Steelcase Inc (SCS) 2008 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 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 fourth-quarter and fiscal year 2008 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; Terry Lenhardt, Vice President, North American Finance; and Mark Baker, Senior Vice President and Global Operations Officer.

Our fourth-quarter earnings release dated March 27, 2008 crossed the wires yesterday afternoon 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 also 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 transcript the text of our Safe Harbor statement 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 yesterday's earnings release and Form 8-K, the Company's 10-K for the year ended February 23, 2007, and our other filings with the Securities and Exchange Commission.

Before I pass the call along to Jim Hackett, our President and CEO, I did want to mention a couple of minor segment changes we will be making to the business segments in which we report our financial information.

Vecta, a brand currently being aggregated within the North America segment, will now be consolidated within the other category as part of the Premium Group.

Brayton, a brand within the Premium Group, has a small portfolio of healthcare products.

These products will now be consolidated within the Nurture brand, which is part of the North America segment.

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 2008 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, as well as the two most recent years of quarterly financial information.

This information will be made available when we file our 10-K in late April, and will be accessible via our Web site.

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

Thanks, Raj, and good morning to all.

At this Q4 call, we will discuss a number of important topics, and I'd like to begin to put some perspective initially on the fiscal year we're completing.

We're very proud of the fact that we grew earnings almost 30% year-over-year, and we did that by growing our top-line by 10% and improving our operating income margin by 220 basis points.

As you will see with our Q4 results, we actually had solid performance in our organic sales in North America and international.

I'm not happy, though, that we missed the Q4 estimates, and Dave will detail what happened in Q4 so you can get your heads around why that happened, which then permits us to have an important discussion about the current state of our business.

A few years ago on calls like this, we detailed the initial thinking of key growth strategies.

And our growth strategies included expansion in Europe with a key acquisition in Germany.

Our work there has propelled us to number one in the German market, and we are the largest player now in Europe, and our share continues to grow, with this past year in Europe as one of the best ever.

We hit hard the need to diversify into healthcare, and this will be our third full fiscal year behind that commitment.

It's safe to say that the healthcare business is not fledgling, and is adding key momentum to our growth in North America.

And as we reported in September 2007, we've initiated a major effort in China with the acquisition of Ultra.

And we've also announced new marketing efforts in India.

In North America this past quarter, we estimate we had organic growth of 4%.

And with the uncertainty of the environment here, I'm proud of that effort.

We will launch a significant number of new ideas this year at our June trade show in Chicago, and I have a great deal of enthusiasm for their potential impact.

Recent previews are getting the kind of endorsements that we want to go forward now with confidence.

And while these sales won't be material at the start, they have the potential to show up in future highlights, like some of the other successes I just detailed.

We will also be launching our newest brand in June.

It takes advantage of a transition that is starting to happen in work styles.

Permit me to be vague about the details at this point to increase the drama of its unveiling.

It's the next step in the evolution of our SDP Premium Group category, and I believe it will redefine this category in our industry.

So you're likely wondering how we see our business going forward in this turbulent environment, and there's no need to establish with you the uncertainty of the times we're in.

The nature of the liquidity squeeze and the credit crisis is playing out continually in the news, and we know that cycles do come and they do go.

This is the fifth banking crisis we've faced in this country, and each time the system gets vilified for how it got there, and yet it always comes out stronger afterward.

In spite of this turbulence, Steelcase is proud to have maintained its sterling balance sheet.

It's true we have more cash than one might carry in theoretical terms, but that is a good position to be in right now.

I like or financial policy today, and realize that there are times to take more risk with one's balance sheet and times to keep dry powder.

I think this part of our business is in great shape.

We were able to add a special dividend this year and increase our buybacks, all the while maintaining the sterling balance sheet.

As often is said, our dry powder is for the unexpected and the opportunities that may present themselves due to the turbulence in the markets today.

These successes -- international, healthcare, new product development, and a very strong balance sheet -- can't get lost in the news about this quarter four or dismiss the hand-wringing over the economy.

We have a good idea about what needs to be done and are intensely focused on executing.

If I get anything across today, it's the fact that we believe we have done what we said we would do.

Our people have worked hard over the last few years to effectively run our business with less capital deployed and return more to shareholders.

This came from an intense effort to make our model more fit.

Now, fitness is defined in terms here as the ability to shrink and grow, and grow and shrink; in other words, to compete today all over the globe, one has to realize that it's never at rest or static.

I make this point because we're telling our organization today about three key pieces of news.

First, we're continuing the modernization of our industrial system.

Our continued passion for lean manufacturing principles, complexity reductions, and leveraging the global supply chain have enabled these steps.

If this was your first call or the first time you've heard this from us, you know that Steelcase has a proud history of being the strongest manufacturer in this domestic industry.

Our on-time performance with products with very high quality was often referred to as the best in class.

Embracing and delivering on principles like lean and leveraging the global supply chain are allowing us to establish a new benchmark for global operational excellence in our industry.

Second, we are in the midst of our turnaround efforts at PolyVision, and some of our actions announced today are targeted to address the issues we've been discussing for the past several quarters.

Third, we are initiating an action we call reinvention.

In its simplest terms it means this.

As a company like ours that operates 24/7 all around the globe, we can now couple the capabilities we have in our various geographies with the customer requirements we are addressing.

Said another way, we don't have to maintain all of our capability in one particular location or geography because technology allows time and distance to be a nonevent.

Consequently, we have begun key process re-engineering that will result in a net reduction of 200 to 250 white-collar jobs in North America.

The details of this are taking shape, and today we're communicating our intent to our employees.

But I want to be clear here.

Apart from the acquisitions and other targeted growth strategies, you may not know this, but we've had little headcount growth from 2004 to today, even as we built this very productive model to compete, even as you saw the sales increase over that period.

So these moves today, while in the midst of the uncertain economic times, are really more connected and would have been more connected to the broader competitiveness that I see as an inevitable next phase of the fitness of global competition.

So I'm very optimistic about the state of our company given this news today, and would like now to turn the call over to our Chief Financial Officer, Dave Sylvester.

David?

Thank you, Jim.

Today we reported a fourth-quarter profit of $30.6 million, or $0.22 per share.

The current quarter results represent a slight increase over the prior-year profit of $29.3 million, or $0.20 per share, which included $6.1 million of after-tax restructuring costs.

You will recall last year's fourth quarter also included favorable tax adjustments totaling $24.8 million, and intangible asset and goodwill impairment charges totaling $7.7 million after-tax.

These adjustments, when combined with related variable compensation expense of $6.3 million after-tax, have the net effect of increasing last year's fourth-quarter net income by $10.8 million.

We have included a copy of last year's Webcast slide related to these adjustments with this quarter's materials for your reference.

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 fifth 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 we posted in fiscal 2003, to a current year profit of $133.2 million, or $0.93 per share, a 29% improvement over the prior-year earnings of $0.72 per share, or $106.9 million.

Further, revenue increased 10.4% to 3.4 billion in fiscal 2008.

Operating income of $202.8 million for the current fiscal year compares to $113.7 million in fiscal 2007.

We recorded net restructuring credits of $400,000 in the current year, compared to net restructuring costs of $23.7 million in the prior year.

Operating income excluding restructuring items was $202.4 million, versus $137.4 million, an improvement of $65 million, or nearly 50% over the prior year.

As a percent of sales up, operating income excluding restructuring items was 5.9%, compared to 4.5% in the prior year.

The improvement in operating income was driven by higher volumes, improved pricing yield, benefits from previous restructuring activities, profit improvement efforts in various businesses, including our wood and interior architecture product categories, and manufacturing productivity gains.

These improvements were partially offset by higher non-cash impairment-related charges, lower cash surrender value appreciation on company-owned life insurance policies, and increased spending on longer-term growth initiatives.

As I have said on previous calls, the management team at Steelcase is committed to delivering the long-term financial target of achieving 10% to 11% operating income as a percent of sales.

Fiscal 2008 marked another good year of progress toward that goal.

However, various economic indicators suggest our industry may continue to moderate in the near-term and face increasing inflationary headwinds at the same time.

As a result, we intend to take this opportunity to accelerate various strategic actions to improve our operating margins.

The actions, which I will discuss in more detail in a few moments, are targeted toward further modernizing our industrial system, improving the profitability at PolyVision, and rebalancing our workforce to better align with our growth opportunities.

In our three-year strategic plan, completed during the third quarter, all of these actions were contemplated, but initial implementation plans were staged for future quarters.

Our decision to accelerate these actions was based on the continued stress in the credit markets, increasing inflationary pressures, and growing consumer concerns underlying the US economy.

Now I will discuss the fourth quarter in more detail.

As I stated before, we reported a fourth-quarter profit of $30.6 million, or $0.22 per share.

These results were below our earnings estimate of $0.23 to $0.28 per share provided last quarter, despite overall revenue growth of 15.8%, which exceeded our related guidance of 10% to 14%.

While we will discuss each of the following items in more detail as we review our segment performance, and highlight the specific impacts on cost of sales and operating expenses, I would like to take a few minutes up front and highlight the aggregate impact of some of the larger unanticipated issues we faced this quarter.

First, you will recall that we carry company-owned life insurance, or COLI, on our balance sheet as a long-term funding source for post-retirement medical benefits, deferred compensation and supplemental retirement plan obligations.

Accordingly, we match the income for COLI performance with the related employee benefit cost allocations to cost of goods sold and operating expenses.

These investments, which aggregated $210.6 million as of February 29, 2008, include both traditional whole life policies and variable life insurance policies, and are carried on our balance sheet at their net cash surrender values, or CSV.

Over the long-term, COLI tends to be a very stable asset.

The issuing companies have very high financial strength ratings.

One is AAA and the others are AA.

Nevertheless, we can experience some short-term volatility, and we saw that during the fourth quarter, driven in large part by the overall performance of the US equity markets.

In fact, compared to the prior year, our fourth-quarter and full-year results reflect lower CSV appreciation of approximately $5 million and $11 million, respectively.

Second, we incurred a fourth-quarter operating loss of $4.4 million in a relatively small country within our international segment.

The losses were driven by inventory adjustments, losses and performance penalties on highly-customized projects, and operational inefficiencies linked to the implementation of a new enterprise resource planning, or ERP, system within this operation.

Third, our international results in the fourth quarter were also negatively impacted by approximately $1 million due to the weakening of the UK pound sterling versus the Euro, given our Euro zone industrial model in Western Europe.

Plus, we wrote off a $1 million long-standing VAT net receivable related to an entity we liquidated several years ago.

Reported revenue of $901.3 million, the highest level of quarterly revenue reported in the last seven years, grew 15.8% as compared to a year ago, and was influenced by the factors we mentioned in our guidance last quarter -- that is, the current quarter compared to the prior year included an additional week of shipments due to the timing of our fiscal year-end, the revenue effect of which we estimate to approximate $65 million; second, favorable currency translation benefits approximating $26 million; and third, a $5 million unfavorable impact related to dealer deconsolidations net of acquisitions completed within the last four quarters.

Thus, if you adjust for these three items, you will note our fourth-quarter revenue reflected organic growth of approximately 5%.

Our international segment again led the way this quarter by posting significant sales growth over the prior year, and representing more than 30% of consolidated revenue for the first time in our company's history.

And remember, our international segment does not include Canadian sales, which is different than some of our competitors.

And thus, international segment comparisons should take this difference into consideration.

When looked at on an apples-to-apples basis, we believe Steelcase continues to lead the industry in both the absolute size of its international sales, as well as international sales stated as a percent of total consolidated revenue.

Fourth-quarter operating income of 46.8 million compared to $2.8 million in the prior year.

Included in our operating income were pre-tax restructuring credits of $300,000, compared to restructuring costs of $9.3 million last year.

Operating income excluding restructuring items was $46.5 million, or 5.1% of sales, compared to $12.1 million, or 1.6% of sales in the prior year.

Remember, last year's fourth quarter was impacted by two major items, as illustrated in the supplemental Webcast slides.

First, we recorded $11.7 million of non-cash impairment-related charges associated with PolyVision intangible assets and goodwill; and second we recorded $9.5 million of variable compensation expense related to the favorable tax adjustments, net of the PolyVision impairment charges.

The balance of the improvement in operating income excluding restructuring items was primarily driven by better performance in our North America segment.

Also, as you complete your quarterly contribution analysis on the increased volume year-over-year, do not forget about the extra week of operating costs during the current year.

Cost of sales, which does not include restructuring costs, was 68.2% of sales compared to 68.7% in the prior year.

North America reduced its cost of sales percentage by 120 basis points versus the prior year, and the other category reduced its cost of sales by 370 basis points.

These improvements were offset in part by increases in cost of sales as a percent of revenue within the international segment.

The overall net improvement, along with lower restructuring costs in the current year, increased gross margin in the fourth quarter to 31.9% from 30.3% last year.

Operating expenses of 240.4 million, which do not include restructuring costs, were 26.7% of sales, compared to $231.3 million, or 29.7% in the prior year.

The $9.1 million increase in operating expenses was influenced by several factors, including -- approximately $10 million to $12 million related to the extra week of operations, approximately $6 million of currency translation effects as compared to the prior year, approximately $5 million of increased spending on new product development and other long-term growth initiatives, and approximately $2 million of lower CSV on COLI.

These increases were offset in large part by the decreasing effects of $11.7 million of prior-year non-cash charges related to PolyVision intangible assets and goodwill, as well as approximately $3 million of decreased variable compensation expense.

As we have said in previous calls, we remain focused on controlling our operating expenses, but we also expect to continue investing in initiatives that we believe will contribute to growing our top-line.

Other income net was $3.9 million for the quarter, flat compared to the prior year.

During the fourth quarter of last year, we repatriated nearly $100 million of cash from our Canadian subsidiary, which resulted in foreign withholding taxes of approximately $5 million that were recorded as a non-operating expense.

The current quarter reflects lower interest income, resulting from lower cash and investment balances, lower interest rates, and a $900,000 impairment charge recorded against the Canadian commercial paper investment that remains in default.

In addition, the current quarter includes a $1.1 million charge to correct the minority interest related to one of our consolidated subsidiaries.

Our full-year effective tax rate of 37.0% was within the range we communicated during our last call, and reflected a fourth-quarter effective rate of approximately 34%.

While there are always many variables at play when it comes to global taxation, we are currently estimating our fiscal 2009 effective tax rate will approximate 35%.

The rate could be higher or lower depending on a number of factors, including the final outcome of a current IRS audit, which we expect will be completed within the next 12 months, the potential reinstatement of the research tax credit by the US government, potential adjustments positive or negative to valuation allowances recorded against our international net operating loss carryforwards, and the level of our non-taxable income relative to overall pre-tax income.

In addition, if corporate tax rates were to change in jurisdictions where we are carrying net deferred tax assets, we would need to revalue these assets in the period any such changes were to be enacted, thereby impacting our effective tax rate.

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

Our cash and short-term investment balances approximated $264 million at the end of the quarter, a $280 million decrease from the end of the third quarter and a $296 million decrease from the last -- from the same quarter last year.

We generated $82 million of cash from operations in the fourth quarter, which was influenced primarily by profitability, improvement in working capital metrics, and non-cash accruals for variable compensation and benefits.

Capital expenditures of $27 million during the fourth quarter reflect increased new product development efforts, further investments in our showrooms and corporate facilities, and additional deposit payments related to the replacement of an existing aircraft.

For the full year, depreciation expense of $84 million exceeded capital expenditures of $79.6 million.

We expect this trend, which has continued for seven consecutive years, to be interrupted in fiscal 2009 as we continue a higher rate of new product development investments, relocate our showrooms within the Chicago Merchandise Mart, complete the renovation of our learning center and surrounding campus in Grand Rapids, and take ownership of a replacement corporate aircraft.

As a result, we are currently estimating fiscal 2009 capital expenditures to exceed fiscal 2008's amount by approximately $30 million.

That said, we also anticipate selling the aircraft that is being replaced in fiscal 2009, and believe proceeds will offset a large portion of the increased capital expenditures.

We paid cash dividends of $268.8 million during the quarter, including a quarterly dividend of $0.15 per share and a special dividend of $1.75 per share.

In addition, we repurchased approximately 2.8 million shares of common stock at a total cost of $40.8 million, or at an average price of $14.57 per share.

Taken together, we returned approximately $500 million to shareholders in the form of dividends and share repurchases during fiscal 2008.

At the end of the quarter we had $272.5 million remaining under our share repurchase authorizations.

Steelcase remains committed to striking a responsible balance between returning value to shareholders in the form of dividends and share repurchases, while maintaining a strong capital structure that can fuel future growth, as well as protect the Company during business cycles.

I would like to update you regarding the two areas of concern within our cash and investment portfolio we have highlighted the last two quarters.

We hold $26.5 million of auction rate securities that have continued to fail auction due to a lack of liquidity in the marketplace.

While the underlying assets have continued to perform, paying interest at higher penalty rates, recent valuation work completed by our brokers suggests that the current value of these securities is less than par value by $2.6 million.

Accordingly, we have reduced the carrying amount and recorded the corresponding adjustment to other comprehensive income within shareholders equity, as we believe the impairment to be temporary.

We also have $5 million in Canadian asset-backed commercial paper that defaulted during the second quarter when the broader Canadian market for this type of security effectively shut down.

As I mentioned earlier, we recorded a $900,000 estimated impairment based on our internal valuation of the underlying assets.

This charge was recorded as a reduction of interest income during the fourth quarter, as we believe the impairment to be other than temporary.

Given the uncertainty as to how long the markets for these securities will remain unavailable, we have reclassified the adjusted balances totaling $28 million to long-term investments in our consolidated balance sheet.

Now I will discuss the quarterly operating results for each of our segments and the other category.

Since the full-year results are simply the culmination of the past four quarters, I will defer the full-year segment discussion to our 10-K, which we expect to file on or before April 29, 2008.

In North America, sales were $492.3 million in the quarter, or 9.7% higher than the fourth quarter of last year.

Current quarter revenue included the favorable impact of an extra week of shipments and favorable currency translation effects, plus the unfavorable impact of approximately $15 million from net dealer deconsolidations completed in the last four quarters.

Adjusting for the extra week of shipments, currency benefits and net divestitures, we estimate organic or same-store sales growth in the North America segment of approximately 4% over the prior-year quarter.

We experienced revenue growth in most all of our product categories, vertical markets, and geographic locations.

The biggest exception was the finance, insurance and real estate -- or FIRE -- sector, which experienced sales declines during the quarter.

During last quarter's call, we noted third-quarter order rates remained relatively strong through October, reflecting upper single-digit growth compared to the prior year.

But order growth had slowed in November.

We also noted that generally shorter leadtimes meant most of the strong September and October incoming orders shipped by the end of the third quarter.

Accordingly, our beginning backlog entering the fourth quarter was essentially flat versus the same timeframe last year.

During the fourth quarter, average weekly orders followed a typical seasonal pattern, declining through mid-January and rebuilding thereafter.

Modest weekly order growth achieved in the first three weeks of December was essentially negated through early January as we experienced soft order patterns relative to the prior year.

Thereafter, weekly orders remained relatively consistent with prior-year amounts through the end of the quarter and into early March.

Accordingly, we finished the quarter with orders that approximated the prior year.

In order to give you some additional color commentary on our fourth-quarter North America order patterns, I will share that we are experiencing a sector decline, as you might expect, resulting from the uncertainty affecting the financial markets.

Specifically, while overall fourth-quarter orders adjusted for the extra week were essentially the same as last year, we did experience low double-digit declines within the fire sector, which we attribute to the turmoil in the credit markets.

This decrease, however, was offset by order growth in other vertical markets, including healthcare, government, and higher education.

In addition, during the quarter we experienced a decrease in year-over-year customer visits for the first time in several quarters.

And we also began hearing about various project deferrals, primarily within the FIRE sector.

Operating income for the quarter was $33.6 million, including $1.2 million of restructuring credits associated with property gains and various adjustments to previously recorded restructuring costs.

Prior-year operating income was $7.2 million, including $9.4 million of pre-tax restructuring costs.

Operating income excluding restructuring items was $32.4 million, or 6.5% of sales in the current quarter, a 95% increase compared to $16.6 million, or 3.7% of sales in the prior year.

Higher volume, continued improvement in gross margin and operating expense leverage all contributed to the improvement.

Cost of sales, which is reported separately from restructuring items, improved 120 basis points relative to sales over the prior-year quarter.

Gains were primarily realized through better volume leverage, improved pricing yields, and benefits from prior restructuring actions and continued plant efficiencies.

These gains, however, were somewhat masked by lower appreciation on COLI this quarter versus a year ago, as well as increasing freight costs linked to the price of oil.

Inflation across the balance of our commodities during the quarter was relatively modest, but we are beginning to experience inflationary headwinds as it relates to steel, steel component parts, diesel fuel, and other petroleum-based commodities.

The improvement in cost of sales, along with lower restructuring costs compared to the prior year, improved North America gross margin to 30.9% in the fourth quarter, compared to 27.7% in the prior quarter.

North America operating expenses, which are reported separately from restructuring costs, were $118.3 million, or 24.1% of sales in the current quarter, compared to $115.3 million, or 25.7% of sales in the prior year.

The quarter-over-quarter variation in operating expense dollars was primarily influenced by the extra week of operating costs, as well as increased spending on new product development.

In addition, the current quarter compared to the prior year included lower CSV appreciation on COLI, which had the net effect of increasing operating expenses by approximately $2 million, $6 million of lower variable compensation expense, the majority of which was related to the prior year favorable tax adjustments net of the PolyVision impairment charges, and the positive impact of net deconsolidations of dealers completed in the last four quarters, which had the effect of decreasing operating expenses by approximately $5 million.

International reported record sales of $278.2 million in the quarter, an increase of 32.6% compared to the prior-year quarter.

The growth was broad-based across most markets, demonstrating the strength of our product offerings and scale of market coverage that we have outside of North America.

Specifically, we experienced sales growth in the quarter across Germany, France, Eastern and Central Europe, Latin America, Asia-Pacific, the UK, and the Middle East.

Currency translation had the effect of increasing revenue by approximately $21 million as compared to the prior-year quarter, and acquisitions net of dispositions completed within the last four quarters contributed an additional $14 million of revenue in the fourth quarter.

Order growth was strong again this quarter, reaching double-digit growth rates in local currency, reflecting continued strength in Germany and solid order patterns in many of the other markets I just mentioned.

International reported operating income of $17.7 million in the current quarter, compared to $14.2 million in the prior year, which included $500,000 of pre-tax restructuring credits.

Operating income excluding restructuring items was $17.7 million, or 6.4% of sales, compared to $13.7 million, or 6.5% of sales in the prior year.

International gross margin was 31.7% of sales in the quarter, compared to 34.5% in the prior year.

The reduction in gross margin was almost entirely driven by the issues I outlined earlier.

Again, we incurred a fourth-quarter operating loss of $4.4 million in a relatively small country within our international segment, driven by inventory adjustments, losses in performance penalties on highly-customized projects and operational inefficiencies linked to the implementation of a new ERP system within this operation.

While we believe most of the related charges are behind us, the ERP implementation is ongoing, and project activity in this market remains highly customized by nature.

In addition, our international gross margin was negatively impacted by approximately $1 million in the fourth quarter, due to the recent weakening of the UK pound Sterling versus the Euro.

In addition, we wrote off a $1 million long-outstanding value-added tax -- or VAT -- net receivable, related to an entity we liquidated several years ago.

International operating expenses were $70.4 million, or 25.3% of sales, compared to $58.1 million, or 27.7% of sales in the prior-year quarter, representing a 240 basis point improvement in our expense leverage relative to sales.

The increase in year-over-year operating expense dollars includes approximately $5 million of growth-related spending in Asia, including the consolidation impacts of acquiring Ultra last quarter, and approximately $5 million of unfavorable currency effects as compared to the prior year.

Our other category, which includes the Premium Group, PolyVision, IDEO and Financial Services, reported revenue of $130.8 million in the quarter, an increase of 9.1% compared to the prior year.

The increase in revenue was almost entirely driven by growth at IDEO.

Strength at Brayton was largely offset by project weakness at Metro within the Premium Group, and PolyVision same-store growth was negated by the impacts of a product category disposition in a previous quarter.

Our other category reported operating income of $1.1 million in the current quarter, which included $900,000 of pre-tax restructuring costs related to a facility closure that was announced internally during the quarter.

In the prior-year quarter, we reported an operating loss of $11.6 million, which included $400,000 of pre-tax restructuring costs and $11.7 million of non-cash impairment charges related to PolyVision intangible assets and goodwill.

Improvement in fourth-quarter gross margin compared to the prior year was driven by the positive effects of increased volume leverage of fixed costs at IDEO, and operational improvements at PolyVision.

Operating expenses, adjusted for the impact of the impairment charges in the prior year, increased by $6.9 million, in large part due to higher variable compensation expense and other variable costs at IDEO.

During the second quarter of fiscal 2008, we mentioned that we entered into an agreement with certain members of IDEO management, which provides for the potential transfer of a controlling interest of the Company to them over a period of approximately five years.

During the first phase of the transfer, management earns higher levels of variable compensation relative to income, and uses such amounts to purchase a minority interest in IDEO.

In the event a certain percentage ownership is achieved through attaining corresponding levels of profitability, the management group will then have a limited option to purchase a controlling interest in the Company.

To date, we have effectively transferred approximately 12% ownership in IDEO to this group of management.

Now I will review our outlook for the first quarter of fiscal 2009.

Overall, we expect revenue growth to be within a range of plus or minus 2% compared to the first quarter of fiscal 2008, which was a strong quarter for us, reflecting 11.2% growth over the previous year.

This projected range takes into consideration the following factors.

First, based on exchange rates at the end of the fourth quarter, our first-quarter revenue estimates contemplate approximately $20 million to $25 million of favorable currency translation effects compared to the prior year.

Second, dealer deconsolidations net of acquisitions completed within the last four quarters, including Ultra, will negatively impact our top-line in the first quarter by approximately $10 million.

Third, North America revenue estimates in the first quarter are based on a somewhat lower beginning backlog coming into the quarter compared to the prior year, a challenging FIRE sector across our industry, and an expectation that first-quarter orders will be up against a strong start in the comparable period last year, which translated to strong shipments in April and May of 2007.

Therefore, we are currently estimating North America organic revenue to decline in the first quarter by low to mid single-digits.

Fourth, international revenue in the first quarter will benefit from a strong order pattern at the end of the fourth quarter that continued through early March, resulting in estimated organic growth rates in local currency of mid single-digits over the prior year.

We also have announced the acceleration of various strategic actions aimed at further modernizing our industrial system, improving the probability of PolyVision, and rebalancing our workforce to better align with our growth opportunities.

These actions present the potential for disruption, and we also are seeing increasing inflationary headwinds, which are expected to increase our costs in the first quarter by approximately $5 million to $7 million.

Accordingly, we expect reported earnings per share for the first quarter will be in the range of $0.14 to $0.19 per share, including after-tax restructuring costs of approximately $7 million.

We reported earnings of $0.23 per share in the first quarter of the prior year, which included $1.1 million of after-tax restructuring costs.

The Company is not providing full-year revenue or earnings estimates.

However, we are estimating full-year restructuring costs of approximately $25 million to $30 million after-tax, including the amounts just referenced for the first quarter.

These actions more specifically include the following.

First, within the North America segment, we expect to close one manufacturing facility and transfer its production along with certain products from another facility to other manufacturing nodes within our network.

These actions, the majority of which will be completed over the next six to nine months, have been enabled by our continued focus on lean manufacturing principles, product complexity reductions, global supply chain leverage, and the implementation of our regional distribution network.

Second, we expect to close two facilities within the other category over the next six to nine months -- one related to the Premium Group, which will involve product and manufacturing complexity reductions, as well as the transfer of remaining production to other manufacturing nodes within our network; and the other related to PolyVision, which is linked to a decision to exit a portion of the public bid contractor whiteboard fabrication business, where profit margins are the lowest.

Third, we are currently in the process of launching various white-collar reinvention initiatives across our business in an effort to curb the automatic replacement of future attrition and retirements, as well as rebalance our workforce to better align with our growth opportunities.

In connection with these efforts, we currently estimate a net reduction of 200 to 250 white-collar jobs across North America over the next 18 to 24 months, or approximately 100 within fiscal 2009.

Some of those jobs will relocate to a company-owned shared service center, some to third parties, and some may be eliminated as we continue to modernize our processes.

As mentioned earlier, the majority of these actions are expected to be completed within the next nine to 12 months and generate annualized savings thereafter of approximately $25 million after-tax.

While detailed implementation plans are being compiled, 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 earnings estimate.

Regarding the overall US economy, we, like you, wonder what the full extent of the economic environment will be on our industry.

While we estimate the FIRE sector will continue to be negatively impacted for the next several quarters, we also believe our revenue diversification strategies will allow us to continue growth in other geographic, vertical, and customer segments of our business.

In addition, we continue to take stock in the Fed's actions as it attempts to stave off recessionary pressures and inject additional liquidity into the system.

So for now, we will remain focused on expanding our operating margins by implementing the announced restructuring actions.

And as we have discussed in the past several quarters, we will continue 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.

In the end, we don't know how long the economic climate in the US will remain uncertain.

But what we do know is that Steelcase will continue to modernize its industrial system, improve its fitness across front-end processes, and invest in strategies we believe will serve to strengthen our global leadership position in this industry.

As many of you know, our industry trade show is June 9th through the 11th 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 we'll turn it over for questions.

(OPERATOR INSTRUCTIONS).

Christopher Agnew.

The first question is a couple of things; I guess a clarification, but I want to wrap them up together.

Firstly, I think you said inflationary pressures in the first quarter you expect to be about $5 million to $7 million.

I would just like to clarify.

If costs stay where they are today -- for example, steel costs -- would that imply that for the full year, the impact of inflation should be 20 to $28 million?

And I guess linked to that, just clarification on your cost actions.

The $25 million you're planning for the full year, that's on an annualized basis, or is that what you expect to achieve in 2009?

And therefore, on an annualized basis, would it be a little bit higher?

And I guess linking those two themes together, do you believe that the actions you are taking will be enough to mitigate inflationary pressures?

What other levers do you have to pull to offset inflationary pressures?

Thanks.

Chris, one of the things that I want to establish for the call today is that the Company has the lever of being able to change prices regarding these kinds of things in our industry.

You can raise list prices and you can change transactional prices, relative to staying competitive.

I'm going to leave the discussion about price increases to that extent today.

We just aren't going to get into any kind of forward view of changes in pricing as Dave begins to answer this question about what are the projections about commodities.

The second point I would make around inflation is that the 5 to 7 is kind of -- it's our estimate of commodity-based inflation, and it's really before the continued efforts that our supply chain organization is implementing to offset some of those costs.

So whether it's -- whether we manage the inflation through pricing or whether we manage it through cost reduction remains to be seen.

But the number that we did give you was 5 million to 7 million, and that's what we expect on the first quarter.

In rough strokes I'd tell you, Chris, that's both inflations in sequential quarter and sequential -- inflation quarter-over-quarter versus the prior year.

Regarding the full year, we're going to stop short of giving you what you are looking for there because we don't give full-year guidance.

It's not perfect math -- I'll tell you that, though -- because the price of steel has gone up and down over the last 12 months.

But you'd be in a range of a reasonable ballpark, I guess.

On the cost-reduction actions, it's a little complicated because certain of them will be done sooner than others.

When they're all done, we believe that we will generate $25 million after-tax of annualized savings.

As I mentioned, the more significant ones, which involve the further modernization of our industrial system, those we expect to actually complete over the next six to nine months.

So those benefits will begin to kick in as early as part of the third quarter, and for most of the fourth quarter.

Another question, sort of moving onto -- I think you talked before about this is a big year for new product launches.

Does that have particular impacts in terms of capital expenditure?

Or, I think we've seen with a couple of your competitors that you're introducing new products tends to hit gross margin a little bit, as sort of tooling and getting up to speed.

I just wonder if you could comment on those points.

Thanks.

I would tell you that it certainly has impacted our capital expenditures relative to kind of the last five years.

As you know, as we came out of the downturn, we spent a fair amount of our energy in the Company addressing the back-end of our business, so to speak, closing factories and such.

And therefore, we were not investing as significantly as we typically had, and that we are now, in new product development.

So certainly there's been an increase in capital expenditures.

Regarding the impact, or the potential impact, on our gross margins during the year of launch, it really remains to be seen.

What's typical is we will run pilot runs in advance of going live, in order to try to offset some of that risk.

And really the volume -- unless the volume of products ramps up very aggressively, it's something that we typically can manage through.

One final question perhaps.

Just a little bit of historical perspective.

Certainly, 2001-2003 was probably an unprecedented downturn, given the sort of length of and the amount of growth in the late '90s, but I'm not sure if we can stretch memories back to '91, '92.

What factors do you think are different and that we should consider today that would be different maybe to '91 and 2001?

Thanks.

I would say let's parse that on the customer side.

The nature of the global competitiveness means the companies at large are structured in ways to compete with a lot of aggressiveness and intensity.

Let's say that the customers I serve, from banks to airlines to insurance companies -- I mean, the whole gamut -- many of them are transformed in that time in ways that we all appreciate.

The consequence of that is that many of our customers, as they face this current situation, I hear them talking about parts of their business that are still very healthy, and parts of their business that still demand our support.

And Dave mentioned in his comments that the finance/insurance/real estate decline was offset by some of our vertical market efforts.

And the question of whether that continues to go down in that segment and offset by other segments, of course, is kind of the big bet.

On the business model side, we have made a lot of progress in that period in building a business model that takes a lot less capital to produce the kind of value that we're enjoying today.

And therefore, as demand can alter the fixed cost absorption, we're not -- what's the word -- we're not smirking about that now because we still have to watch that.

But, I think they had a lot more difficult problem back in '91, given the fixed cost structure of Steelcase, if they had the kind of declines that you are mentioning in the early part of this decade.

So, the diversity of our customers and the variableness of our cost structure make me feel more bullish about where we are.

Chad Bolen, Raymond James.

It's actually Budd Bugatch.

Can you refresh my mind, if you've talked before about, or if you'll talk now about what percentage of your overall US business in the FIRE segment or the FIRE sector represents?

I wouldn't be refreshing your mind because we haven't disclosed that.

Don't feel restricted by that.

Budd, you know it's an important part of our business, but you also know, too, that the FIRE sector includes real estate and insurance.

And not all components of the FIRE sector are in decline.

It's really limited to one kind of area currently, which is more on the commercial banking, retail branch banking sector.

Would that be about half the segment, though, half of that group?

I would think it's around 14% total in that sector; that would be kind of my expectation for you.

Is that a stupid number?

14% of the sector, or 14% of our North American?

14% of North American would be the entire FIRE group, and maybe the banking would be about half of that.

I really -- I'm not comfortable confirming that level of detail.

Let's talk a little bit about long-term growth rates going forward here.

Can I just add something?

Absolutely.

It's the -- if you said what's the optimism in the FIRE chaos right now, in addition to insurance companies having pretty strong years, the retail banking programs that we talk about having been successful continue to be great investments for banks.

There -- it's part of their path out of their earnings challenge is if they can keep doing some of these.

So I want to leave you with some optimism that the part of the banking that's suffering, of course, with mortgage and underwriting, and the huge numbers of people affected by that, a part of our business was and has been benefiting from the branch expansions.

Did you quantify, David, how -- what that reduction in volume or orders in the FIRE group did have in the quarter?

Yes.

I think we said low double-digit.

I was just trying to go, then, from the long-term growth rate, what do you think the -- what do you think you look like and the industry looks like?

As I said before, we're not giving annual guidance.

But from a long-term perspective, we feel pretty confident in our growth strategies.

We've talked about them on several calls and several trips when we've been out with the investment community.

We feel like they not only diversify our top-line and help us kind of ride through the cycles a little bit better, but also they -- given the spread of them across emerging markets and into new vertical markets, and addressing new customer segments, we feel like that ought to be able to enable us to continue to grow our business.

Did I hear a number or any kind of range?

Go back to last quarter when we updated our three-year view; we said that that three-year view contemplated kind of mid single-digit-level growth rates.

That was getting to my next area, which was that strategic area.

The 10% three-year plan still in effect?

Absolutely.

And I would remind you, too, when we talk about mid single-digit growth rates, that's what we built into our three-year strategic plan, and we did that intentionally in order to drive or force us to make the right operational decisions and choices, just in case our growth rate is only mid single-digits.

We're, obviously, targeting something more than that.

You did just confirm that 10% goal is still intact, hasn't been any change to that?

10% to 11% operating income.

You said -- I think in the script you said for the first quarter, 20 to $25 million of currency.

And I think the slide says 15 to 20.

Did I hear that wrong, or is the slide wrong?

In the first -- in the guidance?

In the guidance for the first quarter fiscal '09 outlook.

It's 20 to 25 million.

If the Webcast slide says something different, it might be excluding, maybe, the Canadian estimate.

It's 20 to 25 in our guidance.

The Canadian is 5 or so?

Plus or minus.

(inaudible)

Matt McCall, BB&T Capital Markets.

Going back to a previous question, talking about just looking at a historical perspective, '91 versus '01, Jim, I appreciate the point you made about the differences in the Company.

But I didn't really grasp your comments on -- and maybe I missed it -- but the comments on the environment overall.

I think current [initial] projections paint a picture that looks more like the '91 downturn in this industry, not the '01.

Can you elaborate on that a little bit, what the [similarities and differences] are?

Let me get it roughly right, because it really doesn't matter if it's perfect, and that is, in the recession in the early '90s, you might have the automotive sector in the United States having backlog in inventory of cars, and the supply system suffering, and the economy in the US now in trouble.

Today, the diversification of those companies globally, the nature of other industries accelerating in terms of their role in our GDP, I'm suggesting that climate is so different that while this FIRE thing is a big deal, and, clearly, got the markets all skittish, we're doing a lot of hand wringing over what is, relative to the whole economy and the whole diversification of our economy, not as big a deal.

And that's what diversification has done for a recession like this.

When we look at the one in the beginning of this decade, because it was a capital investment versus a consumer recession, that was dramatic, in that companies for the first time had more depreciation in a given year than they did capital investment.

You know, I don't believe we're heading for something like that in this current recessionary projection.

So I'm just suggesting they are -- it's a recession to a recession, but the strengths of the diversification of our customers, and the fact that we are globally positioned, we're not sure that this is as big a deal as you go back there in '91 when we had the vertical integrated model, and they were not as diversified.

I see.

Okay.

Let's say that things do weaken dramatically in the economy; remind us of the Company and the industry's ability to push through price increases.

I don't know that we've seen exactly this scenario with inflation like it is and demand weakening, but maybe discuss your comfort level with -- and not asking if you're going to push new price -- but the comfort level in getting price if you need it.

That's why I brought up the general comment, just to remind everybody that you can change list prices.

And because this is a transaction-based business where [you're] pricing orders daily, you have the ability over time to change pricing.

But we can't get near the question of if we are or when we are because we're not supposed to talk about that.

I'd leave you with the confidence that it is a really important part of our business, and we study this and have a good handle on it.

And I can say what is true as you look backwards; Steelcase has -- in the last recession, when there was a lot of -- coming out of that a lot of change in steel and so on and so forth, we took a leadership position in dealing with those problems.

We were ahead of the market in addressing that, and we were successful in getting those things done.

In the international segment, you broke down a couple of the sources of pressure.

First question.

The ERP; you mentioned it, I think, in one of the small countries that you serve.

Is that same ERP system going to be implemented in other countries?

It's a local ERP solution.

So that's one country issue.

And then, you mentioned some loss on highly-customized products.

I guess that's reminiscent of the issues that you faced in the wood business a few quarters back.

Was it a similar scenario?

[Did price costs] move against you, or was it -- what was the issue there?

I think it's a little different.

First of all, this market tends to be more custom in nature.

And we've done okay in the past.

If I look back over the last kind of decade, we've done okay in this business, shipping customized solutions.

The demand in that particular country, though, has been a little bit under pressure.

And as a result, I think, we maybe went after a few things that were a little -- even a little bit more complex than what we're used to.

And that caused some problems.

Along with a little bit of a messy ERP system implementation, the management team just had a few things get away from them there.

It was kind of the combination of the two.

Okay.

And then --

(multiple speakers) not acceptable, and so we have taken very direct steps to make sure that doesn't happen again.

Just looking at the accelerated strategic or restructuring plans, at what point did you deem that necessary or see the opportunity there?

I hear what you're saying about the projected growth levels for next quarter.

At what point during the quarter -- what was the -- I'm assuming this is the plan that's been on the shelf for awhile that you can implement at any point.

What was kind of the thought process, and what drove the initial decision?

I'm going to let Dave respond to the specifics of that question, because he deserves a lot of credit in his role in helping us think through this.

And he and Mark Baker, putting a lot of time into our strategic plan, had a vision for how the Company continues to be fit.

The part I want to add is that it's becoming more evident to us that as you see our sales growing internationally, and you see the kind of expertise we're developing with the share growth in Europe, that our confidence about managing the businesses from different geographies has improved.

And the nuance in this is the ability to leverage some of those geographies to other geographies.

It's not all about just moving jobs from Michigan to Asia, because we're talking about the ability to use the geographic footprint as we have it to the advantage of the whole company where it is, which of course is the globe.

So, the way that's been translated to the employees is that we're beginning to define which processes fit best where, and that's why it's labeled the reinvention.

That has been something we've been thinking about, we've talked lightly about in these calls; it's getting much more play today and becoming more, I guess, explicit.

But, Dave, you might react to the question of when it became important to pull all these forward.

As I said in my previous comments, Matt, they were certainly contemplated in our three-year strategic plan.

But as I said, we staged them a little differently, and, frankly, in anticipation that we were going to be in a relatively stable economy at this point.

Remember, this was six to nine months ago that we put together that strategic plan.

But also, as we've had dialogues back and forth quarter to quarter, we've also told you that we had contingency plans.

And part of our contingency plan was the potential acceleration of these actions.

When the volume starts to be flat or even slightly down in our North American business, it gives us a little bit more of an opportunity to get some of these actions done and, at the same time, not increase the risk of disruption as much as it would be if we were growing at 5 to 10% and trying to get this stuff done.

So that's really what drove the acceleration of the industrial system related actions.

I don't need to say anything about PolyVision; we've been talking about that, and we're in implementation mode now.

(OPERATOR INSTRUCTIONS).

Todd Schwartzman, Sidoti & Company.

Not sure if this question was asked previously, but was the level of discounting in the fourth quarter comparable to that of the first nine months of '08?

This kind of falls under the veil, Todd, of that would be too much disclosure.

We can't talk about pricing.

But, Todd, if there was anything wild going on, we'd be talking about something in our margins, right?

The deferrals that you did reference in the FIRE sector, was that industry-wide, what you had heard?

I guess I'd maybe ask Terry to comment a little bit more on it.

But my sense is that it was industry-wide, because some of the projects that we heard were referring, it wasn't an order that we had won that was cancelled; it was a project that us along with our competitors were imagining we were going to compete for, and it was deferred.

That's right.

It's really across the commercial banking and lending institution segment of the FIRE vertical market.

What actually is produced at the North American plant that you guys have slated for consolidation?

I would tell you that, generally speaking, it was a regional manufacturing facility that made most of -- most of the products that were made there -- that are made there currently are already manufactured in other factories within the North American network.

There was one product that we will have to manufacture in a different plant, but the others will in some way simply involve increasing, or slightly increasing, our capacity in existing facilities.

Lastly, I just want to double-check this, and that's it for me.

CapEx fiscal '09, we're looking at 105 to 110, roughly.

Is that correct?

I think I said current spend plus 30, so you're pretty close.

I think your math is right.

There are no further questions in queue at this time.

I just want to thank everyone for their attention today.

We are pleased with the year that we just completed, and we've got a lot of enthusiasm and energy for starting this next year.

So we look forward to our next call.

Thank you very much.

Think you, ladies and gentlemen.

This does conclude today's conference call.

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

Thank you for your participation.