Steelcase Inc (SCS) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to Steelcase's fourth-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.

Raj Mehan, in charge of Investor Relations.

Thank you, Dave.

Good morning, everyone.

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

Here with me today are Jim Hackett, our President and Chief Executive Officer; Dave Sylvester, our Chief Financial Officer; Mark Mossing, Vice President and Corporate Controller; and Terry Lenhardt, Vice President North America Finance.

Our fourth-quarter earnings release, dated March 29, 2007 crossed the wires early this morning and is accessible on our Web site.

This conference call is being webcast and is a copyrighted production of Steelcase Inc.

Presentation slides that accompany this webcast are available on Steelcase.com and 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 the most comparable GAAP measures are included in the earnings release and webcast slides.

At this time, we are incorporating by reference into this conference call and subsequent transcripts 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 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.

Before I pass the call onto Jim Hackett, our President and CEO, I did want to mention a change will be making to the business segments in which we report our financial information.

In October 2006, Jim Hackett announced that our Company would organize around three key brands -- the Steelcase Group, Turnstone, and a design specific brand that builds on intersection between work and lifestyle.

These three brands will give us the most complete offering in our industry and as brand structure provides us the opportunity to clarify and simplify our offering while also providing a single experience for those customers who seek all three brands.

In reviewing the entities within each reporting segment, some changes were necessary based on this realignment of our business.

In a nutshell, we will be taking two of the five companies that constituted Steelcase Design Partnership segment, specifically Vecta and Details and moving them to the North America segment with the Steelcase Group.

The Steelcase Group will be aggregated with Turnstone and Nurture as a North America reporting segment.

The portfolio of products of these companies and selling process is similar to the Steelcase brand of products.

The other three companies in Steelcase Design Partnership segment, Designtex, Braeden, and Metro, which have fairly unique product portfolios, will be reported as the Other Reporting Segment, along with PolyVision, IDEO and Financial Services Group.

Further, we will move the unallocated corporate expenses from the other category and report them separately.

By excluding the unallocated expenses, the aggregate profitability of the companies in the Other category can be measured more clearly.

There will be no changes to the international reporting segment.

A visual chart of the changes is also included in the webcast slides, which accompany this presentation.

While these segment reporting changes are being announced today, our call today will still reference the old segment reporting structure.

The new segment reporting structure will be used for the presentation of financial results in our 2007 10-K filing.

However, in an effort to help the investment community and others get a historical perspective of our performance under these revised segments, we will be making available five years of historical selected financial information using the revised segments.

This information will be available when we file our 10-K in late April and will be accessible via our website.

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

Thank you, Raj, and good morning to everyone.

Given this is our fiscal year-end call, I've spent some time thinking about our performance and here are some of the thoughts.

Businesses are not unlike sporting events.

The game starts with great expectations.

Tons of hours are put forth to plan a great outcome.

Assumptions drive a strategy.

Much work is devoted to studying the opportunity and areas for exploitation and growth.

However, with a great game plan, there are unintended events and the key to being a winner is being agile and having an underlying competitive spirit.

The best sporting events are with the toughest competition and coming out a winner is that much sweeter knowing you had to prepare well and play hard to win.

As Steelcase completes its current fiscal year as the number one furniture company in the world, this is a position we hold with great pride.

However, the inspiration to be the best has always been quoted as being more important to us than being the biggest.

In this past quarter, we saw that Fast Company ranked Steelcase in its fast 50 for profit-driven solutions for what ails the planet, sustainable activities that can be profitable.

I was pleased with their reference that Steelcase is manufacturing intelligence.

At the same time, Steelcase debuted as Number 17 as Corporate Responsibility Officer magazine 100 best corporate citizens.

We debuted at the highest place of all the people that were awarded this honor.

And to be fair, Herman Millers ranked 13th and it supports my notion that you appreciate being number one in this industry when you have fine competitors like them.

The cool thing about this recognition is that it was part of our game plan.

We started an initiative a number of years ago to retool our industrial system, but to do it in the most modern and socially responsible way.

We lovingly refer to the industrial system as the back end of our Company.

Clearly the largest industrial system in our industry is at Steelcase not only with huge factories in the network, but a network of production that spans the globe from Kuala Lumpur, Asia to Athens, Alabama, from Rosenheim, Germany, to Shenzhen, China, we have built a system of lean production entities tied to a global supply chain.

Our back end continues to get better and better.

You'll see our improvements in margins reflective of same.

I will confirm to you that it's not a goal and it's not good enough yet, but it's only because of where we started, not where we're going.

Now, our efforts are about our front end and much has been happening here.

At NeoCon this coming year, we believe we will be the first exhibitor to help our clients understand why being a global player is now the standard for being a winner.

So this year is an explanation point for me.

Our architecture and technology products, which were lightly panned when we said our future domain included these elements have grown faster than the industry two years in the running.

It makes me think that part of our challenge was the launch of these ideas during the past recession and as companies are now spending, our results of a great game plan are paying off.

We will get lots of questions about our view of the near term and I realize that these questions are important to your models, but let me remind you that our industry tends to lag recessions and enters post other companies.

I haven't seen enough decline in their business beyond the housing-related businesses to imagine that we're now starting a recession.

So the answer to this future question is it's anyone's guess, which is why we believe we're a key player for investment.

We just gaining the advantage of our lean production moves that I mentioned earlier.

We have the prospect of our front end investments just around the corner and I believe that the end of the decade shapes continuous change in work environments to maintain for our customers their competitiveness and their ability to attract and retain the best.

With these comments, let's turn to Dave Sylvester, our Chief Financial Officer, who will walk you through the quarter and then we will take questions at the end of his discussion.

David?

Thank you, Jim.

Today we reported a fourth-quarter profit of $29.3 million or $0.20 per share, which represents a significant increase over the prior-year profit of $9.3 million or $0.06 per share and exceeded our earnings estimate of $0.14 to $0.19 per share that we provided last quarter.

In addition to normal operating improvements, the current quarter's profit includes a number of favorable tax adjustments, offset in part by non-cash charges recorded in connection with our annual assessments of intangible assets and goodwill.

These tax adjustments and impairment-related charges, which we will discuss in more detail later in the call, had the effect of increasing net income by $10.8 million, including related variable compensation expense.

In addition, restructuring charges of $6.1 million after tax exceeded the range of $2 million to $4 million that we had estimated for the quarter.

Before I discuss the quarter in more detail, I would like to first comment on the full-year results as the closing of this quarter marks the fourth consecutive year of profit improvement since the industry downturn and the initiation of our efforts to modernize our industrial system.

We have come a long way from the losses posted in fiscal 2003 to a current-year profit of $106.9 million or $0.72 a share on sales of over $3 billion.

Further, fiscal 2007 results represent more than a 100% improvement over the prior-year profit of $48.9 million or $0.33 per share.

While tax adjustments played a role contributing toward the current-year net income improvement, we believe that the underlying events and drivers of these adjustments could continue to provide future benefits through a lower effective tax rate next fiscal year and the potential realization of cash benefits linked to utilization of deferred tax assets recorded over the past several years.

Fiscal 2007 operating income of $113.7 million compares to $82.5 million in the prior year.

Restructuring charges were $23.7 million in the current year compared to $38.9 million in the prior year.

Operating income, excluding restructuring charges, was $137.4 million versus $121.4 million, an improvement of $16 million over the prior year.

As a percent of sales, operating income, excluding restructuring charges, was 4.5% compared to 4.3% in the prior year.

The improvement in operating income was driven by improved pricing yield, benefits from previous restructuring activities, higher volumes, and manufacturing productivity gains.

These improvements were partially offset by non-cash impairment-related charges; increases in variable compensation costs, a portion of which was driven by the tax benefits recorded below the operating income line on the income statement; year-over-year inflation; and investments in longer-term growth initiatives.

Now I will discuss the fourth quarter in more detail.

As I stated before, our fourth-quarter profit of $29.3 million or $0.20 per share was impacted by unforecasted tax adjustments and non-cash impairment related charges.

As I stated before, these adjustments in the aggregate had the effect of increasing net income by $10.8 million, including related variable compensation expense.

To help you further understand these adjustments and their impacts on net income, we have included a supplemental chart in our webcast slides.

Restructuring charges of $6.1 million after-tax exceeded the range of $2 million to $4 million that we estimated last quarter.

The additional charges related to the sale of our Grand Rapids manufacturing campus, which was completed at the end of the quarter.

While the transaction provides for potential aggregate proceeds similar to amounts previously contemplated in our impairment estimates, the final agreement outlines certain contingencies that must first be met before all of the funds will be received.

Accordingly, we recorded a $2.5 million after-tax loss on the actual sale of the property and will record subsequent gains if the various contingencies are satisfied.

In addition, we recorded a reserve of $1.1 million after-tax for estimated environmental remediation costs that may be incurred in connection with redevelopment of the Grand Rapids campus.

The amount of this reserve was determined based on current estimates of the probability of remediation and the intensity of the development efforts.

And therefore, our obligations could ultimately be more or less than the amount recorded.

Revenue of $779 million in the quarter represented a 5.4% increase over the prior year and was within the estimated range of 4% to 8% sales growth that we provided last quarter.

Our international segment again led the way this quarter, posting 17% sales growth over the prior year.

Current quarter revenue included $15.9 million of favorable currency effects versus the same quarter last year and $10 million of revenue from net acquisitions completed within the last 12 months.

Fourth-quarter operating income of $2.8 million compares to $9.3 million in the prior year.

Included in our operating income were pre tax restructuring charges of $9.3 million compared to $11.1 million last year.

Operating income, excluding restructuring charges, was $12.1 million or 1.6% of sales compared to $20.4 million or 2.8% of sales in the prior year.

The decline in operating income was primarily driven by two things.

First, we recorded $11.7 million of non-cash impairment related charges associated with PolyVision intangible assets and goodwill.

Second, we recorded approximately $9.5 million of variable compensation expense related to the tax adjustments net of the PolyVision impairment charges, as is illustrated more clearly in the supplemental webcast slide.

Cost of sales, which does not include restructuring charges, was 68.7% of sales compared to 70.3% in the prior year.

International reduced its cost of sales percentage by 2.8 percentage points versus the prior year, and North America also saw an improvement of 2.4 percentage points in its cost of sales.

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

Gross margin of 30.4% was up from 28.2% in the prior year quarter due to improved gross margins in North America and international.

Operating expenses of $231.9 million, which do not include restructuring costs, were 29.7% of sales, up from $199.3 million or 26.9% of sales in the prior year.

Operating expenses increased by $32.6 million.

The increase was driven by several factors, including the $11.7 million of non-cash charges related to PolyVision; $11 million of increased variable compensation expense, again, a portion of which was related to the tax adjustments net of the PolyVision impairment charges; $5.7 million in longer-term growth initiatives spending; $4.2 million related to currency translation as compared to the prior year; and $1.6 million related to acquisitions.

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

Other income net was $33.9 million for the quarter, compared to $7.5 million in the prior year.

During the current quarter, we repatriated $96.5 million of cash from our Canadian subsidiary, which resulted in foreign withholding taxes of $4.8 million that were recorded as a nonoperating expense.

We expect to recover these taxes through a $1.6 million U.S.

foreign tax credit recorded within our current year provision for income taxes and over the next several quarters as we earn higher interest income on the invested balances in the United States.

During our last call, we communicated that we expected a full-year effective tax rate for fiscal 2007 in the range of 34% to 35%, assuming the retroactive reinstatement of the U.S.

research tax credit.

The President, in fact, signed the bill into legislation and we adjusted our full-year effective rate to 34.1%.

The fourth-quarter impact of catching up the year-to-date effective tax rate from 36.4% to 34.1% approximated $2.9 million.

And remember, this benefit was included in our earnings estimate we provided last quarter.

In addition, we recorded a number of other tax adjustments in the fourth quarter, which aggregated $24.8 million.

These adjustments were primarily linked to our annual assessments of deferred tax asset valuation allowances, which we typically complete in the fourth quarter following the completion of our three-year strategic planning process.

The largest drivers were linked to the completion of certain tax planning strategies and significantly improved profitability across our international segment, which increased the likelihood of utilizing foreign net operating loss and U.S.

foreign tax credit carryforwards.

Other factors included the receipt of a note change letter by a foreign subsidiary, which marked the completion of a long outstanding three-year audit and state tax law changes eliminating the benefits associated with intangible asset holding companies, which increase the likelihood of utilizing state net operating loss carryforwards.

As I stated earlier, we believe that the underlying events and drivers of these adjustments, while subject to significant estimation and judgment, may continue to provide future benefits through a lower effective tax rate for fiscal 2008 and the potential realization of cash benefits from the utilization of deferred tax assets recorded over the past several years.

While there are always many variables at play in the realm of global taxation, we are currently estimating that our effective tax rate will stay within a range of 34% to 35% for fiscal 2008 with the U.S.

Research Tax Credit remaining in effect through the end of calendar year 2007.

Thereafter, we may see our longer-term effective tax rate increase to 35% to 36% if the U.S.

Research Tax Credit is not extended.

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

Due to strong cash generated from operations, our cash and short-term investment balance was $560.3 million at the end of the quarter compared to $525 million at the end of the third quarter.

Our debt balance at the end of the fourth quarter was $255.1 million.

During the quarter, we repurchased approximately 2.5 million shares under our outstanding share repurchase authorizations at a total cost of $45 million or at an average price of $18.12 per share.

As of the end of the quarter, we have $84.6 million remaining under our current share repurchase authorization and we expect to continue returning value to shareholders through ongoing repurchases.

Also, we announced late last week that our Board of Directors authorized an increase in the fourth-quarter dividend to $0.15 per share, representing a 15% increase over the prior year -- I'm sorry, over the prior quarter, and a 50% increase compared to the fourth quarter of the prior year.

We believe this dividend level can be supported throughout fiscal 2008 by our existing cash balances and projected operating performance.

Capital expenditures during the quarter totaled $24.3 million, which is higher than we have averaged for the last several quarters.

Investments in IT systems and various office and showroom improvements were the primary drivers.

Looking forward, we are currently estimating that fiscal 2008 capital expenditures will approximate $70 million to $90 million.

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

Since the full-year results are simply the culmination of the past quarters, I will defer the full-year discussion to our 10-K, which we expect to file on or before April 24, 2007.

Despite relatively flat revenue growth, the North America segment continues to benefit from changes to its industrial system, as evidenced by its gross margin expansion for the quarter.

In North America, sales were $417.2 million in the quarter compared to $413.7 million in the prior year.

Current year revenue included $8.9 million from net acquisitions that occurred in the last 12 months.

During last quarter's call, we noted that order rates had rebounded during the third quarter, and that our backlog had returned to more normal levels by the start of the fourth quarter.

In addition, we stated that one, it was typical for orders to begin to decline in the fourth quarter; two, we were seeing that seasonal pattern develop in early December; and three, our revenue growth estimates were consistent with that expectation.

Order trends, in fact, did follow normal seasonal patterns in the fourth quarter, although overall orders during the first two months were slightly lower than we anticipated.

However, order rates strengthened during the last month of the quarter and were more consistent week to week, resulting in a low, double-digit increase in quarter-end backlog versus the prior year.

Further, order rates have continued to build during the first four weeks of the current quarter.

In total, for the quarter, North America orders grew at a low single-digit rate despite a prior-year comparison that included a price adjustment.

You will recall that in the prior-year quarter, we implemented a list price adjustment, which was larger than usual as it incorporated a steel surcharge into our ongoing price list in addition to a typical market adjustment.

We believe the adjustment affected order patterns last year as customers submitted orders in advance of the price -- of the increase in mid January.

And current quarter sales and orders did not benefit from a price adjustment.

Lastly, fourth-quarter sales were impacted by an unseasonably low level of project business in large accounts, as well as moderating growth rates at Turnstone.

We believe that both conditions are temporary as project-related orders and backlog had rebounded to double-digit growth rates by the end of the quarter and Turnstone orders are also rebounding nicely.

In addition, sales activity and prospects in our large customer account base is robust.

Operating income for the quarter was $2.5 million, including $9.4 million of pre-tax restructuring charges.

Prior-year operating income was $10.5 million including $7.7 million of pre-tax restructuring charges.

Operating income, excluding restructuring charges, was 2.8% of sales compared to 4.4% of sales in the prior year.

The decline was driven by higher operating expenses linked to increased variable compensation costs and investments in longer-term growth initiatives.

North American gross margin was 27.2% compared to 24.7% in the prior-year quarter.

Pre-tax restructuring charges included in gross margin were $7.7 million in both the current quarter and the prior-year quarter.

Cost of sales, which is reported separately from restructuring costs, improved 2.4 percentage points over the prior-year quarter.

Gains have been realized from better pricing yields, restructuring benefits and continued plant efficiencies, and improvements in our wood segment.

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

On a fully allocated basis, the wood category lost about $5 million this quarter or about $1 million less than the third quarter despite lower sales and about $5 million less than the fourth quarter of last year on relatively flat sales.

Operating improvements were, again, somewhat veiled this quarter due to reinvestments in additional cost reduction initiatives.

As we have stated in previous quarters, there are a number of project underway to drive continued profit improvement over the next several quarters and we expect to reach the first step of approximating a breakeven run rate by early in fiscal 2008.

North America operating expenses, which are reported separately from restructuring costs, were 26.2% of sales compared to 22.2% of sales in the prior year.

Operating expenses increased $17.5 million compared to the prior year, primarily due to a $9 million increase in variable compensation expense, a portion of which was linked to the tax adjustments net of the PolyVision impairment charges; $4.1 million for investments in longer-term growth initiatives and $1.2 million related to net acquisitions completed within the past 12 months.

International had another strong quarter of operating results, demonstrating the success of our new products, the benefits of our restructuring efforts, and the scale of market coverage that we have outside of North America.

International sales were $209.8 million in the quarter, which was an increase is 17% compared to the prior-year quarter.

Currency translation had the effect of increasing revenue by $16 million as compared to the prior year.

Current year revenue also included $1.1 million from dealer acquisitions that were completed during the past 12 months.

The growth this quarter was influenced by strength in Germany, Spain, and the United Kingdom.

International reported operating income of $14.2 million in the current year quarter, which includes $0.5 million of pre-tax restructuring gains.

In the prior-year quarter, international reported an operating loss of $1.2 million, which included $3.2 million of pre-tax restructuring charges.

Operating income excluding restructuring charges was $13.7 million, or 6.6% of sales compared to $2 million or 1.1% of sales in the prior year.

The improvements have been relatively broad-based across most markets and throughout gross margins and operating expenses despite investments in longer-term growth initiatives across emerging markets.

Further, it is worth mentioning that our business in the United Kingdom has shown significant improvement relative to one year ago.

International gross margin was 34.5% in the quarter compared to 29.7% in the prior year.

Gross margin, excluding restructuring impacts, was 34.3%, a 280 basis point improvement over 31.5% in the prior year.

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

International operating expenses, which are reported separately from restructuring costs, were $58.1 million or 27.7% of sales.

This compares to operating expenses of $54.5 million or 30.4% of sales in the prior-year quarter.

The increase in year-over-year operating expense dollars includes $4.1 million in unfavorable currency effects as compared to the prior year, approximately $2 million in growth-related spending in Asia, $1.4 million in variable, higher variable, compensation costs, and $400,000 related to dealer consolidations that were completed in the past 12 months.

In addition, operating expenses in the prior year included $4.7 million of reserves recorded in connection with acquired dealers and lease impairments.

For SDP, sales were $89.8 million in the quarter, a 5.3% increase compared to the prior year.

SDP reported an $8.4 million operating profit in the quarter versus $8.7 million in the prior year.

As a percent of sales, SDP operating income was 9.4% compared to 10.2% in the prior year.

SDP gross margins of 35.9% were down from 36.6% in the prior year.

The decline in year-over-year margins is similar to the first two quarters of the year, supporting our comments last quarter that the 2.9 percentage point decline in the third quarter was somewhat of an anomaly.

The current quarter decline continues to be influenced by mix shifts and operational challenges, which are expected to persist for a few more quarters.

However, at 35.9% in the fourth quarter, SDP continues to have the highest gross margins of any of our segments.

SDP operating expenses were 26.5% of sales in the current-year quarter, relatively consistent with 26.4% of sales in the prior-year quarter.

Revenues in the other category were $62.2 million in the current-year quarter compared to $61 million in the prior-year quarter.

The other category reported a loss of $22.3 million in the current-year quarter compared to a loss of $8.7 million in the prior year.

The higher loss is primarily due to $11.7 million of pre-tax, non-cash restructuring -- charges related to PolyVision, intangible assets and goodwill, which was referenced earlier.

During the fourth quarter of each year, we complete our annual assessments of recorded intangible assets and goodwill across our business segments.

The related impairment charges that were recorded at PolyVision were influenced by the recent profitability challenges we have been facing in our static white board business.

The charges were recorded against both intangible assets and goodwill and approximated 10% of net book values recorded on our balance sheet.

Similar to the wood segment, the team at PolyVision remains focused on turning this business completely around.

Step-by-step action plans are being finalized which target first to return the business to an annualized breakeven run rate and second, to rebuild the profitability back to levels experienced historically.

Now I will review our outlook for the first quarter of fiscal 2008.

We expect revenue growth to be 6% to 10% over the first quarter of the prior year and be spread in a more balanced way across our segments as compared to the last two quarters, wherein international and SDP growth rates have exceeded North America.

As we have said in the past, it's possible that orders could weaken 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, however, our estimates are based on a relatively stable U.S.

economy and improving order patterns over the past couple of months as well as the fact that a number of key projects have been won across North America and international markets.

In addition, customer visits continue to be strong, growing at a double-digit pace in the fourth quarter of this year compared to last year.

We expect reported earnings per share will be in the range of $0.15 to $0.20 per share compared to $0.12 per share in the prior-year quarter.

Further, we expect to complete the exit of the Grand Rapids manufacturing campus in the first quarter and incur related restructuring charges of $2 million to $4 million after-tax.

While detailed implementation plans are in place and we expect to manage through these events with minimal disruption, these activities are nevertheless significant and, therefore, pose some risk to the first quarter's earnings estimate.

So in summary, the first quarter should represent a good start to the next fiscal year, which we expect will mark the fifth year in a row of improved profitability since the industry downturn and another step toward achieving our long-term goal of 10% operating income as a percent of sales.

As many of you know, our industry trade show is June 11 through the 13th in Chicago.

We look forward to seeing many of you there if not sooner as we get back on the road to visit investors in April and May.

Now I'll turn it over for questions.

(OPERATOR INSTRUCTIONS).

[Chad Bowen].

I'm filling in for Budd, who is on the road but I think listening to the call with us.

Just wanted to get your sense a little bit more of kind of your macro outlook.

Some of the recent data points we've seen from [Bifma] suggest a bit of a deceleration and North American orders were up fairly modestly.

What are your expectations for the industry and how do you think you can perform given that environment?

Well I'll start and then maybe Terry Lenhardt, who leads finance for North America, can chime in.

First of all, I'm going to do a little bit of a dance here, because I don't want to give you really a good -- or a concise full-year outlook.

We don't do that.

But I will comment a little bit more on next quarter as well as what we experienced in the current quarter.

It was a little bumpy to start, but also I would tell you that the comps versus the prior year including that price increase caused that bumpiness.

And once we got beyond January, which was where the bumpiness kind of took into effect the prior-year increase, things started to smooth out a little bit and grow.

And actually, like we said, we finished the quarter with a backlog that was double-digit over the prior year and has since seen orders grow kind of in a nice way through the first four weeks.

So we're feeling okay.

I read everything that you read, though.

I'm a little bothered by the inflationary tone that seems to rear its head every couple of months again.

Certainly, the Iraq war is out there and the consumer sentiment is not that great, but I go back and I look at corporate profits, fixed non-res investment, job growth, unemployment rates, vacancy rates, new office construction and I hear what our dealers and our salespeople are saying.

We're feeling okay.

I don't know if you want to add anything to that, Terry.

Thanks, Dave.

I think you summarized it very well.

If you look at two things, one is the overall trends in order rates as well as volatility.

In the last two plus months, they've been pretty smooth as they've grown for the seasonal rebound that we would expect.

So it's not volatile last nine months, nine weeks, and a good, smooth trend.

Does that help?

Thank you very much.

That is very helpful.

Peter Wahlstrom.

You mentioned that CapEx spending for this coming year is expected to be $70 million to $90 million.

Could you share a little bit more in terms of where that's going to be allocated?

Whether it's internationally across North America or which product line perhaps?

I don't want to get into great specifics on that, but I will tell you where you're going to see us spending our money next year is on facility and showroom improvements.

Also, we do need to spend a little bit of money in the Grand Rapids campus as we have sold off the manufacturing side of the campus.

We will need to kind of rebuild what's left into a true global headquarters, which includes our learning center, so we will see some investment there.

Plus, I would tell you that relatively speaking, we've held back for a number of years on our office and corporate facilities, so we will put some money into those over the course of next year.

A little bit of IT investments and such, but that's about it.

Yes, David, I just want to add -- it's Jim.

That you will note in my comments I was talking about the back end of the business and then the front, where we are making new investments in product development, and that is across all the brands and across the world.

Okay.

And the acquisition that was completed during the quarter, should we expect more of these to come?

If so, what geographic region are these dealerships?

Or again, what product line, etc.?

Peter, I think you know something we don't because I don't -- we didn't complete an acquisition in the quarter.

We did complete a software acquisition last quarter in the third quarter and what we typically try to get color on in the call is the impact of previous acquisitions and the impact that it has on our top line or operating expenses in the current quarter.

But there was nothing completed in the current quarter.

As far as color on what you might expect go forward, we always kind of dance a little bit around the acquisition question.

It's certainly a possibility that it will play into our growth initiatives, but it's not the only source of growth either.

So we look at it from time to time, there's always companies out there, and if it fits, we will pursue it further, but nothing in the current quarter.

Okay.

And finally, when you mentioned your revenue guidance for the next quarter and you mentioned that it would be a little bit more balanced between segments, is that across the new segments, I'm assuming North America, other, and international?

Yes.

We -- the last couple of quarters, we have seen great international growth and relatively flat performance in North America and I think that 6% to 10, my comments about balance were meant to give you color that it will be more evenly spread across the segments.

Okay.

And I know that quarter over quarter, it's very difficult to look at growth, in particular, for North America, but how do you anticipate our how do you see this reacceleration of growth in North America?

I'm not sure I understand your question.

Can you ask it maybe a little different way?

Sure.

Last year, year-over-year, North America revenue increased by 5.8% and last quarter was up 1%.

Now, as we look longer term, and maybe even just to first quarter '08, you're expecting a more balanced outlook.

So I guess quarter over quarter, how do we get more comfortable with a reacceleration in North America revenue growth?

Oh, you mean how do you get more comfortable with our guidance of 6% to 10% and being balanced if you plot North America in that 6% to 10%, how can we convince you or get you more comfortable?

Correct.

Well, I go back and I'd say first of all, we've got a good backlog coming into the quarter.

I referenced that it's double-digit higher than what it was last year.

And last year, we had some backlog benefit at the end of the quarter that was linked to our price increase that we took last January a year ago.

I also referenced the fact that our orders have steadied or become more consistent week to week and begun to build over kind of the last couple of months.

Bifma has got a number out there.

I don't remember exactly what they're calling -- I think it's around 7% or 8% for next year.

They've been known to be high or low, so I'm not going to comment any more about Bifma.

But add all that up, we're feeling pretty good about the guidance of 6% to 10% and that it will be balanced.

Okay, thank you.

Chad Bowen.

It's actually Budd.

I hope you can hear me.

Where are you, Budd?

I'm in Bangkok.

It's a little farther away than I normally am.

Question for you on the reconciliation of significant items.

I am confused by the inclusion of the variable compensation impact.

I'm actually also confused by the intangible write-offs, but because I would have thought you were pretty well aware of that at the time you gave fourth-quarter guidance, particularly the variable comp.

I thought you would have figured that out or at least seen it coming down the road.

Am I wrong on that, or is it something different?

Dave, you mentioned -- actually, you confused me with the way you characterized it, so hopefully you can help me understand this better.

Let me try again.

So, coming into the quarter, no, we didn't have it in our guidance as far as the tax adjustments or the PolyVision impairment.

As I said, we do both of those analyses in the fourth quarter for the tax arena, it in large part follows the completion of our three-year strategic planning process in the third quarter.

And from an impairment perspective, we look at that in the fourth quarter of each year -- that's the time that we evaluate our intangible assets and goodwill for impairment.

So it wasn't part of our guidance.

So we went through that work in the fourth quarter and as a result of everything I talked about, related to taxes and PolyVision, we took an impairment charge for PolyVision and we also took a number of favorable tax adjustments in the fourth quarter.

Now, both of those impact variable compensation.

The PolyVision obviously drove our variable comp down, but the tax adjustments helped our variable compensation.

The reason that we call it out and I think maybe it might be a little confusing for people is that the tax adjustments obviously fall on the income tax line, but the variable comp that we accrue, it's operating income and it frankly hits the business segments across -- not just in the corporate bucket or not just in North America, because many of our employees are comped on inc.

profits versus only their segment profits.

Does that help?

Well, to make sure I understand it.

Just to rephrase then, then the $9.5 million pretax variable comp only relates to the incremental variable comp that happened because of PolyVision write-off or the tax -- payroll tax adjustments; is that it?

That's right.

The other variable comp -- okay.

That does help.

That helps a lot.

We kind of assumed that some of the investment community would want to set those things aside, so we wanted to make sure that you didn't set one aside without the other because they all work hand in hand.

Okay.

Now the other thing that I wanted to make sure I understood is have you got a price increase planned at all in what you've done now since the first quarter of last year?

I hope the jet lag isn't hurting your head, Budd.

You know we can't talk about price increases.

But I will tell you this and I'll --

You have instituted one?

No --

You have instituted one?

Since July.

That's already been announced.

Okay, so -- we have not instituted one that's -- let's say it another way.

All that have been announced have been instituted.

Just to go back --

Nothing since the first quarter of last year?

No, remember, we did a modest price increase in the -- well, I say modest from a finance perspective.

Our customers and dealers would argue it wasn't modest in the summer.

So last year -- a year ago in January, we took a price increase that rolled the surcharge in as well as did a market adjustment.

And then in the summer, six, eight months ago when we were feeling the inflationary pressures from the particleboard, from steel continuing to increase, diesel fuel and plastics and such, we took another price increase, but smaller relative to a year ago in January.

But we have not since announced another price increase.

Okay.

And so if I can ask a question in a different way, looking at the environment as it is today, have you recovered all of your incremental costs or are you still behind the (technical difficulty) and can you quantify that in any way?

Hey, Budd, it's Terry.

We feel that we always look at obviously inflation and the market.

We feel that we have kept pace overall with our adjustments and we continue to monitor the environment.

Okay.

Thank you very much.

Matt McCall.

Going back to I think one of the previous questions, the $9.5 million in variable comp, you said it was spread across the segments.

Can you give us the way it was broken out across those segments?

I think if you looked on the webcast slide, there's a footnote that kind of gives you a general feel of how it spreads.

I'm not going to give you the specifics, but some goes to cost of goods.

Some stays in OpEx and then a larger chunk would go to North America.

Okay.

I'll see that now.

When you talk about your investments in future growth initiatives, I know you probably don't want to show your hand, but maybe if you can broadly speak, I think -- you talked about it in both North America and in the international markets and specifically you talked about China.

But maybe could you provide any other color as to what you're talking?

Is it new products or is it just new markets?

Just any color would be helpful.

You bet, Matt.

It is those things.

It's the product investment that we have made I would say has been a fraction of what we intend to make.

Most of the product investment over the last few years went into the new Nurture products in health care, international products.

And coming soon are the rest of the geographies -- are getting a lot of attention.

And in addition, the brand structure that we have announced, which there are really three core brands that make up our focus in North America, and each one of them Turnstone, the Steelcase brand and the current Steelcase or excuse me, the Design Group brand, are all planning investments in product.

Additionally, as you suggested, we have made investments in geography, the most recent being the Chinese factory in Shenzhen that we've invested in and things are going well relative to our plans to continue to expand in other geographies.

Okay.

And again we said that the product investments, and I assume that goes for the overall spending, has been a fraction of what is coming.

What level of incremental spending -- you quantified the incremental spending this quarter.

What level of incremental spending is assumed in your guidance?

And then what does the full year look like?

I'll let Dave build some of that, but let me be clear about something, which is the overall expansion of our spending is something we watch a great deal.

The percentage of our spending that was devoted to some of our restructuring in the back end is now what -- attempting to shift more of the spending to the front end of our business, just so we're clear about that.

Dave, do you want to add?

Yes, that's absolutely right.

If you think about, historically, all of the spending that we had to modernize the industrial system has been showing up, not all of it, but a large percentage of it has been showing up as restructuring charges.

The front end investments are going to be show up in a large part as OpEx.

I don't know that I can size those in absolute dollars for you, but -- but I don't know I would describe it as I think your word was a fraction of what might be coming?

Those were Jim's words.

No, I thought you said -- you said a fraction.

I did, or I thought I was repeating what he said.

Yes, no.

Well let's just be clear from this point.

The percentage of spending on the front end has been a fraction of what it will be, but our goal, of course, is to stay lean and keep the overall spending in check.

Okay.

At the end of the day, I wouldn't advise you to model a tremendous increase.

Okay.

In increments -- okay.

The tremendous being is $4 million -- is that what that means in Michigan?

I don't know.

You broke up on that last comment!

I didn't hear you.

I probably did.

Okay.

And I will probably break up on this one as well, but you quantified -- in the past you talked about that early '08 timeframe for getting PolyVision back to break even.

Did I hear -- I'm sorry, the wood.

You're right.

Well PolyVision is the second part of this.

So you're saying early '08.

Is that a -- are we still on this we're getting $1 million closer every quarter kind of trend or are we going to accelerate that trend and the first half we'll be more of a break even?

And then any color you can provide on the PolyVision front as to the timing of the improvement would be helpful.

Sure.

So I'll start with wood.

So if you draw the slope of the line and you assume $1 million a quarter, you would not get to early fiscal 2008, so I think that kind of gives you your answer.

Is that we do expect some of the improvements to be a little bit more significant over the next few quarters.

And that's, frankly, going to happen simply in some ways because we are slowing down some of the investments in the productivity gains and such in the factory.

We actually feel like we've gotten that, most of that part of the business to a reasonably good level.

Our variable margins are almost at a ten-year high and our scrap rates are continuing to move down, so we're feeling pretty good.

So I think you'll see that -- slope of that line steepen a little.

On PolyVision, this is a different situation than wood.

Not nearly as challenging in the scale of the loss, of course, but also, I think we will make money.

I don't think.

I'm almost positive we will make money in the second quarter in that business, simply because it is the busy season for them as they work with a lot of the school systems in the off-season.

So, I think you'll see an improvement there in the second quarter, but what we're really focused on is how do we get them to an annualized run rate that we feel good about.

I think that's going to take a few more quarters simply because we don't want to mess too much with the system during the busy season of the summer.

The other thing, Matt, is that when we acquired PolyVision, working with IDO, we made a number of investments in new digital technology and these products are growing quite fast.

They're doing very well in terms of kind of a growth curve.

Of course, the basis was low, where we started.

I would just -- I would leave be discussion of PolyVision by suggesting that one of the great things that Company has done has been able to straddle the world of the analog kind of white board world as you know it, and the digital kind of communication tools that we imagine would emerge as the Web became more prevalent and finding that to be true.

So we've got some work to do there.

It's too early to tell you that with this impairment this quarter, that all of that is fixed, but I want to support what Dave is saying.

It's a different kind of issue than the wood business and one of which we are all over.

Okay.

And Jim, I was encouraged by your thought -- your comments about North America overall.

I guess -- I know you've stressed many times and the folks in the industry have stressed many times that one quarter does not make a trend and -- but the last couple quarters, modest growth in North America.

I guess I'd love your comments about any market share issues you're seeing there.

Obviously the comments you are talking about double-digit growth are very encouraging, so think obviously if there were some near-term items that hit growth, I'd love to hear about them.

But just industry dynamics in general if you can make some comments?

Well I'm going to share this response with Terry Lenhardt, who had two hats this year as VP of Finance for North America plus he led our strategy work.

And I would give you a perspective that if we went back three to four years and we just did a film of what was going on to the customer set we serve, large companies, they came out of the recession and loaded with cash and profits and they didn't invest a lot more money in North America.

A lot of it went to expansion in their strategies around the world.

This explains one reason.

Just but one, why our international business has been strong.

The other part of that is that as they've begun to now have experience, many of these companies have had experience with the way they devise their operations around the world.

They're back [end] supports structures.

They've begun to understand which parts place well there versus which parts place well here, and I have seen a reinvestment in American office space in a way that I'm excited about.

And it's more strategic.

It's more, I would say around the knowledge worker and as I said in my earliest comments, that it's about attracting and retaining workers.

It's very -- it's going to be very competitive at the end of this decade for companies to hire the gold collar workers, the engineers, the people who are needed for innovation in these corporations.

And then the third thing I would say to you that, it's a dynamic that's always hard to quantify in a call like this, but you've got to believe that some of the merger and consolidation that goes on in various industries, which has heated up in the last two years causes -- it would seem that it would cause an inventory of used furniture, but in fact, it's simpler for companies to build new spaces and to buy new.

And so we've benefited because of our share in these large accounts from that dynamic as well.

We are on the West Coast making this call today because we've had our North American dealer conference this week.

We've had 1,000 dealer and dealer leadership people here for a conference and I've got to tell you that there's a cautious optimism, and I was expecting this.

But I come out of this session with even more enthusiasm that North America is going to be a great market, as we clearly expect it would, and that these things I just mention to you have great upside.

Terry, would you want to add anything to that?

Thanks, Jim.

Recent history, we've had stronger growth outside the Fortune 1000s and also in some certain vertical markets, but what we've been seeing is, there appears to be an uptick in the Fortune 1000 kind of activity, looking at our backlog at the end of the year as well as project business we're working on and projects we've won recently.

It's all of anecdotal evidence from talking with our dealers.

So as Dave said, broader economic indicators actually will affect the large companies and their growth, but we've been seeing an uptick in that sector.

Okay.

Thanks, guys.

Thanks for the time.

Peter Wahlstrom.

Just a quick couple of follow-up questions.

Could you talk about your outlook for raw material costs and what you are seeing in the marketplace now from the steel, wood and aluminum front?

Sure.

I'll give you some color on that.

It's Dave.

If you kind of rewind a little bit, for the current quarter, we did have a little bit of inflation over the prior year, but you would have expected that we would have been relatively flat with third quarter on a sequential basis and we were.

For the first quarter of next year, I think we'll see a little bit more of that kind of sequential flatness so to speak.

But, I also have got a close eye on the fact that we are seeing diesel fuel start to pick up again.

We are seeing that in last month's CRU monitor, that the steel prices have gone up.

And while wood has moderated a bit, it's not showing any current signs of going down again.

So we are -- I think we will see continued kind of flatness into Q1 and unless those indicators that I chose referenced turn the other way, we could start to see a little bit of inflation in subsequent quarters.

If you remember, we've talked in the past about our steel contracts and how they lag the market by 90 days.

Okay.

And when I -- when we also think about now your revenue guidance for the quarter, does that outlook also include an impact of currency translation?

This question comes up periodically.

I'll just tell you how we do our forecast and go forward.

What we do is we take the rate at the end of the quarter and we apply that to our foreign revenue forecast go forward and that's kind of the assumption we use.

We don't try to update it with each day after quarter end as currency moves up or down, nor do we try to get smart about it.

So if you just kind of go back to the end of each quarter and look at the euro rate and other currencies, we're using that go forward.

So more specifically, I guess, the euro rate at the end of the quarter would have been what we assumed go forward.

And you can calculate the currency benefits or losses from there.

Okay, thanks.

And finally, you talk about your long-term operating margin goal of 10%.

It's historically been a three year goal.

Are you still on -- just from previous calls, are you still on track with that?

Is that still the timeframe that you're considering?

Yes, we talked, updated that in the last call back in December and it is our three-year goal.

What we haven't done and didn't do on that call is give a lot of color in the in between years.

We have mentioned that it's not a hockey stick.

But yes, to answer your question, we still are focused on that 10% and nothing has changed in the last 90 days that would tell us otherwise.

Thanks.

Margot Murtaugh.

Thank you very much.

I have just a couple of follow-up questions.

What are you using for depreciation and amortization for fiscal '08?

Margot, this is Mark Mossing.

I can't hear you too well, sorry.

Margot, Mark Mossing here.

I would expect that we're going to see the slight decline from last year just because of the lower CapEx rate over the last few years, but we don't typically give you a specific number, but it will be probably slightly less than this last year.

Okay.

And I don't know, do you break -- I don't know if I missed this, but what is the operating loss for PolyVision and how did it lose this year?

We don't break that out, but our other category, Margot, so we haven't given that historically.

You haven't given it, okay.

What we've continued to say, Margot, is that it is smaller than the wood losses.

Okay thank you.

And international, you have a 10% margin goal overall, but what are you thinking you can accomplish in the International segment?

We have not specifically broken that out, but I think if you do the math, you would expect it to be roundabout the same.

At the pace that they're pushing their margins, and our expected volume growth in that segment, I think you would be not too far off if you assumed around 10%.

Okay.

Thank you very much.

The last question we have this afternoon is a follow-up from Chad Bowen.

Yes, it's Budd again.

Just a couple of very quick things.

Did I understand you that the restructuring in the Grand Rapids campus in terms of movement of assets will be completed in the first quarter?

Yes, at the end of the quarter, yes, we will be completely out.

The campus is actually sold and we are in one of the facilities for a couple of more months, but by the end of the quarter we should be completely out of the manufacturing campus.

Okay, but (multiple speakers) then moved -- okay, so then the campus will be relatively stable from that point on.

Yes.

Two, you said the wood, you expect to break even in this first quarter?

We've said in early next fiscal year.

So somewhere in the first half.

Okay.

And finally, Dave, I just want to thank you for giving us a little bit of color on the size of the change in the backlog and if you want to give us an actual level, don't let us stop you from doing that.

You know, Budd, every quarter I want to but Lenhardt won't let me, so you really ought to be beating on him.

I see.

Well we can put tape on his mouth (multiple speakers)

If he does, we're going to send him to Bangkok.

That's a good place.

Thank you.

Thank you, ladies and gentlemen.

There appear to be no further questions.

Do you have any closing comments you'd like to finish with?

I just would like to confirm that we're very proud of this year's performance.

We've worked very hard to deliver the results today that we have shared.

The employees all over the world that support Steelcase have worked extremely hard over the last couple of years.

We look forward to telling them about bonuses this week and for all of your attention today, I thank you very much.

Thank you, ladies and gentlemen.

This does conclude today's conference call.

You may disconnect your lines and have a wonderful day.

Thank you.