Steelcase Inc (SCS) 2009 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, Director of Investor Relations.

Thank you, Danielle.

Good morning everyone.

Thank you for joining us for the recap of our first quarter fiscal year 2009 financial results.

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

We have also asked Mark Baker, Senior Vice President of Global Operations, to join us on the call to answer any questions related to the commodity cost environment, both domestically and around the world.

Our first quarter earnings release dated June 27, 2008 crossed the wires this morning and is accessible on our web site.

This conference call is being web cast and its copyright production of Steelcase, Inc.

Presentation slides that accompany this webcast are available on Steelcase.com and a replay of this call will also be posted to the site later today.

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

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

These measures are presented because management believes this information useful 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 this release and during the conference call constitute forward-looking statements.

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

For more details on these risks, please refer to today's earnings release and Form 8-K, the Company's 10-K for the year ended February 29, 2008 and our other filings with the Securities and Exchange Commission.

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

Raj, thank you very much.

I would like to start my comments this morning with three insights for the listeners on today's call.

First, the nature of our business performance is that it can be affected by the short and midterm issues that are part of the evolving events or stories in the world's economy.

Said another way, we can be affected by some of the economic stories that are capturing the headlines these days.

Given its large office buildings and high concentration of knowledge workers, New York City is an important market for us.

We are a major player in this market, and as you might suspect the impact of the banking industry deterioration has tested us.

We have news in this broadcast of its relative impact and, in turn, how we have worked hard to develop a revenue base that can offset that affect.

And secondly, the impact of steel and energy inflation has the potential to limit our year.

Again, I say potential, because we have plans to address this and are committed to aggressive strategies so that we don't lose ground to inflation.

But there can be a lag with positive or negative impact of inflation in this business; hence we intend to provide more color here today.

But I have to admit the steepness or slope of the recent run-up defies logic, given the news in the automotive industry about car production being flat to shrinking.

We weren't contemplating the levels that have materialized.

Finally, as you will see, we have kept our investment continuing in future ideas and developments that are keyed to meeting our financial goals over the long-term.

I have started off with confirming these impacts because I think the Company has fared well in spite of those challenges and is in excellent shape.

I'm intent on ensuring that the performance is top of mind for those running our business.

Let me illustrate.

In June of this year, Steelcase enjoyed one of its most exciting NeoCons in recent memory.

The press labeled this as -- the year of Steelcase.

We were able to relocate our presence in the Merchandise Mart which gave us the stage to expose our multi-brand strategy.

These investments don't replicate quarterly, and while we annually invest in this trade show, this is the first major relocation of the Company in this setting in 30 years.

We received seven Best of NeoCon Awards, including three gold, or the highest award; three silver awards and the innovation award.

The gold awards were for two very exciting products called c:scape and media:scape.

This portfolio of furniture products embodies the connection between our user base research and our product development.

They enable the connections our customers must make within their organizations around the world.

These products ship in 2009, but in our business customers who are planning projects are interested right now.

These awards validate our comments in the past on these calls when we claimed we had to prioritize the reshaping of our massive industrial system.

Once that was in good shape, we'd turn our attention to the front end of the business.

Well, we are doing that, and new products are our lifeblood of our expansion strategy and I have directed the folks in the business to keep on investing in order to meet our two market commitments and our future growth targets.

I've also been clear that we need to continue our pace of expansion into other international geographies that we detailed in earlier calls; for example, China and India.

Additionally, on this investment side, our early commitment in the clinical health care arena continues to grow faster in the market by a wide factor.

This business has helped to offset some of the shrinkage I mentioned earlier in the financial sectors.

In fact, one of the gold awards was for a product line we introduced for oncology treatment areas within hospitals.

The tension for protecting the longer-term investments while there is short-term pressure is the classic business management paradox.

Steelcase has a history of taking a long view on its prospects, and we have no plans to become weak-kneed here.

However, management is not asking for a pass either as we get paid to deal with unintended events.

As you read in our earnings release today, we had some challenges, but our track record demonstrates that we can address them.

I am proud of the fact that we announced a series of actions a number of months ago to address further efficiencies in the industrial system and a commitment to build a shared service center in Asia.

These actions have traction, and while they're not offsetting some of the turmoil today, they are large and important cost reduction projects for our near-term.

Of course, if we saw further erosion of the economy, that would threaten -- which would threaten the threshold of where we are now, of course we would have lists of contingency ideas where we can take action.

But I like the longer-term prospects of our business for these reasons.

First, Steelcase was the first in the industry to invest meaningfully in the trend of workers spending more time in group settings versus individual settings.

Our effort to translate our insights into better health care environments is the second reason, and it's proving to be a winner.

Third, our investment in growth in international was ahead of our competitors.

We achieved this by being in these markets with commitments to servicing our customers locally and we do that so we get quicker lead times for our customers.

Fourth, we've built a more variable cost structure since the last time we were in a recession.

You saw us making continued progress last year in our margin improvements and we do remain focused on hitting our longer-term goals of 10% to 11% operating income.

Fifth, I am very involved in the visits to our headquarters by our customers and the daily activity is still vibrant.

These customers are coming because the R word hasn't changed their plans.

So my intent for this call was to attempt to provide answers to the questions you might have about the larger economic forces, our responses to them and the midterm prospects.

Let's move to Dave Sylvester, our Chief Financial Officer, who will walk through the quarter, and then I will join Dave and Mark Baker, who is our Global Operations Officer that includes responsibility for the industrial system and procurement, for Q&A at the end of Dave's comments.

Dave?

Thank you, Jim.

Today we reported a first-quarter profit of $22.1 million or $0.16 per share, which compares to $33.6 million, or $0.23 per share in the first quarter of last year.

These results were within our earnings estimate of $0.14 to $0.19 per share that we provided last quarter.

Revenue of $815.7 million in the quarter represented a slight increase over the prior year.

It was also within the estimated range of plus or minus 2% growth that we provided last quarter.

North America revenue, which represented approximately 53% of our total revenue, declined by 9% compared to the prior year, influenced by the negative impacts of dealer deconsolidations which totaled $20 million and soft demand in the financial services sector.

The International segment, which totaled approximately 31% of total revenue, reported another quarter of strong sales growth over the prior year, or 29.1%.

While currency translation and acquisition benefits contributed to the growth rate, we estimate organic growth approximated 10%, driven by strength in Germany, the Middle East, Benelux, Africa and Latin America.

In total, current quarter revenue included $31 million of favorable currency translation effects versus the same quarter last year, offset in part by $11 million of less revenue from dealer deconsolidations net of acquisitions completed within the last 12 months.

Operating income of $36.8 million compared to $48.3 million in the prior year.

Included in our first quarter operating income were pretax restructuring costs of $7.2 million compared to $1.7 million last year.

Operating income excluding restructuring costs was $44 million or 5.4% of sales compared to $50 million or 6.2% of sales in the prior year.

While we continued to expand operating margins in our North America segment despite the initial impact of growing inflationary headwinds, the performance within our International segment and Other category did not meet our expectations.

Restructuring costs of $4.7 million after-tax primarily related to the strategic actions announced last quarter.

Recall that we announced three plant closures and certain product moves that we plan to complete by the end of November 2008.

We also announced white-collar reinvention initiatives targeted for completion over the next 18 to 24 months.

These actions are aimed at further modernizing our industrial system, improving the profitability at PolyVision and rebalancing our work force to better align with our growth opportunities.

The net charges in the quarter also included the realization of remaining wholesale gain contingencies related to the Grand Rapids manufacturing campus and certain other credits related to previous restructuring activities.

While the net charges incurred were below our estimate of approximately $7 million after tax, the announced initiatives remain on track to be completed in the same time frames and with the same costs and benefits as outlined in our last call.

Cost of sales, which does not include restructuring costs, was 66.8% of sales compared to 67.1% of sales in the prior year.

North America realized a 190 basis point reduction in its cost of sales percentage while International and the Other category experienced respective increases of 180 and 140 basis points compared to last year.

I will provide additional color around each of these variations when I comment on segment performance.

The net improvements in cost of sales were essentially offset by higher restructuring costs in the current year, which resulted in gross margin of 32.6% in the first quarter compared to 32.7% in the prior-year quarter.

Operating expenses of $227 million which do not include restructuring costs were 27.8% of sales, up from $215.7 million or 26.7% in the prior year.

The $11.3 million increase was driven by $8 million of unfavorable currency translation effects as compared to the prior year, increased spending associated with new products and showrooms previewed at NeoCon earlier this month and $3 million of increased spending related to the launch of Coalesse and our ongoing expansion efforts in emerging markets.

These increases over last year were offset in part by approximately $3 million of spending related to last year's sales and dealer conference which occurred in the first quarter of last year while this year's conference is scheduled for the third quarter, $3 million of operating expenses associated with dealer deconsolidations net of acquisitions and $3 million of lower variable compensation expense.

Other income net was $1.5 million for the quarter compared to $7.4 million in the prior-year quarter.

Interest income decreased by nearly $5 million compared to the prior-year because of lower cash and investment balances and lower interest rates earned on those balances.

Our effective tax rate of 35% for the quarter was consistent with what we communicated during our last call and represents our current estimate for the full fiscal year, taking into consideration the assumptions we communicated in last quarter's call.

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

Our cash and short-term investment balances approximated $143 million at the end of the quarter and a $121 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 decreased by approximately $307 million primarily due to the payment of a special cash dividend in January 2008 and share repurchases over the past four quarters, which in the aggregate totaled nearly $400 million.

Consistent with last year, we had a significant use of cash related to changes in operating assets and liabilities.

This is a normal impact, resulting from cash payments in the first quarter of each fiscal year associated with variable compensation and contributions to employee retirement funds.

Capital expenditures of $17.9 million during the first quarter reflect increased new product development efforts and further investments in our showrooms and corporate facilities.

We currently estimate fiscal 2009 capital expenditures to approximate $100 million, including the replacement of a corporate aircraft, compared to $80 million in fiscal 2008.

However, we also anticipate selling the aircraft that is being replaced and estimate the net proceeds will likely offset the increased capital expenditures.

During the quarter, we have repurchased 3.8 million shares of common stock at a total cost of $46.3 million or at an average price of $12.32 per share.

The majority of the repurchases were completed pursuant to a stock repurchase agreement which was established in January 2008 in accordance with Rule 10b-51 of the Securities Exchange Act and has since expired as the preset authorization of $60 million was fully utilized.

In addition, we have paid quarterly dividends of $20.3 million, or $0.15 per share in the first quarter and our Board recently approved maintaining this level of dividend for the second quarter as well.

Over the past four quarters, we have returned $474 million to shareholders through quarterly dividend, a special cash dividend and share repurchases.

As of the end of the quarter, we had $228 million remaining under the $250 million share repurchase authorization announced in December 2007.

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 and liquidity position that can fuel future growth as well as protect the Company through the typical ups and downs of business cycles.

As a brief update, there has been no change to the two components of our investment portfolio that we continue to classify as long-term.

As you know, we hold $26.5 million of auction rate securities where the auction market is no longer performing.

The underlying assets continue to perform, paying interest at higher penalty rates, but we did take additional reserves this quarter of $300,000 based on updated valuation work completed by our broker, bringing the total temporary allowance to $2.9 million.

We also continue to hold the $5 million of defaulted Canadian asset-backed commercial paper and have made no change to the $900,000 estimated impairment we recorded last quarter.

The impairment was based on information coming out of the pan-Canadian resolution process, which is now nearly completed.

As a result of information received from this process, we expect an exchange of our current commercial paper investment for longer dated securities in the coming weeks.

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

In North America, sales were $430.7 million in the quarter, or 9% lower than the prior year, which was a strong quarter and reflected the double-digit growth rate compared to the previous year.

Approximately half of the decline was due to dealer deconsolidations completed within the past 12 months.

The remainder was due to the tough prior-year comparison and soft demand in the financial services sector.

Beyond the financial services sector, which experienced significant declines largely driven by lower project business in the New York region, most other sectors posted modest increases or slight decreases in revenue versus the prior year.

Health care was an exception, posting another quarter of double-digit growth.

In addition, we continued to experience nice growth throughout Canada and in various cities across the southern U.S.

During last quarter's call, we noted average weekly orders in the fourth quarter followed a typical seasonal pattern, declining through mid-January and rebuilding thereafter, finishing the quarter essentially at the same level as orders in the prior year.

We highlighted that a double-digit decline within the financial service sector was offset by order growth in other vertical markets, including health care, government and higher education.

In addition, we shared that customer visits decreased year-over-year for the first time in several quarters and also that we were beginning to hear about various project deferrals primarily within the financial services sector.

During the first quarter, the same story largely continued, but to a different degree.

Specifically, the decrease in project-related orders within the financial services sector was more severe compared to the order patterns last year.

However, we experienced strength in a number of other sectors, including technical professional, federal government, higher education, health care and energy, all of which in total essentially offset the decline in financial services.

Further, these order patterns which resulted in an ending backlog which was slightly higher than the prior year have continued through the first few weeks of June but have reflected modest growth compared to last year.

One other point is that customer visits rebounded in the first quarter, reflecting growth over the prior-year quarter, which is a marked increased from the double-digit decline in the fourth quarter.

Operating income for the quarter was $34.3 million, including $3.7 million of pre-tax restructuring costs related to the strategic actions announced last quarter, net of remaining gain contingencies realized in connection with the sale of our Grand Rapids manufacturing campus.

Prior-year operating income was $34.4 million, including $1.7 million of pre-tax restructuring costs.

Operating income excluding restructuring costs was $38 million or 8.9% of sales, compared to $36.1 million or 7.7% of sales in the prior year.

The increase in operating income as a percent of sales was driven by higher gross margin in the current year quarter, offset in part by higher operating expenses as a percent of sales, despite lower spending in absolute dollars.

Cost of sales, which is reported separately from restructuring costs, improved 190 basis points over the prior-year quarter.

Gains have been realized from a favorable property tax settlement recognized in the quarter which aggregated $3.8 million, improved pricing yields and continued plant efficiencies.

These gains were offset in part by increased direct material and energy-related inflation which was consistent with our estimate provided last quarter.

The improvement in cost of sales compared to the prior year was primarily driven -- was the primary driver of North America gross margin increasing to 32.4% in the first quarter compared to 30.8% in the prior-year quarter.

North America operating expenses, which are reported separately from restructuring costs, were 24.2% of sales compared to 23.5% of sales in the prior year.

Operating expenses decreased $7.1 million compared to the prior year primarily due to $6 million related to dealer deconsolidations completed within the past 12 months and a $2 million decrease in variable compensation expense.

In addition, the prior-year first quarter included approximately $3 million of spending related to our sales and dealer conference which was scheduled this year for the third quarter as well as certain bad debt provisions recognized in connection with dealer transitions in various markets.

These decreases were partially offset by increased spending associated with the new products in new showrooms we unveiled at NeoCon earlier this month.

International sales were $252.8 million in the quarter which represented an increase of 29.1% compared to the prior-year quarter.

The growth this quarter was primarily driven by strength in Germany, the Middle East, Benelux, Africa and Latin America.

In addition, currency translation had the effect of increasing revenue by approximately $26 million as compared to the prior year and current-year revenue also included $9 million from net acquisitions completed during the past 12 months.

Adjusting for the impact of currency translation and acquisitions, we estimate organic revenue growth in the quarter to approximate 10%.

However, orders during the first quarter were essentially the same as one year ago stated in terms of local currency and adjusted for acquisition impacts, reflecting mixed results.

Strength in markets such as in Germany, Angola, Mexico, Australia, China and India was offset by weakness in three core markets -- France, Japan and Spain -- in addition to soft demand in Morocco.

While we began experiencing these mixed order patterns in the second half of last year, up until this quarter, the areas of growth outweighed the areas of decline.

Nevertheless, the outlook for the second quarter anticipates the continuation of organic revenue growth as backlog remains relatively strong and order patterns in total have regained some momentum in recent weeks.

International reported operating income of $12.4 million in the current quarter, which includes $300,000 of restructuring costs.

In the prior-year quarter, International reported operating income of $13.1 million which did not include any restructuring costs.

Operating income excluding restructuring costs was $12.7 million or 5.0% of sales compared to $13.1 million or 6.7% of sales in the prior year.

The decline in operating income as a percent of sales is primarily linked to gross margin which declined from which declined from 34.4% of sales in the prior-year quarter to 32.8% in the current year.

The primary drivers include negative currency impacts associated with a weak UK pound sterling compared to the euro given our euro zone industrial model in western Europe; the effects of consolidating Ultra, which currently has lower gross margins than average and rising costs in China driven by regulatory reform in the areas of employee compensation and VAT recovery on exports; lower gross margins in Italy and Morocco where we are implementing structural changes and other products -- product and business mix issues.

International operating expenses, which are reported separately from restructuring costs, were $69.8 million or 27.6% of sales in the current quarter compared to $54.3 million or 27.7% of sales in the prior-year quarter.

The $15.5 million increase in year-over-year operating expense dollars include $7 million in unfavorable currency translation effects as compared to the prior year, $3 million from net acquisitions completed within the past 12 months, $1 million in growth-related spending in Asia and $1 million of dealer-related charges.

Our Other category includes the Coalesse Group, formerly the Premium Group; PolyVision and IDEO in the current year.

In the prior years, the Other category also included our financial services subsidiary, which now rolls up within the North America segment.

While we continue to originate leases to customers and earn an origination fee for that service, a third party continues to provide lease funding.

In addition, we continue to reduce the nature and level of financing services provided to our dealers.

As a result, we transitioned its residual activities to our North America segment on a prospective basis at the start of the current fiscal year.

The Other category reported revenue of $132.2 million in the quarter, a 5.2% decrease compared to the prior year.

The decrease in revenue was driven by soft order patterns in the Coalesse Group early in the quarter, the impact of transferring financial services to the North America segment in the current year and the decrease in revenue at PolyVision related primarily to our decision to exit a portion of the public bid contractor whiteboard fabrication business where profit margins are the lowest.

Offsetting a portion of these declines, IDEO grew revenue again this quarter.

The Other category reported an operating loss of $4.2 million during the first quarter which included $3.2 million of restructuring costs.

The current year operating loss excluding restructuring costs of $1.0 million compares to operating income of $7.7 million in the prior year.

The decrease was primarily driven by current year weaker performance in the Coalesse Group and prior-year gains from our financial services subsidiary.

PolyVision results continued to improve, despite lower sales.

The Coalesse Group recorded a modest operating loss excluding restructuring costs in the current quarter compared to nearly $5 million of operating income in the prior year.

The current year loss resulted from poor order patterns early in the quarter, which have since rebounded to double-digit levels over the past several weeks; temporary inefficiencies associated with the consolidation of manufacturing activities announced last quarter and investments underlying the launch of the brand and various new products at NeoCon.

The strong performance in our financial services subsidiary last year contributed approximately $4 million of operating income in the first quarter of fiscal 2008 and was primarily related to residual gains from several large early lease terminations that we had originated and funded years back; restructuring costs of $3.2 million in the current year related to the two facility closures announced last quarter, one within the Coalesse Group and another at PolyVision.

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

Overall, we expect revenue growth to be within a range of 3% to 7% compared to the second quarter of fiscal 2008.

This projected range takes into consideration the following factors.

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

Second, we expect the negative impact of dealer deconsolidations completed within the past 12 months to net out the positive impacts of acquisitions completed in the same period, essentially having no collective impact on our top line in the second quarter.

Third, North America revenue estimates for the second quarter are based on a slightly higher beginning backlog coming into the quarter compared to the prior year as well as June order patterns which have approximated last year.

While we expect the challenges confronting the financial services sector to continue for at least the next few quarters, we are estimating that orders across other sectors will continue to grow in the second quarter compared to the prior year and offset the decline within the financial services sector.

Therefore, we are currently estimating North America organic revenue growth to be relatively flat.

Fourth, International revenue in the second quarter is expected to benefit from a relatively strong backlog and favorable order patterns in recent weeks, resulting in estimated organic growth rates in local currency of mid to upper-single digits over the prior year.

As you know, we are in the midst of implementing the strategic actions we announced last quarter.

As a result, the operational inefficiencies we experienced in the first quarter associated with the facility rationalizations may continue as these actions are completed over the next two quarters.

In addition, we are facing significant inflationary headwinds which are estimated to increase our global costs in the second quarter by approximately $15 million to $20 million compared to the prior year.

The current level of inflation exceeds that contemplated in setting the upcoming July list price adjustment in the U.S., and since it takes several quarters to realize the full impact of price adjustments it will only begin to offset some of this inflationary impact in the third quarter.

We are facing similar challenges in most international markets where inflation is also beginning to outpace our most recent list price adjustments.

As is always the case, we continue to monitor inflation and other economic factors as we make strategic pricing decisions.

We expect reported earnings per share for the second quarter will be in the range of $0.15 to $0.20 per share, including after-tax restructuring costs of approximately $7 million.

We reported earnings of $0.26 per share in the second quarter of the prior year, which included $1 million of after-tax restructuring credits.

In addition, we recorded nonoperating income in the prior year of approximately $10 million related to interest income on higher cash balances, gains from dealer transitions and the disposition of an equity interest in a company outside of our industry.

Regarding the overall U.S.

economy and the potential spillover affects around the globe, we, like you, continue to wonder what the full extent of the economic environment will bear on our industry.

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

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 the expansion into vertical and emerging markets, the strengthening of our brands around the world and new product development in our core markets as evidenced by the significant portfolio of new products and solutions we introduced at our recent industry trade show in Chicago.

In the end, we don't know how long the economic climate in the U.S.

will remain uncertain or the extent of the spillover effect around the globe, 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.

Now, we will turn it over for questions.

(OPERATOR INSTRUCTIONS) Matthew McCall, BB&T Capital Markets.

Good morning, thank you.

Dave, thanks for the comments on the International market, specifically the organic growth.

I think that was helpful.

Can you talk a little bit more about what you're seeing from maybe some of the legacy businesses -- I'm sorry -- the legacy markets that you're more ingrained in, in Europe?

And you're growing in some of these other markets.

Where's the growth coming from?

And maybe talk about some of the different leading indicators in some of those markets.

Well, Matt, as I said, the growth in the quarter was pretty broad based -- Germany, Middle East, Benelux, Africa and Latin America in the quarter.

What we have talked about in the past is, the way we think about our International business is in two buckets.

One is Western Europe, and the other is kind of the rest of International, the emerging markets.

So -- and we've talked about the fact that Western Europe is something more than half, certainly less than two-thirds, of our total International revenue.

What the color I think you're looking for is -- where did the growth come from in those two buckets?

And, without getting into specifics, I would tell you that the growth dollars were split pretty close 50-50.

So organic growth in dollars came, a chunk from Western Europe, and the other half or so came from the rest of International.

Okay.

And similarly, if you look -- you commented on the order patterns, but if we look out a little further, and obviously you've got some comfort in the order patterns continuing this year, or at least, I'm sorry, through the quarter.

Can you talk about some of those other leading indicators -- customer visits, mockups, bid activity -- just things like that, that can give us a better idea of what the year could hold?

For International, or North America?

North America, specifically.

Well, I'll start, and then maybe Jim or Terry can add on.

I would tell you that, our ability to look into the crystal ball of North America is challenged and I think you hear that from our competitors as well.

Visibility is limited right now.

For the near term, we feel okay.

We feel okay because, so far through last week, our orders versus prior year, as I mentioned, in North America, we're showing some modest growth.

We also talked about the fact that following a fourth quarter where customer visits dipped significantly versus the prior year, we actually are up this quarter versus last year.

I wouldn't take that to the bank and start to cash in a rebound, but at the same time as we have said for the last several quarters, we're not seeing the signs that would suggest there is a cliff.

So it's continuation of mid-cycle slowdown and moderation of growth rates, is how I would best describe it.

Matt, I would just add, echo, the kind of weak signals that you would look for.

[Like on trips], you look at who's coming and what is their purpose.

There has been no decline, for example, in the kinds of issues that are -- people coming to talk about.

I've referenced this in my earlier comments that some of the fundamental shifts that are happening in offices are causing people to want to remake their spaces.

It connects with a second trend or forecast which is, there's going to be a challenge to attract and retain certain white-collar workers in the last part of this decade.

So companies are modernizing facilities to make their spaces be more attractive.

The third thing is, is the nature of the expansion internationally, which a lot of companies over the last five years that are North American would prioritize their investments in Asia and India and [with] that expansions.

A lot of that has kind of been completed for them, so they're now turning back to the North American market.

So it is part of the reason why I'm feeling very bullish about kind of our proposition and the demand opportunity, because this is a little bit of an interruption, but I don't see it as a deep problem.

Matthew, may I add, this is Terry here, while we are probably seven months into a decline in financial services orders, in the quarter, we had some pretty strong order growth in other vertical markets -- health care, higher ed, federal government, technical professional, so that is helping really to ease the downturn in that one vertical.

Which is a diversification strategy playing out.

Right, okay, thank you on that one.

And then finally, you gave some detail on the expected cost pressures in Q1, and it sounds like there's going to be a little bit of a gap between your pricing and the price you're moving through and then the cost pressures you're experiencing.

I guess, first, is the $15 million to $20 million of pressure, is that a good indication of what you expect, that current -- we've got to assume current cost levels, and you carry this forward -- is that a good number for the rest of the year?

And then, what is the outlook from the margin front?

I guess remind us of some of the benefits on the restructuring front that are going to help you offset some of that along with pricing as we move through the year.

I know, Jim, you spoke about the longer-term target, but maybe if we could talk about where margins could potentially end up this year, all things considered.

Well, Matt, I'm going to let Dave take the question of how you guys are going to try to work your models, but I just want to make something clear, but let me make the assumption.

I know this isn't you, but a caller or two is just hearing this for the first time.

The nature of inflation in this industry is that, because we're a made-to-order business and we do have some long-term pricing arrangements both with customers and with suppliers that, as something like this starts to inflate, you may not have much of an effect at all.

And that is what Dave was saying in Q1, you mentioned Q1.

We were able to offset this, and we planned for it.

When you have the procurement side, in this case steel inflating faster, of course you've got everyone here thinking, okay, how do we offset that?

And we can do a portion of that based on the projects that we are quoting.

In other words, if a project were being quoted today for shipment this year, we of course know that that inflation presents itself, and we factor that into our pricing.

But the issue is, is that you have some committed agreements with customers that it takes us some time to adjust.

And so that's what Dave is trying to say, is you kind of have two lines.

You have the line which is the nature of the price you realize over time, and the line which is your costs over time.

And so for him to go out over the next two or three quarters, you've got to understand that some of his realization on pricing improvement is starting to happen.

Even though as inflation hit us now, it's actually starting to happen out in the future.

And that's some of this difficulty in projecting that, but I will let him now try to explain it.

What we don't do is, we're not going to get into forecasting the margins, but I will let you Dave, if you can build on that principle.

As Jim said, Matt, you know that when we do a list price increase, it takes a number of quarters to convert our customer base over to the new price list.

So we had -- continue to have benefit, frankly, from previous pricing actions in our discipline about converting those customers to more recent price lists.

So we had some of that benefit in the first quarter, and we planned on that and we expected that.

Coming into the quarter, inflation spiked tremendously, which is why we guided on the $5 million to $7 million negative impact for the first quarter.

And as I said, that was plus or minus within the range that we provided.

Inflation go forward we see as increasing significantly.

That's why we guided the $15 million to $20 million.

While there is previous pricing action benefit coming in from last year's price increases, from the benefit of the international business having a March price increase that will start to have some positive effect in the second quarter, etc., it is well below what we were anticipating relative to inflation.

So we have a negative impact coming forward.

The inflation number that we give you is not a net number, it's a versus prior year commodity-related inflation that we expect.

I can't reasonably estimate with any level of accuracy or comfort what the price yield benefit will come in, but we do expect some.

On the restructuring side, as I said last quarter, we plan to spend around $40 million pre-tax for these restructuring actions.

We expect around $40 million of pre-tax savings as well.

And what I've also said in the past is that the majority of those are related to the three plant closures, all of which we expect to have essentially closed and exited by the end of our third quarter, or November 2008.

The balance will take a few more quarters.

We said the white-collar work force reduction related to the reinvention initiatives will take 18 to 24 months, so I guess we're 90 days into that time frame.

In fact, Matt, again, let me build on that last comment, because again, it might come up in the call, it's worth mentioning.

The Company essentially, from the last downturn to today, added very little if any white-collar growth, but for acquisitions or investments in new ideas.

So this restructuring that Dave just said confirms that we're taking is actually about the Company being as its sales inflated up, and it didn't add headcount.

We're actually going to be more efficient, you know, even dealing with more growth.

So it's probably a sixth reason I should have put on my list of optimism.

Okay, thank you, guys.

Christopher Agnew, Goldman, Sachs.

Thank you, good morning.

With respect to financials sector, have you seen any sign of stabilization or slowing down in activity, and especially in the New York region?

Well, I would say that, if you're asking if it has hit bottom, I don't know that we have all the news from all the banks yet about what their nonperforming assets are going to do to their balance sheets.

But I will tell you, an interesting side light is that I've noticed some cost engineering that they are doing such that we've won projects in other parts of our footprint where they're moving some of their capabilities to other parts of the world in order to offset some of their cost.

So that's an interest question when I sit here and I go, huh, I really have to count that as financial sector kind of volume, and it's not enough -- not enough of that is going on to offset what has happened in New York.

But I wouldn't want you to have the impression that they've quit spending, because that's not the case.

In fact, Chris, the continuing business has continued relatively okay.

It's really the project business where, if you wanted to have a generality where the financial institutions have really paused and decreased their spend.

Okay.

Just I guess a little question.

On the dealer deconsolidation, and I think that it's net of acquisitions, when did those take place?

When should we sort of stop adjusting for those items?

In the middle of -- we initiated them in the middle of last year's second quarter.

So we have about half a quarter impact left in the upcoming second quarter.

On the dealer deconsolidation --.

And we should be back to straight comparability on that regard, unless we were able to deconsolidate another one, which we are always working on.

Okay.

Then in Asia, it's sort of -- you [did] mention that is one of the areas of strength.

Just a little update on what you're seeing in Asia in your emerging market segment?

Well, I mentioned that Japan, which is a core market for us, has started to slow down, and that's a negative.

But the areas of positive that we've been talking about for the last several quarters of India and China remain very strong.

A little bit of a timing issue this quarter.

I didn't reference China in particular as a growth area in this quarter, but it's really timing related.

They had a project that was pushed to being installed in the next quarter, but I think they will be back to very nice growth rates go forward.

Okay, thanks.

And final question.

With the price increase in July, should we expect that to have an impact on pulling forward orders and thinking about timing with respect around the quarter?

We always feel a spike -- I say always.

I have not been with the Company for its history, but for certainly the last 10 years in advance of a price increase, we have a spike, and then following the price increase there's a lull.

If you step back from that chart though a couple of feet and look at it, it almost appears as though the spike offsets the decline and it's really not a dramatic pull forward.

But should it impact our view of sort of 2Q, 3Q impact, or will that be but a wash and we won't be talking about it?

It would probably be a wash, but we are in an uncertain time right now so there could be other factors that impact our order pattern.

Okay, thank you very much.

Margot Murtaugh, Snyder Capital Management.

Thanks.

Okay, so you're announcing a price increase in July.

Was that like 5%?

We announced a price increase a couple of months ago, actually a price adjustment the way we term it, and we haven't quantified the exact amount of the percentage, because frankly it will vary by customer as they're in the process of moving to different price lists.

But on average, it's in the mid single-digit range.

But commodity costs have gone up more since that time frame, right?

That's for sure.

So what -- do you need to make further adjustments down the road?

Well, you know, I really can't talk about the future pricing actions.

The only thing I can point you to is our history of, when we have faced inflation in the past, we have dealt with it effectively.

We have -- in some cases, we have implemented a price increase once a year; in other cases, twice a year, and even in other extreme cases we implemented a surcharge.

Margot, Jim here.

The other thing to keep in mind is that the tension here is that your customers have to feel confirmation with a basis of the increases.

So the inflationary data that drove this increase that you and Dave were just referring to that has been announced correlated quite well.

This is a rapid change in commodities that we're now talking in the industry in the last, I would say last month.

And we have, as I mentioned, a way to deal with that in subsequent decisions, including transactional decisions when we are pricing every day made to order.

So you have some contracts where you had -- you have some long-term contracts where you have fixed pricing, and so you can't adjust that until the contract comes up?

I would say we have long-term contracts.

We have contracts that allow for price adjustments once, sometimes up to twice a year continuously going on.

And as I stated to Matt, we would expect some pricing benefit of that in the quarters to come of our continued discipline of converting customers to more recent price lists.

Now you might have benefited from -- I mean, do you have contracts on steel so that you benefited from a lower steel price in this quarter (inaudible)?

Margot, this is Mark Baker.

We have agreements with steel producers, but they -- in some cases, they were longer-term contracts.

What we're seeing though in the market is that the increase in prices have been so dramatic that in some cases, those contracts are being essentially torn up and the availability is quite tight.

So in order to ensure that we've got the material to provide the product to our customer, we don't have a lot of leverage there.

Some of our other contracts also are more variable in nature that they're tied to some external benchmarks, and so they would adjust on a quarterly basis both as the price is rising, as it has obviously in the last six months.

And to the extent this might be a bubble, they would also decline on a quarterly basis as well.

Okay.

And so, the savings from the restructuring, they don't really kick in until the fourth quarter?

They will start to progressively kick in over the second and third quarter, but we'll be complete with the manufacturing rationalization initiatives by the end of the third quarter.

So the annualized benefit will start to show up in the fourth quarter.

And that was, you said $40 million pretax?

$40 million pretax, and again, the majority of it is related to the plant closures.

Right.

And what are the cash costs of that restructuring?

A little bit less than the $40 million.

Okay, because I was surprised to see your cash down so much, even though it was a seasonal -- I mean, even though there was stock buyback and dividend.

Yes, it's typical.

If you went back and looked at the last several years, you would see that our cash in the first quarter declines because of the payment of bonuses and profit sharing contributions and other annual payments that are made in the first quarter.

Okay.

Now you have already taken a lot of cost savings moves, but is there more you can do?

I mean are you -- because maybe you're a little bit more concerned about the environment.

Have you done enough, or are there other things that you're looking at?

Well that's the -- I made reference to that, that's it's the business paradox because, clearly, the attitude in the Company is to take very aggressive actions to be cost efficient.

These early announcement, Margot, that we've made were before some of the inflation news, so I have to kind of show that as evidence of our attitude about continuing to be lean and continuing to improve our efficiencies.

Now with the news that we're facing, we - of course we've built contingencies, and there other actions we can take.

But I wanted to declare today that I feel it's important that you think about us as a long-term investment in these -- most of the -- to remind you, most of the growth that we had up to this point required no additional headcount.

So the Company was doing very well in containing those kinds of costs.

And what I would have to cut at this point is our future investments, future innovation ideas, and I don't want to do that yet.

If I thought this was going to get a lot worse, I want to assure you by looking back, you can just look at this as the same management team that managed through the last horrific recession.

I don't want to be a prognosticator, but I don't feel that same kind of situation right here.

But a lot of us have been around long enough to make sure that we see signals that say it's more difficult, then we do have to be much more aggressive.

I want to assure you that we understand that.

Can you quantify at all these discretionary product development costs that you had for the balance of the year, and also incentive comps, if that's going to come down (multiple speakers)?

(multiple speakers) don't have the exact number of product development efforts, but they were part of the increase over the prior year.

Variable compensation will continue to move with our profitability.

As described in our proxy, it has a strong link to our overall level of profitability.

Okay, thanks a lot.

Todd Schwartzman, Sidoti & Co.

Good afternoon.

Question is regarding New York.

Excluding the financial sector, can you give some insight as to how the New York region did relative to the rest of North America?

I don't know that I have the data at my fingertips around how, if I exclude financial services from New York, how the balance of it played out.

I'm looking at Terry or Raj to see if they have a sense.

I guess that's enough to tell you, Todd, that if there was something wild going on in addition to financial services, I would know about it.

So I don't think there is anything unusual going on there.

But I'll tell you what we will do is we will follow up on that and get back to you.

Okay.

Well, looking at some of the other U.S.

financial centers -- Boston, San Francisco -- generally speaking, how is business in those markets?

It's pretty good.

And there are more diversified, though, markets from a sector standpoint, beyond financial.

But the sub-prime issue, as you know, is a banking issue.

There's an investment banking challenge regarding some of the [tarriness] -- I want to use that word -- to the trading structures and securitizations in the markets themselves, liquidity.

But life insurance companies or insurance companies, you know, other real estate businesses that are our customers have not had the kind of decline that you would find just in the pure banking business.

Jim, you had mentioned I think in your prepared remarks that the daily activity that you saw during the quarter, Q1, was vibrant.

Could you possibly maybe quantify the increase in customer visits during 1Q?

Well, I was making reference to the quality of those, just because -- I use those visits as a way to understand the kinds of issues that a customer is coming to talk to us about, the scale of the kinds of projects that we're talking about.

And that's the vibrancy that I'm referring to.

We don't release the customer visit data per se, just for competitive reasons, but we are still very busy.

I would tell you if I thought that was drying up.

That's not the case.

And on the international side, now that you've got more than 30% of sales overseas, could you speak qualitatively at least to what you're seeing in terms of customer visits there locally?

Actually, we don't track customer visits the same way within the international arena, in part because it's not just one kind of primary showroom.

When we speak to customer visits in North America, we are referencing Grand Rapids, primarily.

In Europe and really around international, our showrooms are spread around in most of the major cities.

So then, are there other metrics that you guys have not really spoken to publicly that we may hear about in the future, as far as tracking the international business?

You mean, like North America, we look at the economic metrics.

We listen to dealer sentiment.

We talk to our field salespeople.

We keep a very close eye on weekly and -- order patterns and the like.

Is it safe to say that, in UK, the rest of Europe as well, but in particular UK, that you are continually looking to identify additional sources of cost savings that you haven't previously spoken to?

We are evaluating those opportunities.

Thanks, guys.

[Chad Boland].

Raymond James.

Good morning everybody.

Just I guess one question for you.

You had mentioned earlier that the revenue guidance for Q2 assumes that sort of a net impact of the dealer deconsolidations, the acquisitions, would -- I guess it would net each other out so there wouldn't be any impact.

And the deconsolidations, if I'm thinking about it right, that is a domestic event, and then the acquisitions is an international.

Could you sort of break out the separate impact of those for us to help us with modeling our segments?

You have it right.

One's a domestic issue and the other is an international acquisition.

I would rather not give you the details because I don't want to quantify or forecast for the Ultra business, specifically.

But you can get that, Chad, if you make a few assumptions.

They were a public company just before we bought them.

Okay, thanks.

Hey, David, it's Budd, how are you?

Just a question on -- I was surprised by the loss in Coalesse.

I don't ever remember the STP or that organization having an [op] loss before.

Maybe help me through that, and what does the future look like?

Well, I think the future looks quite good, and I'm sure Jim will give some added color on that based on what we brought to the market at NeoCon in Coalesse.

I referenced early that it did not -- Coalesse and international gross margins did not meet our expectations, and gross margins are what primarily drove the issues in Coalesse.

So we were not expecting a loss.

And it is quite rate that they had a loss, but I also expect them to be back on track next quarter.

With the exception of, they still have some inefficiencies to deal with as they are closing one facility and consolidating it into another.

But I would say that I agree with you.

It wasn't a surprise in the sense that we weren't watching our business, but it's the kind of thing that I don't expect to happen again.

And we have already started to see the order pattern recover.

And I think if we look back, it will be one of the consequences of all of the work we had to do to change the branding.

But [Dave] said I would refer to NeoCon.

I know that a number of you were there.

We do a lot of formal surveying of people that were through that and get a great deal of customer insight.

Coalesse hit really high marks in terms of what we were trying to do with that brand and it's showing up in the fact that the kind of poor order pattern they had that drove that quarter has been fixed.

Yes, but that's still -- I'm still confused.

I thought the [SDP], that group, had about a 1000 basis point differential in margin historically to the overall business, to the fleet average.

What caused the op loss this quarter?

Is it -- David said inefficiencies.

Was it volume related?

How did you wind up in that situation?

First of all, I'm not sure where you get 1000 --.

Well, it was the old SDP when it was reported as a separate segment, you could get there.

I mean, you had those numbers.

You might have been comparing it to the old North American business prior to its restructuring as well, but it's not 1000 basis points.

You could tell that simply by looking at the Other category in total versus North America.

Sure, I know that now, but that has PolyVision in it, which had some depressed margins, too.

Sure, but not so much that it's dragging by a 10 basis point difference.

So let me talk about the quarter for Coalesse one more time.

From a top-line perspective, as Jim said, order patterns were quite soft in January and February.

They came back a little bit in March, and so we thought we were through it, but then they fell off considerably in March and April and -- at the back end of March and into April.

And so that's what drove the volume miss for us in the Coalesse Group.

They have since rebounded very nicely in most of the month of May and into June, up through last week.

So we feel like that was kind of an air bubble from a volume perspective.

So that played a role for sure.

What played a role in our profit comparison year-over-year but what didn't surprise us was the operational inefficiencies and redundant costs that we have currently in place as we transition volume from one factory to another factory.

We have had to hire and train and prepare for the new processes to be moved into the new facility.

So we have a redundant -- a bit of a redundant cost structure for a few quarters while we get through that.

And the other thing that affects our comparability quarter-over-quarter that didn't surprise us by the fact of the profitability comparison is the level of investment that we made and continue to make in the Coalesse brand and the new products they're bringing to market.

So, for the rest of the year, excluding -- I think there's still restructuring charges for each of the remaining several quarters, and maybe even into next year for this group, will it be profitable either at the adjusted line or at the reported line?

How should we look at that?

I'm not going to give you a forecast for the rest of the year, but we expect it to be profitable at the adjusted line, excluding restructuring charges in the second quarter.

Okay, thank you.

I'll ask other questions off-line.

This call has gone long enough.

Thank you very much.

Thank you, Budd.

So I just want to kind of confirm that, a little turbulence here because of the economy, inflation and our commitment to continue to invest.

We've got a good handle on this.

I'm optimistic, as I pointed out in a number of my comments, about our Company.

The morale here is very high from NeoCon and the kind of response we got.

So we look forward to our next call and talking about results.

Thank you.

Thank you, ladies and gentlemen.

This does conclude today's conference call.

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

Thank you for your participation.