Steelcase Inc (SCS) 2008 Q1 法說會逐字稿

Good day, everyone and welcome to Steelcase's first 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.

Good morning, everyone.

Thank you for joining us for the recap of our first quarter fiscal year 2008 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 and Corporate Controller.

Our first quarter earnings release dated June 26, 2007 crossed the wires 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, 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 statements included in this morning's release.

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

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

For more details on these risks please refer to 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, Raj.

And I am pleased to start our conference call this morning to discuss our performance for the first quarter.

To remind you, our fiscal year is March '07 through February '08 basis for its performance is centered in the operating activities of the business.

Profit is) profit so we can report at times income from nonoperating income and we'll take that, like we did with last quarter income tax reserve adjustments.

However as the CEO of a business you realize that quality of earnings is what you and our shareholders count on and this quarter shows us attributes of this improvement.

In fact, Dave Sylvester, our CFO, will confirm that our operating income can be calculated in a way that even further enhances that absolute percentage of income we are producing.

Our annual shareholders meeting was held last week, and the discussions there and in the annual report distributed earlier, built an insght for you around the notion that over the last three years we have built our focus of improvement around our industrial system.

The benefits of our lean production system are what drive the rhythm of results that this quarter is realizing.

While we can't make forward statements of our performance I feel you should understand how complicated and consuming the work to change the industrial system was.

Such that it had an effect to delay a portion of our investment in the front end.

The front end to me is the place where products, services and information are invented and launched.

Activities now are going full out.

It is why I believe that our Company is on solid footing due to the impact of having the front-end now on track to catch up to the modernization of the back end.

Consider this following news as confirmation.

First, we told you a few years ago that the obvious growth potential in the healthcare market posed a huge opportunity for our approach to) understanding the nature of work and to build clever solutions for those patterns.

Nurture has earned (technical difficulty)

All right, breaking up?

Okay.

Nurture has earned the Premier Healthcare Alliance 2000 Pinnacle Award for supplier performance that meets and exceeds the expectations of Premier and its members.

Second consecutive year that Nurture earned the Pinnacle Award for consistent performance excellence with the Premier alliance.

The 2007 Premier Pinnacle Award was awarded to 13 suppliers out of 720 eligible suppliers who submitted for recognition.

These 13 suppliers have consistently achieved the 2006 scorecard rating of 95% or higher.

It's in some ways unfortunate that we don't release detailed orders and backlog or any insight into healthcare orders won, not entered as all of these metrics are showing signs of strengthening.

This latter point related to "orders won, but not entered" is something that we are increasingly seeing in the clinical world as we are gaining commitments for large pieces of business that will ship three years later, in some examples.

Healthcare spaces are more complicated than offices due to the interstitial spaces that they allow to have gases and fluids that flow in and out of the operating theater and patient rooms.

Hence, these buildings take time and consequently the furniture awards are made early in the process.

The second point of confirmation of our front-end focus is Steelcase won 6 awards at NeoCon.

NeoCon is our annual trade show and we highlighted products that emerged out of research for improving work settings not only in the office but as you just heard around healthcare and education environments.

Third confirmation is our solid performance internationally does represent for you how the front and back end in combination can produce even stronger operating results The International folks had a smaller industrial system and were able to enhance the front end sooner.

Fourth, we are of the generation that wants to do these products in a way that makes them sustainable.

I want to continue to report to you our progress in this area more to meet and exceed what is believed to be in my mind the seismic shift consciousness in the world around the notion that it's not business plus cost environmental conscientiousness, but rather it is about business being sustainable enterprises.

Sustainable is a higher state that we aspire to and sustainability is a better descriptor because it depicts how we need to see our system as a closed loop system).

Steelcase received three additional what are called cradle to cradle certifications, sustainability certifications if you will.

Montage, the pathways movable walls and Siento.

We now the manufacturer with the most cradle to cradle certifications and listen to this, not just in our industry, but more than any other manufacturer today in any industry.

I add this footnote as much to confirm to our employees that this isn't a fashionable principle that will be abandoned in the next downturn as our markets will just expect it.

Here you have it.

It was really a good quarter and confirmation that the pieces are starting to come together.

So let's divert for a moment and take the next few minutes to hear from Dave Sylvester, our Chief Financial Officer, about the details in the quarter and then of course I will be back later to answer any questions.

Dave.

Thank you, Jim.

Today we reported a first quarter profit of $33.6 million or $0.23 per share, which represents a significant increase over the prior year profit of $18.2 million or $0.12 per share and the highest level of quarterly net income that we have reported in 26 quarters.

These results exceeded our earnings estimate of $0.15 to $0.20 per share that we provided last quarter.

Revenue of $808.5 million in the quarter represented an 11.2% increase over the prior year and was slightly higher than the estimated range of 6 to 10% sales growth that we provided last quarter.

North America revenue, which represents approximately 60% of our total revenue, grew by 11.2% compared to the prior year and our international segment which totals approximately 24% of total revenue reported its third consecutive quarter of strong sales growth over the prior year, or 17.0%.

Current quarter revenue included $13.5 million of favorable currency effects versus the same quarter last year and $6 million of revenue from net acquisitions completed within the last 12 months.

Operating income of $48.3 million compared to $28 million in the prior year.

Included in our first quarter operating income were pretax restructuring charges of $1.7 million compared to $4.3 million last year.

Operating income excluding restructuring charges was $50 million or 6.2% of sales compared to $32.3 million or 4.4% of sales in the prior year.

This 55% improvement in operating income was primarily due to better performance in both our North America and international segments.

Restructuring charges of $1.1 million after tax related to the completion of our previously announced plan to exit our Grand Rapids manufacturing campus and consolidate those operations within our facilities across North America.

The actual charges incurred were below the estimated after-tax range of 2 to $4 million primarily due to the realization of post sale gain contingencies related to this campus.

Cost of sales which does not include restructuring costs fell to 67.1% of sales compared to 69.2% in the prior year.

North America reduced its cost of sales percentage by 230 basis points versus the prior year, and international also saw an improvement of 160 basis points in its cost of sales compared to last year.

These improvements in cost of sales in addition to lower restructuring charges increased gross margin to 32.7% in the first quarter from 30.3% in the prior year quarter.

Operating expenses of $215.7 million which did not include restructuring costs, were 26.7% of sales, up from $191.9 million or 26.4% in the prior year.

The $23.8 million increase was driven by several factors, including $8.6 million of increased variable compensation expense, approximately $5 million of increased spending on longer term growth initiatives, $3.7 million in currency translation effects as compared to the prior year, and $0.9 million related to acquired businesses.

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

Other income net was $7.4 million for the quarter compared to $4.9 million in the prior year quarter.

Interest income increased by $1.8 million over the prior year because of higher cash balances and higher interest rates earned on those balances.

Our effective tax rate of 34.5% for the quarter was consistent with what we communicated during our last call wherein we stated that we expected our effective tax rate to stay within a range of 34 to 35% for fiscal 2008.

Thereafter our longer-term effective tax rate could increase to 35 to 36% if the US Research tax credit is not extended.

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

Our cash and short-term investment balance approximated $450 million at the end of the quarter, a $110 million decrease from total cash and short-term investments at the end of the fourth quarter but in line with our expectations.

Compared to the first quarter of the prior year cash and short-term investments increased by $63.6 million as a result of strong cash flow over the past 12 months.

We had a significant use of cash related to changes in operating assets and liabilities.

A portion of this is related to increased working capital needs associated with the revenue growth experienced during the quarter.

In addition we also make certain cash payments in the first quarter of each fiscal year related to accrued bonus payments and contributions to employee retirement funds.

Capital expenditures were $12.6 million in the quarter compared to $20.1 million in depreciation expense, which represents a source of cash.

Looking forward, we expect to increase capital expenditure investments in the near-term as we ramp up new product development efforts, invest in our showroom and corporate facilities and replace an existing aircraft.

Accordingly, we continue to estimate that fiscal 2008 capital expenditures will approximate $70 to $90 million.

During the quarter we repurchased 3.6 million shares of common stock at a total cost of $69.6 million or at an average price of $19.58 per share.

In addition, we paid quarterly dividends of $22.1 million or $0.15 per share in the first quarter, and our Board recently approved to maintain this level of dividend for the second quarter, as well.

Over the past four quarters we have returned more than $300 million to shareholders in the form of increased quarterly dividends and through share repurchases.

As of the end of the quarter we have $17.5 million remaining under the $100 million share repurchase authorization announced last October, and our Board last week approved an additional $100 million authorization to continue returning value to shareholders through ongoing repurchases.

Now I will discuss the quarterly operating results for each of our segments and the Other category starting with North America.

In North America sales were $486.9 million in the quarter, or 11.2% higher than the prior year.

Fueled by double-digit growth within the systems and storage, seating and architecture and technology product categories.

This growth was broadbased with strength across our larger Fortune 1000 customers, as well as smaller customers and across several vertical markets.

Current year revenue included $8.6 million from net acquisitions that occurred in the last 12 months.

During last quarter's call, we noted that order rates had rebounded late in the fourth quarter and that our resulting quarter end backlog reflected a low double-digit increase versus the prior year.

Further, we stated that order rates had continued to build during the first four weeks of the current quarter.

That trend continued for a short time following our call but then moderated for the balance of the quarter.

As a result, first quarter orders grew by low single digit levels, and backlog finished the quarter slightly less than the prior year in part due to a relatively high mix of quick ship orders in May.

Operating income for the quarter was $35.5 million, including $1.7 million of pre-tax restructuring charges.

Prior year operating income was $27.2 million, including $2 million of pre-tax restructuring charges.

Operating income excluding restructuring charges was 7.6% of sales compared to 6.7% of sales in the prior year.

The increase in operating income was driven by higher gross margins in the current year quarter offset in part by increased spending on longer-term growth initiatives.

North America gross margin was 30.9% compared to 28.4% in the prior year quarter; pre-tax restructuring charges included in gross margin were again $1.7 million in the current quarter and $2 million in the prior year quarter.

Cost of sales which is reported separately from restructuring charges, improved 230 basis points over the prior year quarter.

Gains have been realized from higher volume, better pricing yields, restructuring benefits and continued plant efficiencies as well as improvements in our wood product category.

We have talked in the last four quarters about the profitability issues we have been facing in our wood business, and we have shared our expectations to return this product category to a breakeven run rate by early this fiscal year.

Well, today I am happy to report that we have essentially done just that.

On a fully allocated basis the wood category nearly broke even this quarter, representing an improvement of approximately $9 million compared to the first quarter of last year or approximately $5 million compared to the fourth quarter.

We are pleased with the progress that all wood employees have helped drive, and we expect further improvements as this team takes the wood business into the next stage of our turnaround efforts.

During the first quarter we essentially completed the North American operations related restructuring that was originally announced in March 2005.

Through the implementation of lean manufacturing principles, reduction of the complexity across our product lines and adoption of a more global supply chain we now have a more flexible industrial model, and the Company was able to reduce total manufacturing space within North America by more than 50%, from approximately 14 million square feet at the start of fiscal 2001 to approximately 6.7 million square feet today.

North American operating expenses which are reported separately from restructuring costs, were 23.6% of sales compared to 22.2% of sales in the prior year.

Operating expenses increased $17.7 million compared to the prior year primarily due to a $5.6 million increase in variable compensation expense, approximately $3 million of increased spending on longer-term growth initiatives and a $1.3 million increase related to net acquisitions completed within the past 12 months.

In addition, first quarter operating expenses included approximately $4 million of spending related to our sales and dealer conference which typically occurs every 18 to 24 months, as well as certain bad debt provisions recognized in connection with dealer transitions in various markets.

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.

Many international markets continue to demonstrate reasonably strong growth prospects and our historical and targeted presence in those markets continues to be leveraged.

International sales were $195.8 million in the quarter which represents an increase of 17.0% compared to the prior year quarter.

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

In addition, currency translation had the effect of increasing revenue by $13.5 million as compared to the prior year, and current year revenue also included $0.8 million from dealer acquisitions that were completed during the past 12 months.

International reported operating income of $13.1 million in the current quarter, which does not include any restructuring charges.

In the prior year quarter international reported operating income of $4.6 million which included $2.1 million of pre-tax restructuring charges.

Operating income excluding restructuring charges was $13.1 million or 6.7% of sales compared to $6.7 million or 4.0% of sales in the prior year.

The improvements have been relatively broad based across many markets and influenced by both improvements in gross margin and operating expense leverage.

International gross margin was 34.4% of sales in the quarter compared to 31.5% in the prior year.

Gross margin excluding restructuring impacts was 34.4%, a 160 basis point improvement over 32.8% in the prior year.

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

In addition, we are continuing to benefit from positive mix effects between certain markets and product categories.

That is, we are seeing higher sales growth in certain more profitable markets in product categories and as a result our gross margin continues to be favorably impacted.

International operating expenses which are reported separately from restructuring costs, were $54.3 million or 27.7% of sales.

This compares to operating expenses of $48.2 million or 28.8% of sales in the prior year quarter.

The increase in year-over-year operating expense dollars includes $3.7 million in unfavorable currency effects as compared to the prior year, approximately $2 million in growth related spending in Asia, $1 million in higher variable compensation costs and $400,000 related to a dealer acquired in the past 12 months.

Our Other category, which includes the Design Group, PolyVision, IDEO and Financial Services subsidiaries reported revenue of $125.8 million in the quarter, or a 3.0% increase compared to the prior year.

The increase in revenue was influenced by growth across certain Design Group companies and IDEO, offset in part by a decrease in revenue and PolyVision, almost all of which was related to a business disposition within the past 12 months.

The Other category reported operating income of $6.6 million during the first quarter, a $4 million improvement compared to the prior year.

As a percent of sales operating income increased to 5.2% compared to 2.1% in the prior year.

The improvement was attributable to both gross margin and operating expense improvements and was primarily driven by the Design Group and PolyVision.

While PolyVision continues to face intense price competition in the U.S.

static whiteboard business and other operational issues, we are pleased that their performance reflected improvements despite reduced sales.

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

Overall we expect revenue to be relatively flat compared to the second quarter of the prior year.

Reflecting the North American order pattern experienced late in the first quarter, as well as the anticipated completion of certain dealer transitions this quarter, that will result in the deconsolidation of their financial results.

Remember in fiscal 2006 we consolidated various dealers pursuant to the requirements of FASB interpretation #46, consolidation of variable interest entities.

This financial instruction explained how to apply the controlling financial interest criterion to variable interest entities, which in our case largely consists of Steelcase financed dealer transitions.

As these dealers complete the equity transition from Steelcase and/or refinance their existing debt obligations with third parties, we find ourselves in a position whereby we are no longer required to consolidate their results on an ongoing basis.

While there will be no effect on pre-tax income from the deconsolidations, given the fact that we have not had participation rights associated with their income, there is an impact on sales growth.

As prior year sales in the second quarter included approximately $25 million from these dealers.

I would also like to note that in the second quarter we are bumping up against a strong prior year comparison when Steelcase North America sales grew by approximately 15% over the previous year.

Regarding the North America market in general, we continue to closely monitor the economic environment in an effort to gauge demand trends.

While indicators have remained somewhat mixed, we are not experiencing any significant signs that the overall industry moderation is intensifying.

For example, we have not experienced any significant order cancellations or deferrals, and customer visits continue to outpace the prior year, which seems consistent with the attendance levels and general enthusiasm experienced at NeoCon earlier this month.

Plus it is important to note that some economists are predicting the economy to strengthen in the back half of the calendar year, and this sentiment could positively influence demand in our industry.

It is also possible, of course, that our orders could weaken if our customers become increasingly concerned about the overall economy in the U.S.

For now, however, we remain focused on expanding our gross margins regardless of whether or not industry demand continues to moderate.

And as we have discussed, we are continuing to invest in longer-term growth initiatives related to new product development in core markets, expansion into vertical and emerging markets and strengthening of our brands around the world.

International results in the second quarter are expected to reflect typical seasonality associated with European vacations but should continue to expand versus prior year results and post higher growth rates compared to the North America segment.

We expect reported earnings per share for the second quarter will be in the range of $0.21 to $0.26 per share including minimal restructuring charges.

This range includes anticipated after-tax nonoperating gains of $3 million or $0.02 per share and continued spending on longer-term growth initiatives.

These nonoperating gains relate to a dealer transition completed earlier this month and an expected liquidation of a long-term equity interest in a company outside of our industry.

We reported earnings of $0.18 per share in the second quarter of the prior year, including after-tax restructuring charges of $2.8 million.

So in summary, the first quarter posted strong results, representing a great start to fiscal 2008, which we continue to 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.

Now we will turn it over for questions.

(OPERATOR INSTRUCTIONS) Matt McCall.

This is actually Sean for Matt.

Matt is a little under the weather today.

Still trying to understand the demand environment a little bit.

I guess if we take out the $25 million -- trying to get an apples-to-apples comparison -- if we take out the $25 million from dealers, that is roughly a 3% year-over-year increase on the top line.

Is that still in line with what is being I guess assumed or built in to the to your, the long term EBIT margin goal, or is the, I guess the any sort of weakness there putting that goal in jeopardy?

I don't think there is any impact of significance in our long-term goal of 10% from the deconsolidations.

Regarding your quantification of the three points of impact from the deconsolidations at all, I agree with that math.

Okay.

I guess secondly goes to any sort of future use of the cash.

Acknowledging the increase in the authorization from your Board, would the weaker demand environment put any sort of increase at a comfort level of cash that you hold on hand or decelerate any sort of pace of repurchasing?

What we have is from our last experience and the downturn I think is a pretty good handle on the nature of the cash requirements in the Company, and this question of cash in our business is one that we have talked about before and we are consistent with this notion that our first preference is to invest cash in ideas that will grow our business.

We are very fortunate that we have a Board and management team that see lots of upside potential in this industry.

And strategically want to pursue all ideas that make sense that build shareholder value.

Beyond that, then, we want to return value directly to shareholders through a combination of dividends and buybacks.

And what we do each budget year is go through a planning process of assessing what those kind of requirements are, and we are sufficiently cushioned.

That is not the issue now.

The issue is how do we meet the first objective strategically in terms of making the right kinds of investments in this business and do it in a way that builds shareholder value.

You commented on wood, and that is great that you are ahead of pace there.

What about PolyVision?

I think it was comments were made previously they're about two quarters behind wood, which I guess would have put that at a breakeven run rate at the end of fiscal year '08.

Is that still on pace there, or is that accelerated as well?

I would say with PolyVision we're making progress.

It is going to go a little bit on hiatus so to speak over the summer months as we go into their busy season.

We've talked in the past they're somewhat concentrated in the whiteboard business in the education world.

And as you can imagine, that industry requires a lot of implementations during the summer months.

So it is a big time of their year but we will get back after continued improvements throughout the fall.

Whether or not they are two quarters or three quarters behind, I don't exactly know how to quantify.

What I would tell you is I will reiterate that the PolyVision is in some ways like North American business, in that there are some components of that business that are doing just fine.

The challenge for them is like North America over the last several years is they need to reinvent their industrial model to compete on a more global scale.

That is not something that we're going to be able to turn around in all of a sudden in a couple of quarters, but we are working aggressively on it.

[Peter C.

Volshum]

Good morning.

It is actually Chris Agnew.

The first question is just pretty focused on the growth rates in your international business and thinking about your guidance.

If I am still -- would I be right to assume that you are still getting some currency benefit and if I assume 10% in the next quarter maybe their international business growing somewhere between around 15% to 17% -- does that then imply that your North American business -- and I'm excluding the dealer transition, is actually flat to down in 2Q?

I do not want to go into that great a detail for you, Chris.

I understand the math you are trying to do.

You are not far off, but you are leaning a little bit too far in the one direction.

In terms of international growth rate?

I'm not telling you much there.

Okay.

I would just reiterate what I said in the script.

That international we think will continue to expand results over the prior year and post growth rates higher than North America.

And North America is being impacted in the second quarter by these deconsolidations.

The other thing that I would caution you to do, I mean you have to think about is I run the business, that imagine the amount of business that we enjoy because of domestic expansion, internationally.

And that in effect the system that helps create demand in international can be connected to the nature of the system that is managed in different parts of the world.

So simply put, a lot of the resources that sometimes we deploy here are helping develop business there and vice versa.

So while I understand how you want to do the math to try and paint a picture of what kind of demand you can expect and you would say well currency is most of the updraft here, I don't think that is a fair conclusion at all.

Okay.

So currency is not benefiting going forward in 2Q?

Is that what you are saying?

Or to ask another way, when --.

I'm asking you to be careful that you're not separating the business geographically in a way that is saying that you are making a categorization about demand because you think of the differences in geography.

That is not a fair way of thinking about this business.

Okay.

On the currency side, Chris, we've said in the past that the way we model our business is we take the quarter end rate and use it in our forecast go forward.

Okay.

And we've done that.

So if you model that quarter end rate of this year versus the average rate of last year in the second quarter you will see that we are obviously planning some benefit from currency.

But I don't see that becoming the big storyline.

The big storyline on international is many of the markets continue to show good signs of strength.

Sure, sure.

We are just trying to think and what sort of growth rates to put into our model for the back half of this year.

And so I was trying to think of when you are anniversarying in terms of getting the benefit from the currency.

Is it largely euros and the UK pound that is the currency impact, or what other currencies should we take into consideration?

Those of the two primary currencies.

Okay.

Can I ask a little bit about the gross margin?

And I think you said there were three areas; volume, price and restructuring that are benefiting gross margin on a year-over-year basis.

Can you remind me when your last price increase was, have you got any plans for further price increases, and what is the overall market environment like?

Is price really enough just to recover inflationary pressures, or are you able to get price over and above?

Chris, I'll start and maybe Jim or Mark can add.

When we do price adjustments we oftentimes are focused on a couple of things.

One is certainly what is going on in the inflationary environment.

We can talk about that if you want.

And the other is to adjust certain products to what I would say to be more in line with the competition and what the products that they compete against.

So what we are planning to do is a price adjustment, and it has been announced for July of this year.

It is not necessarily an increase that is being driven off of inflation.

It is more of an adjustment of various products to bring them more in line with some of their direct competitors.

The thing I would build on as you think forward in that regard is that in previous calls we talked about our attitude about inflation is how insidious it can be, and one of the biggest mistakes is to try and imagine that you will get it later.

You really need to respond quickly so the culture and our pricing practices, particularly in the case of steel and some of the fuel things we reacted very quickly to any of those kinds of pressures and we are committed to do that.

I just took a look at the steel, raw steel kinds of pricing, and clearly the data shows that steel is down versus the peak that we all remember.

But one of the interesting things is that the Europe started to catch up where it had kind of a pricing advantage from a supply standpoint.

And supply is beginning to emerge in Asia, which was causing some spiking problems.

Fuel oil and its effect in our business in the early part of the stream, the diesel fuel, is a critical question.

And later in plastics and downstream.

And all things which Dave was just confirmed that we do study and we stay on top of.

I feel like we've got a good handle on those effects in our economics right now.

And if I'm thinking about the benefits from restructuring, are you -- and I'm thinking more on a sequential basis because obviously year-over-year you will still continue to get some benefits -- but can you still -- will you be getting any sequential progression in gross margin as a result of the restructuring benefits, or is that largely done?

I would say certainly from a sequential basis into the second quarter we would expect some benefits as we were still completing the exit of the Grand Rapids campus in the first quarter and now we are completely out.

So there will be some modest sequential benefits there.

The bigger question which I don't exactly know how to quantify for you, but I do have growing confidence in is the benefit that comes out of stability.

So if you think about what we are focused on from a lean manufacturing perspective, oftentimes what can come in a stable environment is continuous improvement from your focus on lean, and we have not been stable for quite a long time, and we are just now getting there.

So I'm not going to quantify that for you but I'm going to tell you that there is opportunity there for us to continue to improve our margins, just through having the stability of not moving massive pieces of equipment and people around as much as we have been over the last couple of years.

And that is built into our longer-term 10% operating income objective.

That makes sense.

And then maybe finally a housekeeping item.

In your guidance, EPS guidance, do you take into account any share buybacks, or is that -- would that be additional?

Not of significance.

But you do include just a little bit?

We certainly take into consideration the share buybacks that we did in the first quarter, and the full quarter impact that they will have in the second quarter on the weighted average shares.

But we do not contemplate additional share repurchases.

Again, not to indicate that we don't plan to do any but also not to give you any kind of indication that we are planning to do some.

Sure, and then based on that what was your share count at the end of the quarter rather than the weighted average?

We are just under 145 right now, Chris.

Excellent.

Thank you very much.

Chad Bolan.

Good morning Jim, Dave, Mark and Raj.

This is Chad Bolan from Raymond James; I am filling in for Bud who as typical I believe is either boarding an airplane or in the air as we speak.

A couple of quick questions, if I may.

Looking at the segments, if I have done my math right and probably a big if, the contribution margin in the quarter for North America calculates at about 17% and around 30% or so for international.

What would be the right way to think about contribution margin in the segments going forward?

Well, we've said in the past that we believe our contribution margins can be in the 30 to 40% range.

There will be sometimes less than that given some of the investments we are making in our business.

So we talked this quarter about our continued investments in longer-term growth initiatives of about $3 million in North America, as well as the fact that we had our sales and dealer conference and a couple of bad debt provisions that outpaced the prior year in this quarter and we quantified those I think at $4 million.

So I think if you make those adjustments you're going to get back to this kind of more typical contribution margin range that we've talked about.

And I saw in the slides for North America and you mention on the call there is $5.6 million increase in the variable compensation expense.

How did that compare with sort of initial expectations?

Do you feel like is that an unusual number and I guess what is the right way to think about that going forward, as well?

I would say it compares exactly with our expectations because it is designed off of a model that we understand and has been approved by the comp committee.

On that what we've said in the past is well, Chad, is that variable comp tends to approximate 30% of prebonus or precomp income.

It was in that neighborhood.

Great.

Thank you.

And one other quick one, if you can help me understand, in the press release we've got $6 million contribution from net acquisitions.

I saw in the slide as well $8.6 million for North America.

Is the $2.6 million, what is the difference there?

Is that related to the dealer transitions or kind of walk me through that, help me understand.

The difference, Chad, is in the, we mentioned PolyVision had a business that was sold latter part of last year.

It falls under the PolyVision disposal.

Excellent.

Thank you very much.

Todd Schwartzman.

Sidoti & Co.

Thanks.

Good morning, guys.

How did the UK business fare in the second quarter?

In the second quarter or the first quarter?

First quarter, rather.

It did okay.

We didn't see quite the same level of progress that they had in the fourth quarter where I think we called them out as a very strong quarter.

We did okay.

Looking at last year's second quarter, Q2 '07, was there any unusual strength in the international business at that time, making a comparison difficult this year?

I'm just thinking -- I don't recall -- Mark, do you?

No, it wasn't particularly strong.

It is always seasonally down, Todd, but there wasn't anything that I would call out that was extraordinary.

And the dealers scheduled to be deconsolidated, are they operating at roughly breakeven?

Todd, the issue there is because of the way we participate or don't participate in their income, they basically have no net effect on our pretax income.

So they will go out and the revenue will go away, but there is no operating or pretax margin because any profit that we would consolidate essentially gets eliminated as a minority interest in the non-operating part of the income statement.

So there isn't much contribution there.

You're no longer required to consolidate them, but could you if you wanted to continue to if you chose to?

We could acquire them, I guess, but that would be about the only way.

Okay, so we won't likely see them at a later date reconsolidated if you will?

Not this dealer, no.

But as you know, the potential exists that other dealers can be at times.

Okay.

Finally, the second quarter revenue guidance, flat revenue, is that versus the GAAP number of about 790 last year?

Yes.

Can I talk just a little bit about that, because you said flat and we purposely said relatively flat.

We in the past have given a range of guidance on our top line.

Last quarter was 6 to 10%.

I don't recall exactly what it was the quarter before but it was something like 4 to 8.

So a 3, 4 point spread.

This one we called relatively flat ,and it seems as though everybody is tagging it flat, period.

We have a range on it, as well.

As you can imagine, slightly down to slightly up.

And that includes this deconsolidation effect of these dealers, which someone quantified earlier on the call -- I think it was Sean -- at about 3 percentage points.

So if you do that math I just want to make sure everybody understands that flat and relatively flat still implies some organic growth in there.

If you were to ignore the impact of those two dealers, would you characterize plus or minus -2.5% as relatively flat?

That was a nice try, Todd.

I am not going to give it to you exactly like that, but as we said in the script, we're still feeling okay.

Our customer visits are pretty good, NeoCon was frankly great.

We have that strong comp in the last year; remember a 15% sales growth in North America.

So we are not cashing in that the party is over, so to speak.

It is still okay.

(OPERATOR INSTRUCTIONS) Gentlemen, there appear to be no further questions in the queue.

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

Yes, this is Jim Hackett, and I just want to reiterate that in my experience running the Company in this industry it is important to have a good first quarter.

It does wonders to the morale in the Company, the attitude of the people making stuff happen here.

So we our very happy, delighted with coming out of the box with this strong quarter and we appreciate your attention this morning and commitment to our performance and our success.

Thank you.

Thank you, ladies and gentlemen.

This does conclude today's conference call.

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

Thank you for your participation.