the prior year.

We remain focused on controlling our operating expenses and carefully investing in initiatives that we believe will help grow our top line.

Other income net was $13.9 million for the quarter compared to $2.6 million in the prior-year quarter.

During the current quarter we completed the transition of one of our consolidated dealers, which resulted in a nonoperating gain of $3.6 million.

Also during the quarter we finalized certain legal proceedings and recorded a $1.3 million nonoperating gain related to a minority interest ownership that we have in a European entity.

In addition to these two items, interest income increased by $4 million over the prior year because of higher cash balances and higher interest rates earned on those balances.

Our year-to-date effective tax rate was reduced to 36.4% during the third quarter, down from 38.5% at the end of the second quarter.

During our last call we communicated that we been booking our expense using an estimated tax rate of approximately 37%, but that we had also added a $1.1 million valuation reserve related to deferred tax assets in the quarter, which resulted in a higher effective rate for the second quarter.

Further, we communicated that for the full year we still expected the effective tax rate to approximate 37%.

The decrease during the current quarter is due to expected lower permanent differences primarily related to appreciation of our Company-owned life insurance policies.

The full year effective tax rate will likely be further impacted by the retroactive reinstatement of the U.S. research tax credit, which has been approved by both the House and the Senate but has not yet been signed into legislation by the President.

If the retroactive proposal is approved by the President, we would expect a full-year effective tax rate in the range of 34% to 35% for fiscal 2007.

While we continue to believe that our long-term rate is approximately 37%, the research credit could have the impact of lowering the rate by nearly 1 percentage point next fiscal year while it remains in effect through the end of calendar 2007.

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

Our cash balance was $525 million at the end of the quarter compared to $707 million at the end of the second quarter.

Remember we had inflated cash and debt balances at the end the second quarter because we issued new term notes of $250 million late in the second quarter, while redemption of the existing notes occurred early in the third quarter after a 30-day notice period.

Our debt balance at the end of the third quarter was $256.1 million.

During the third quarter we acquired Softcare Innovations for $13.6 million.

The acquisition of Softcare is part of Steelcase Inc.'s strategy to grow its new healthcare division, Nurture by Steelcase.

Softcare has a portfolio of patient room case goods and healthcare seating products that will expand Nurture's ability to provide holistic solutions for its customers.

Also during the quarter we repurchased 592,000 shares under our outstanding share repurchase authorization at a total cost of $9.7 million or at an average price of $16.37 per share.

As of the end of the quarter we have 1.6 million shares remaining on a prior authorization in addition to the $100 million authorization approved by the Board of Directors during the third quarter.

Lastly we announced late last week that the Board authorized an increase in the third-quarter dividend to $0.13 per share.

Excluding the cash paid to redeem our senior notes, our cash balance increased by approximately $68 million from the beginning of the quarter.

This increase is consistent with our normal seasonal pattern and was driven by strong profitability, increases in accrued compensation liabilities, utilization of deferred tax assets, and continued careful management of capital expenditures.

Capital expenditures during the quarter totaled $11.9 million and remain on an annualized run rate of less than $50 million.

Now I will discuss the operating results for each of our segments, starting with North America, which improved profitability again this quarter.

In North America sales were $434.9 million in the quarter, compared to $433 million in the prior year.

Current-year revenue included $7.3 million from net acquisitions and $1.2 million of favorable currency impacts compared to the prior year, related to sales by our subsidiary in Canada, which is included in our North America segment.

During last quarter's call we noted that order rates decreased the last few weeks of the second quarter, leading to an unseasonably low backlog entering the third quarter.

Orders improved in the third quarter and generated moderate single-digit year-over-year growth as well as sequential quarter growth over the second quarter.

The increase in timing of our order rates, however, was not sufficient to drive more than a few million dollars of sales growth over the prior year during the current quarter.

As a result, ending third-quarter backlog rebounded to normal levels.

The only other factor that I would like to call out is that the third quarter of the prior year was one of our strongest quarters, representing a 17.4% increase over the previous year.

Accordingly, this year's quarter was up against a tough comparable period.

Operating income was $21.4 million, including $5.2 million of pre-tax restructuring charges.

Prior-year operating income was $19.5 million, including $4 million of pre-tax restructuring charges.

Operating income excluding restructuring charges improved to 6.1% of sales compared to 5.4% of sales in the prior year.

The improvement in operating income was primarily the result of improved cost of sales as a percentage of revenue.

North America gross margin was 28.0% compared to 26.6% in the prior year quarter.

Pre-tax restructuring charges included in gross margin were $5.2 million in the current quarter compared to $4 million in the prior-year quarter.

Cost of sales, which is reported separately from restructuring cost, improved 1.7 percentage points over the prior-year quarter.

Approximately one-third of this improvement was realized through improved pricing yields and continued plant efficiencies.

The balance of the improvement can be attributed to two things.

First, in the current quarter we experienced lower disruption costs related to manufacturing moves and product launches.

Remember, last year we experienced significant operational and customer disruption during the launch of our new large case products.

This year, while we are still completing product moves previously announced, we have been able to do so with minimal operational or customer disruption.

Second, we experienced significant increases this quarter compared to the prior year in cash surrender value appreciation on Company-owned life insurance policies, which was driven by a strong stock market during the current quarter.

You will recall that these investments were made with the intention of utilizing them as a long-term funding source for employee benefit plan obligations.

Accordingly we matched the accounting for their performance with the related employee benefit cost allocations to cost of goods sold and operating expenses.

We have talked in the last two quarters about the profitability issues we are facing in our wood category.

On a fully-allocated basis, the wood category lost about $6 million this quarter or about the same as the second quarter.

Operating improvements over the second quarter, which approximated $1 million, were veiled due to reinvestments in additional cost reduction initiatives, lower volume, and a higher mix of low-margin, long-term contract business that was originated during the downturn.

There are a number of projects underway to drive continued profit improvement over the next few quarters; and we remain focused on returning the business to a breakeven run rate by early next fiscal year.

North America operating expenses were 23.1% of sales compared to 22.1% of sales in the prior year.

Operating expenses increased $4.8 million compared to the prior year primarily due to a $5.1 million increase in variable compensation expense and $2.2 million for investments in growth initiatives, both of which were partially offset by $2.6 million in higher appreciation of Company-owned life insurance policies.

International sales were $199.6 million in the quarter, which was an increase of 19.2% to the prior-year quarter.

Currency translation had the effect of increasing revenue by $8.7 million as compared to the prior year.

Current-year revenue also included $2.5 million from acquisitions that were completed during the past 12 months.

The growth this quarter was influenced by strength in Germany, Spain, Eastern Europe, and Asia.

International reported operating income of $15.8 million in the current-year quarter, which includes $400,000 of pre-tax restructuring charges.

In the prior-year quarter international reported operating income of $6.6 million which included $1.4 million of pre-tax restructuring charges.

Operating income excluding restructuring charges was $16.2 million or 8.2% of sales compared to $8 million or 4.7% of sales in the prior year.

This is the highest operating income reported by the international segment since Steelcase became a public company in fiscal 1998.

It signals the potential impact this segment can have moving forward.

International gross margin was 34.1% in the quarter compared to 31.4% in the prior year.

Gross margin without restructuring costs was 34.3%, a 290 basis point improvement over 31.4% in the prior year.

The improvement reflected volume leverage, restructuring benefits in certain markets, and better operational performance.

In addition we experienced a more favorable mix of business in certain of our more profitable markets.

International operating expenses, which are reported separately from restructuring costs, were $52.2 million or 26.1% of sales.

This compares to operating expenses of $44.6 million or 26.7% of sales in the prior-year quarter.

The increase in year-over-year operating expense dollars includes $2.3 million in unfavorable currency effects as compared to the prior year, $2 million in growth-related spending in Asia, $1.3 million related to acquired dealers, and $1.3 million in higher variable compensation costs.

For SDP, sales were $95.3 million in the quarter, a 9.8% increase compared to the prior year.

SDP reported a $9.5 million operating profit in the quarter versus $10 million in the prior year.

As a percentage of sales, SDP operating income was 10% compared to 11.5% in the prior year.

SDP gross margins of 35.2% were down from 38.1% in the prior year.

The decline in year-over-year margins is similar to the first two quarters but slightly higher than our internal expectations.

This decline was due to various mix shifts including a higher mix of project business, which typically carries deeper discounts, and various mix shift among products and between companies.

In addition we continued to experience some operational issues in a specific plant.

While we expect some of these issues to persist for at least a few more quarters, the current-quarter decline of 2.9 percentage point versus the prior year represents somewhat of an anomaly due to all of the factors that contributed negatively at the same time.

However at 35.2% in Q3, SDP continues to have the highest gross margins of any of our segments.

SDP operating expenses were 25.1% of sales in the current-year quarter, which was down from 26.6% in the prior-year quarter primarily because of higher sales volume.

So the decline in gross margins was partially offset by an improvement in operating expenses as a percentage of sales.

Revenues in the other category increased by 13.7% over the prior year on higher sales from PolyVision.

The other category reported a loss of $6.2 million compared to a loss of $3.4 million in the prior year.

This is primarily related to prior-year credit recoveries in financial services and flat operating performance in PolyVision, despite revenue growth.

You will recall that in prior quarters we have discussed the intense competition we are facing in the U.S. static whiteboard business within PolyVision.

In addition, the operational issues that we have been facing in some of our facilities continued to negatively impact our performance.

Now I will review our outlook for the fourth quarter.

We expect revenue growth to be 4% to 8% over the fourth quarter of the prior year.

International order patterns remained solid throughout the third quarter, and we expect a strong fourth quarter in that segment.

In North America, order rates rebounded during the third quarter, leaving us with a good backlog for the start of the fourth quarter.

It is typical for orders to begin to decline in the fourth quarter.

We have seen that pattern develop in recent weeks and our revenue growth estimates are consistent with that expectation.

It is possible of course that orders could weaken further if our customers become increasingly concerned about the overall economy in the U.S.; or of course orders could strengthen as competition for white-collar workers continues to intensify and new office building construction continues to increase.

For now our estimates are based on typical seasonal patterns.

We expect reported earnings per share will be in the range of $0.14 to $0.19 per share, combine to $0.06 per share in the prior-year quarter.

This range anticipates the full reinstatement of the U.S. research tax credit as adopted by Congress, which would have an estimated impact of approximately $0.02 per share.

We expect to incur restructuring charges of $2 million to $4 million after-tax in the fourth quarter.

For the full year we expect $11 million to $13 million in after-tax restructuring charges.

So in summary, we had a good quarter particularly within international; and we are pleased to see the expansion of North American gross margins despite moderating volume.

Next I will comment on our long-term operating targets, which we have typically updated in this call following our strategic planning meetings, which take place annually during our third quarter.

Our planning horizon is three years, which at this point would end with fiscal 2010.

Today we are confirming that our long-term goal remains at 10% operating income as a percent of sales and that the components we're targeting are 35% gross margins and 25% operating expenses as a percent of sales.

Those are the same long-term goals we have set the last couple of years.

Our current three-year modeling contemplates organic and initiative-related revenue growth, continued cost-reduction efforts within cost of goods sold and operating expenses, and plans to improve the operational performance of certain businesses that are currently not achieving our expectations entirely.

Our top-line assumptions include ongoing realization of price increases and moderate single-digit growth rates, plus growth from specific initiatives.

You already know about some of those initiatives, such as our Turnstone brand and expanding our position in the healthcare segment.

We have referenced in previous calls that we are investing in certain higher-growth markets including Asia, India, and Eastern Europe to create supply chain showrooms and/or sales organizations in order to leverage the growth in these parts of the world.

Finally we believe that our recently announced reorganization will intensify the energy and excitement surrounding our branch structures and thereby continue to support organic growth at or above market levels in existing markets.

We developed our plans prudently on single-digit growth assumptions to ensure that clear, achievable objectives were in place to move us toward our targets, rather than diluting the performance with overambitious growth rates.

Efficiency improvement within cost of goods sold and operating expenses will continue to originate from our focus on lean principles throughout our supply chains as well as within the offices.

The primary focus within North America will remain on cost of goods sold, while international will continue its efforts to optimize the operating expense model across Europe.

As you know, we have certain businesses that are not performing at levels that are entirely consistent with our expectations, in particular wood and PolyVision.

In addition we have referenced in the past several calls a few other areas where we have been experiencing challenges which, when overcome, will improve our overall profitability.

Our long-term targets reflect the confidence we have in our leadership teams to get these businesses completely back on track.

The management team at Steelcase Inc. remains committed to our long-term targets.

Internal confidence levels are high and continue to be influenced by the momentum our results have demonstrated.

Over the past three years we are in operating income margins, excluding restructuring charges, have improved from a loss in fiscal 2004 to over 5% year-to-date in fiscal 2007.

Nevertheless this is not a risk-free target; and therefore I would like to reiterate a few of the more challenging areas, which include predicting and reacting to economic uncertainty; ongoing realization of price increases; and the achievement of growth initiatives that take Steelcase into new vertical markets and geographies around the world.

Sometimes we have been asked if the target could be higher than 10%.

First we believe that as the industry recovery continues, competitive forces will limit profit margins at some point.

So we don't just keep increasing the margin target even though we plan on continuing to improve our efficiency.

Second, the target is intended to be something we could sustain, not just achieve in a peak year.

We are also sometimes asked to talk about one-year targets and two-year targets.

We choose is not to do that because it begins to feel like a forecast.

Instead, as we have done today, we update the three-year target and share some of the assumptions so you can draw your own conclusions about the three years in between.

Now we will turn it over for questions.

(OPERATOR INSTRUCTIONS) Chris Agnew.

Goldman Sachs.

First of all, can I just confirm with you -- can I confirm that in the outlook for revenue guidance, are you including any FX impact?

Because I know the weak dollar recently, it is 11% down year-over-year, should benefit you in the next quarter.

Chris, it is Dave.

I will tell you from experience, the way we have developed our forecast in international historically and continue to do so today is we really take a look at where the exchange rate is at the end of the quarter that we just finished.

We kind of hold that flat and don't pretend to be smart about where it is going.

We really do not adjust it if it starts to trickle up in the first few weeks of the quarter, like it did in this current quarter.

I think right after the Thanksgiving holidays it started to go up to 133 and then kind of came back to 130.

So we kind of settle in on where it is at the end of the quarter and use that as our benchmark go-forward.

Okay; so that is probably 5% benefit for your international business (multiple speakers) roughly year-over-year?

If you have run the model on the average of the prior year and that's how you're doing the math, then you are probably right.

I don't have that data in front of me.

Okay.

Then secondly just another quarter of good cash generation.

How are you thinking about your capital structure going forward?

Are you going to continue to sit on this large cash balance?

Or do you think you would be more aggressive in buying back shares, or dividends, or acquisitions?

Maybe could you prioritize those areas where you plan to use your cash?

Do you think you will get to a position where you actually have some net debt?

I don't want to tip my hat too much on that, but I will try and give you a little bit of color.

First, it is a lot of cash.

Over $500 million is definitely a lot of cash, and we know that.

But the thing you've got to keep in mind is we also typically build cash this time of year; and then you will see that cash reserve deplete somewhat in the first quarter when we pay our benefit employee benefit obligations that accrue throughout the year, as well as the value variable compensation plans.

So keep in mind that right now we are in kind of our peak season.

We also -- I know I have historically talked about carrying a cash cushion so to speak.

Well, today I'm not prepared to update you on whether or not we see that as more or less.

Although I would to you that I think it is probably a little bit less than what we have been carrying in the past.

I am not ready today to give you an exact amount.

Okay.

On how the -- how we target using cash, you have hit on a couple of things.

We certainly are going to continue to look at share buyback; and we certainly, most importantly, are going to look at reinvestments in the business.

Those could take the form of acquisitions; or they could be more greenfield like what we're doing in China right now.

Of course we continue to return value to shareholders through dividends.

So I don't really want to prioritize one over the other except to leave you with, obviously, where we believe that it will grow the business, that is going to be our first priority.

From then on I don't want to get into a lot of details.

Does that help?

That's great.

Thank you very much.

Matthew McCall.

BB&T Capital Markets.

I wanted to talk a little bit about the North American demand trends.

I understand the difficult comps in Q3.

I try to smooth that a little bit, maybe look at a two-year average.

It looks like the two-year average is even down a little bit from the first two quarters of your fiscal year.

I understand the seasonality effect a little bit.

But if you look what the projections are, and I guess this is a question about the projections, next couple quarters 8% is what Global Insight is looking for.

I know you have had some good results in the past, maybe above the industry.

So it is not perfectly apples-to-apples, but a low single-digit number seems a little bit low to me.

Can you tell me what is going on in the market?

Are you seeing weakening trends?

Or is it just attributable to seasonality?

It is Dave again.

Let me kick that off, and then maybe Jim or even Terry Lenhardt will build from there.

You know, for me you've kind of got to rewind and play the whole story.

So I go back to last quarter when Jim Keane talked about how our orders fell off a bit in August.

Right?

Remember we took a price increase in July; and typically in advance of price increases our orders will spike and then fall off.

But they fell off a little bit more than we expected in August, which left us with a low backlog coming into the quarter.

From there, like I said a few minutes ago, the orders over the quarter were not bad.

They were not outstanding, but they were not far off; or frankly they were pretty darn close to what BIFMA has been reporting throughout the quarter.

The timing of them, though, did not fall in such a way that it enabled us to get good shipments over the prior year.

Remember last year was one of the best quarters we had in North America.

I think I referenced something like 17% sales growth last year.

We kind of have all that going on.

So we don't have a whole lot of sales growth this year, in the current quarter, but we've got a good backlog going into the fourth quarter.

But what I want to make sure you guys understand is we are into that seasonal pattern where orders start to fall off considerably in November and start to rebuild after the first of the year.

Matt, I would add that -- Jim Hackett here -- two things.

First at that time in the summer which Dave refers to, a little bit of the drop-off, we were in the midst of the conflict in the Middle East.

It was predictable that I think it probably put not a negative spin on confidence from business folks, but it did pause them a moment to see how difficult that problem was going to be.

Our category might be the kind of category that can get stalled in something like that.

The good news is I'm confident from talking to customers and seeing lots of people across various industries that there seems to be no shrinking of capital investment.

There is a lot of effort by a lot of North American companies that are our customers to invest in other parts of the world.

So some of the priority of their budgets are going into Asia.

So I think one reason why we are going to keep stressing that you look at our business globally is, because of that dynamic, that Steelcase has probably a better picture of how these large companies will be pacing and placing their investments.

One last thing is that we also talk to our dealers a great deal about their backlog and that has all been very positive.

So there's no shrinkage, we think, in terms of demand.

I suspect we are being conservative as we have been in terms of thinking about the future growth rates.

Okay; so no share concerns?

No, I watch that closely.

You know the interesting thing, as we talk about this on this call often, is that you've got to look --.

For example if you looked at shipments from a BIFMA perspective, some of these projects were released to various manufacturers earlier than this year.

So some of that bouncing around share, some of the information bouncing around in share lags the effects in our industry.

Additionally though, we pay close attention to it; and we find at times that there may be a dip and then it comes back.

What I am most optimistic about is that Steelcase spent a great deal of its energy on the back-end system the last few years.

You know, rationalizing our industrial model.

Not done, but made tons of progress.

And we are beginning to turn a lot of our concentration towards the front end of the business, new product ideas, some of branding things that I just described, and the like.

So there won't be any shortage of ideas to try and help grow business either.

Okay.

I want to hit on one thing you said about you're not seeing any slowdown or any shrinkage in capital investment.

Does that go for nonres construction?

I have heard some concerns about the inflationary environment potentially putting some projects on hold.

Can you tell me what you're hearing there?

I would tell you from an economic metrics standpoint -- this is Dave again -- there's definitely a couple of concerns out there with the housing market and the automotive market where it is.

Certainly the Iraq War continues to pose weekly volatility.

But when I look at a lot of our other key metrics, corporate profits are up; fixed, nonresidential investment is still up; good job growth.

It is a little volatile but it is still steadily staying above that 30,000 job mark per month, which is kind of what we see as a good line to sustain overall economic growth.

The office vacancy rates are still falling as well, so it's hard to ignore that stuff.

It feels pretty good.

Okay, that is the same stuff I am seeing.

Then the final question.

You talked a little bit about international and talked about the countries that showed the most strength.

Help me understand what -- is it improving market conditions?

You're talking a lot about improving the cost structure over there, but are you doing a lot to change your selling strategy or ways that you are attacking those markets?

Really what was behind this strength?

Is it overall market improvement or is it something the Company is doing?

I will let Dave talk about some of the back-end changes that he helped see through; and then I will make a comment about what has been going on in the front end.

That would be great.

There's no question that there's some good fundamentals going on over there right now.

We had good volume and that contributed.

But the other thing though is there is definitely continuous improvement from a cost perspective.

What is almost as impressive is that, with the volume spike that we had, we were able to get it out and not affect our customers at all.

So our service levels were actually improving while our volume was going up, which tells me a lot about what the factories are able to do in an environment like this.

In the scripted part of the call I referenced Germany and Spain and Asia and Eastern Europe.

Those were a couple of the bigger drivers.

But there was still a lot of positive activity in other markets.

I don't mean just because I left them off that they were not good.

But we have good fundamentals.

The team continues to make good cost-reduction improvements.

We had nice mix;

I mentioned that, and I want to come back to that.

Not that it is not repeatable, but we had nice mix towards some of our more profitable countries.

So it was a solid quarter, no question.

Just to amplify that, the GDP data shows Europe in the midst of a recovery.

On a par basis the absolute percentage was lower than what we had experienced in North America.

Now North America I think is near more of a happy slowdown, as it's being referred to.

Europe is continuing to grow.

Germany for example is having its highest level of business confidence since 1991, and unemployment is falling very sharply.

We're noticing that in our German business.

So I think that there is a bit of mixture here of the good job we did in restructuring about the time the market came back.

I also want to add that Japan has been very strong as well, and we are well positioned there.

We have been there a long time.

We've got a great management team.

Between I think Germany and Japan, you would have to say that a lot of the improvement in international is a consequence of that.

Okay.

Thank you all very much.

Budd Bugatch.

Raymond James.

Going through the analyst's pain of entering an aircraft.

I do want to talk a little bit about Europe.

Congratulations on that as well.

Just for my clarification, was there any impact that helped you on the currency translation in terms of the earnings impact as well, the cost impact?

I'd tell you that we certainly got a little benefit on the top line; but you also get it in your costs, so a little bit of bottom-line benefit.

But if you're looking at percent of sales, you're not going to see a whole lot of impact from the euro fluctuation, because most of what we sell in the euro zone we make in the euro zone.

Yes, I understand that.

So just as (inaudible) operating margin (inaudible) local currency and in translated currency.

Second question just goes to the [long view]. (inaudible) The long-term goals of going to 35, 25, 10.

We have constantly heard the three-year target; that stayed the same (inaudible) to give a one- and two-year forecast. (inaudible) I am going to try my best to get you to change that.

Do we see any linear expectation to that?

Do we see it -- is it a hockey stick?

How do you look at that, David?

You're trying to get me to give you the inside years.

If I tell you one way or the other I will draw the slope of the line, which I don't want to do.

I just want make sure -- we're not saying yes or no about possibilities in between next quarter and three years out.

What we are trying to tell you is that third year is at a 10% operating income for the full year.

I think if you look back at our kind of last three years and how we've gotten from a loss to better than 5%, you have not really seen a dramatic hockey stick there.

So if you use that and extend it out, I think you are not going to be far off.

And that is about all the further I am going to go, because I'm getting some stares in the room.

Okay, last question.

You did tell us that backlog was better and improved.

Can you kind of give us quantification on backlog now and maybe orders?

You may have done that and I may have missed it as I went through security, so I apologize.

[Rog] told me that you would probably ask me that question.

The only thing I would tell you is we're back to levels that were around the first quarter, which we feel pretty good about.

We are not going to quantify.

We have not done that in the past and we don't want to start now.

Normal levels are six to seven weeks' worth of shipments?

Is that about the way to look at that?

I would say a little bit less.

It's generally -- generally speaking our operations teams are trying to keep lead times within four weeks.

While we will occasionally have some product that will slip out, we also have quick ship programs.

So on average it has got to be four weeks or less.

Okay.

Thank you very much and congratulations on the quarter.

Margot Murtaugh.

Snyder Capital.

Just a couple of little questions.

The other income without the nonrecurring gains was then $9 million?

Is that what you are saying in the quarter?

Other income without the nonrecurring gains, what we talked about was a $3.6 million gain associated with the dealer transition; and a $1.3 million adjustment due to an equity ownership issue that was finalized.

So what is that? $4.9 million, and had strong interest income.

So the rest of it is all interest income?

Because that is a big jump.

I think you'll see in the Q that there is another smaller adjustment on one of our JVs; but now we are in the hundreds of thousands kind of thing.

Okay.

All righty.

Let's see.

The $0.14 to $0.19 projection, that includes restructuring costs, right?

That includes your restructuring costs?

Yes.

Okay.

On PolyVision, is that $6 million loss in other mostly PolyVision, then?

What is the plan for PolyVision?

What are the goals?

Any time frame for turning it around or getting rid of it?

Or what is the plan?

It's Jim here.

We do not break PolyVision out as a stand-alone business.

I called attention to it because I wanted the people on the call to understand that we are addressing some of the performance issues; and we have a plan to turn around its profitability.

This is Mark Mossing.

The largest component there is unallocated corporate expenses.

That is why that has typically been a loss.

It is offset by income from IDEO or finance services [in] the results of PolyVision.

So it is a combination of things.

It is not one item.

Okay.

Europe or international had a really strong margin, 8% I believe.

So can you give us any thoughts about the margin in international going forward?

Is that 8% sustainable or is that a blip?

That is a great question.

I would tell you to make sure you go back and look at our seasonal patterns in international.

The second quarter is always a tough quarter for us.

Certainly Q3 and Q4 typically are the stronger quarters.

So let me just comment on your question around -- was it a peak, was it a fluke, that level kind of thing in international?

I don't think so.

There were certainly a couple of things that leaned our way; and that was overall volume was very strong, and it was a nice mix towards some of our higher or more profitable markets.

At the same time, though, when I am in the details of that business, either in my old job in the operations role or my new job, I can see plenty of opportunities for improvement.

So I would not call it a peak.

Okay.

I understand.

Thanks.

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