Steelcase Inc (SCS) 2009 Q3 法說會逐字稿

Good day, everyone and welcome to the Steelcase's third quarter conference call.

As a reminder, today's call is being recorded.

For opening remarks and introductions, I would like to turn the conference call over to Mr.

Raj Mehan, Director of Investor Relations.

Thank you.

Good morning everyone.

Thank you for joining us for the recap of our third 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; In addition we've asked Gary Malburg, Vice President and Treasurer to join us today to address any questions specific to a decrease in cash surrender value of the company owned life insurance and the resulting impact to our reported profitability this quarter.

Our third quarter earnings release dated December 22, 2008, crossed the wires early this morning and is accessible on our website.

In addition, this conference call is being webcast, presentation slides that accompany this webcast are available on Steelcase.com, and are replay of this call will also be posted to this 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 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're 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 this morning's release and Form 8-K, the Company's 10-K for the year ended February 29, 2008 and our other filings with the SEC.

This webcast is a copyrighted production of Steelcase Inc.

Now with these formalities out of the way I'll turn the call over to our President and Chief Executive Officer, Jim Hackett.

Thank you, Raj.

Good morning.

I appreciate having the opportunity to make comments prior to our CFO, Dave Sylvester, detailing for you a clearer picture about what is going on during a very murky time.

All of us want clarity during these times and yet we realize that these are economic times that seem to happen only in cycles of at least 70 years or so.

Thus, let's be candid that there's no amount of speculation on our part that will help clear up what is going to happen in the economy, especially when the economy continues to mystify others who make the pursuit of the information their life's work.

Our life's work is taking care of our customers and building the best Company we can.

However, it is vital, I believe, that those in the leadership roles be able to manage the difficult times by simultaneously paying a great deal of attention to our future, while obsessively managing every detail now in order to have our Company be as vibrant as possible.

So let's first talk about what is going on now.

First, we have been working on the issue of reducing complexity in our business by managing the right amount of diversity of products and brands, with the optimal platforms to serve those concepts.

Second, we've worked hard to diversify our customer base, especially with significant investments in vertical markets like healthcare, and expanding geographies in Europe and Asia.

Our investment in the healthcare market has been paying off and we expect this to continue to be a growth area for us.

I'm proud to report that during the quarter, our Nurture by Steelcase subsidiary won two major awards for a product line called Sync which will start shipping in March of '09.

We used our observational research methods to understand how caregivers work, how their space can best support them.

The Sync stations are flexible, modular and designed to seamlessly connect healthcare professionals to the technology that they use.

Now, Nurture isn't our only award winner.

The Steelcase showroom in Chicago that was totally redesigned for NeoCon in 2008 that had a strong focus on sustainability was recognized by Interior Design magazine with the best showroom of the year award.

Continuing with Now, we made a dedicated commitment in March of 2008 to continually invest in actions to improve our fitness.

We define this state of fitness as the ability to compete on a global stage with any competitor who we might face.

These actions are about building a very solid global industrial system that proudly has a firm footing here in the US to help us serve our domestic markets.

These efforts in March 2008 were targeted to save about $40 million.

And we anticipate another $40 million in cost reduction from the actions we announced earlier this month.

That list includes accelerating our efforts to improve the fitness of our enterprise by turning our global reach into a sustainable advantage.

This is a big deal.

We will see additional operational efficiencies from closing another one of our North American manufacturing plants and we're preparing to further reduce the size of our salaried workforce.

With regard to the future, we're committed to investing in our long-term goals and protecting our growth strategies.

This in a smart and disciplined way.

Last month we opened our new work lab here in Grand Rapids.

This is a customer center that we're using reclaimed factory space to enhance that customer experience and demonstrate our ability the to create solutions.

We had nearly 1,000 dealers and Steelcase salespeople in town last month to see the opening of this new space and get training on our new products.

These products are on track to launch in the new fiscal year.

Incidentally, the question of scrapping an event like this wasn't seriously considered because we're going to need the trained sales force of Steelcase and its dealers as our economy eventually returns to that growth state.

Last quarter, I told you we had won a major government award but we weren't able to talk about it yet.

Well, today I can provide a few more details.

This is a five-year agreement that has the potential to be one of the largest contract awards in the Company's history.

US Department of Defense has selected Steelcase to provide up to 113 million in furniture, installation, design and other services, and the contract guarantees a minimum purchase of at least $3 million.

We're already hard at work on the first phase of the contract.

However, because of the nature of the Department of Defense's work, we won't be discussing more about our work in this agencies transformation.

Trust us, it's a big deal as well.

Dave Sylvester is about to go into detail on our performance and outlook for the fourth quarter.

We recognize that this will be a challenging period but our balance sheet, well, it's strong and there are bright spots in our markets here and abroad.

Steelcase people frankly continue to amaze me with their ability to pull together, face these tough challenges, and build a strong and exciting future for our Company.

I'll close with my best wishes for a safe and restful holiday season and now turn it over to our Chief Financial Officer, Dave Sylvester.

Thank you, Jim.

As Jim mentioned our balance sheet is strong.

As you'll hear in a moment, cash and short-term investment levels are in excess of $200 million.

In addition, long-term investments including our Company-owned life insurance and other securities also exceed $200 million.

And our $200 million untapped credit facility remains accessible to the Company, if needed.

So as we enter this downturn, our liquidity position is solid.

Equally as important, we are a different business than we were going into the last economic slowdown.

We have executed well against our strategy to diversify our revenue base and modernize our industrial system, product offering, and business processes and we are preserving our investments in growth initiatives.

As we know this cycle, like all others, will end and when it does, we expect to maintain our momentum in the targeted growth areas of healthcare, higher education and government, emerging markets around the world, and new products that facilitate connections in the network world.

Now let me shift to the quarterly results.

Today we reported a small third quarter profit which compares to $31.3 million or $0.22 per share in the third quarter of last year.

These results were slightly better than the estimated modest loss we anticipated on December 4.

Revenue declined to $811.3 million in the quarter, which was also slightly better than our estimate earlier this month.

The decline of 8.4% compared to a strong quarter in the prior year, when revenue grew by more than 10% compared to the third quarter of fiscal 2007.

The North America segment experienced an 11.4% decline in revenue and the other category realized a 14.8% decline.

International revenue in the third quarter grew by 2.3%, despite negative currency translation effects compared to the prior year.

In total, third quarter revenue included an $18 million reduction from currency translation effects, and a minimal net impact from acquisitions and divestitures completed within the past 12 months.

Operating income excluding restructuring costs was $19.7 million, or 2.4% of sales in the current quarter, compared to $52.6 million of 5.9% of sales in the prior year.

Current year restructuring costs of $4.7 million primarily related to the strategic actions communicated in March.

Which are now nearing completion.

Again, these actions included three plant closures and certain other product moves as well as white collar reinvention initiatives targeted to eliminate 200 to 250 jobs in North America over an 18 to 24 month period.

Or 100 during the current fiscal year and 100 to 150 during fiscal 2010.

You will also recall that the third quarter of last year included goodwill and intangible asset impairments related to PolyVision.

Which after the reduction of related variable compensation expense reduced operating income by approximately $15 million.

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

Beyond restructuring, current quarter operating income was also negatively impacted by a $27.5 million non-cash charge related to a reduction in cash surrender value or CSV, of our company-owned life insurance or COLI.

This reduction in CSV in the current quarter compares to $2.1 million of income in the third quarter of last year.

We estimate this $30 million variance compared to the prior year had the effect of reducing operating income by approximately $15 million.

Taking into account the related reduction of variable compensation expense.

The reduction in bonus related to the COLI charge is obviously a higher percentage than what you would expect for typical operating income items.

Due to the fact that annual pluses and minuses in CSV are exempt from income taxes.

We've included a webcast slide to more clearly illustrate the impact on operating income by segment.

The remaining reduction in third quarter operating income compared to the prior year was largely driven by lower volume and higher commodity cost inflation, which continued to outpace recent pricing actions.

Although various commodity prices retreated during the quarter from their recent peaks and resulted in slightly less of an impact on cost of sales in the quarter than the 15 million to $20 million previously estimated.

We expect these cost pressures to continue into the fourth quarter, until our supplier contracts automatically reset pricing, or are renegotiated.

Other income and expense net decreased by $4.9 million compared to the prior year, interest income decreased because of lower cash and investment balances and lower interest rates earned on those balances.

In addition, the current quarter included foreign exchange losses compared to gains last year.

We also recorded an $800,000 impairment charge related to one of our auction rate security investments during the quarter as we discovered the underlying assets of the fund had suffered losses due to aggressive investment strategies.

We recorded $9 million of income tax expense which was nearly equal to pretax income for the quarter.

This unusual effective tax rate included the following.

A year-to-date catch-up adjustment of $7.6 million to increased tax expense for the first half of fiscal 2009, to our current estimated effective tax rate for the year of 42.5%.

It also included third quarter income tax expense of $4 million, or 42.5% of the quarter's pretax income, and certain favorable adjustments totaling $2.6 million resulting from changes in estimate associated with our fiscal 2008 tax returns, and the retroactive reinstatement of the US research tax credit to January 1, 2008.

The increase in our year-to-date effective tax rate was the result of the large non-tax deductible COLI losses incurred during the third quarter.

We currently estimate that our fourth quarter effective tax rate will approximate 42.5%; however, two factors could change this estimate.

First, our effective tax rate estimate does not assume any significant change positive or negative in cash surrender value of COLI during the fourth quarter.

Non-deductible COLI losses have the effect of increasing our effective tax rate while non-taxable COLI income has the opposite effect.

Second, we are in the process of finalizing a multi-year audit with the Internal Revenue Service in the US and may be in a a position to release certain tax reserves if the final outcome is favorable.

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

Our cash and short-term investment balances approximated $220 million at the end of the quarter, a $91 million increase from the end of the second quarter.

The increase was primarily driven by decreases in accounts receivable associated with lower volume in the quarter, as well as timing associated with quarter-end accounts payable disbursements.

Compared to the third quarter of the prior year, cash and short-term investments decreased by approximately $324 million, primarily due to the payment of the special dividend in January 2008, and share repurchases over the past four quarters.

Capital expenditures totaled $21.3 million during the third quarter, bringing year-to-date investments to $66.2 million.

We continue to estimate fiscal 2009 capital expenditures will approach $100 million, including a final progress payment of $13 million in the fourth quarter, related to the purchase of a replacement aircraft.

We estimate full year capital expenditures will include a total of approximately $40 million for the replacement aircraft and for investments in showroom and corporate facilities in Chicago and Grand Rapids.

We have listed the aircraft that is being replaced with a broker but to date have experienced limited inquiries given the slowdown in the current market.

Looking forward we are targeting closer to $50 million of capital expenditures during fiscal 2010.

During the quarter, we repurchased 558,000 shares of common stock at a total cost of $4.9 million or at an average price of $8.75 per share.

In addition, we paid quarterly dividends of $20.2 million or $0.15 per share.

Over the past four quarters, we have returned approximately $430 million to shareholders through quarterly dividends, a special cash dividend and share repurchases.

As of the end of the quarter we had $215 million remaining under the $250 million share repurchase authorization we announced in December 2007.

The action taken by the Company's Board of Directors last week to reduce the quarterly dividend to $0.08 per share will serve to further strengthen our balance sheet and enhance our flexibility to maintain investments and growth initiatives and to take advantage of other opportunities that may present themselves during this economic cycle.

We continue to target a strong quarterly dividend.

Current conditions, however, warranted action to preserve cash in the face of an unpredictable environment.

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

North America revenue decreased by 11.4% compared to a strong comparable period last year.

Current quarter revenue included an $8 million negative effect related to the sale of Custom Cable in July of this year, and $5 million of unfavorable currency translation effects compared to the prior year.

Adjusting for these items we estimate the organic decline in the North America segment approximated 9% in the third quarter, which was below the low to mid single digit decline we estimated during last quarter's call.

Project related revenue within financial services remained very soft.

Especially in the New York region, driving a significant portion of the sales decline in the quarter versus last year.

We continued to experience growth in a few sectors including energy, higher education, Federal Government, and technical professional.

However, for the first time this year, larger year-over-year declines in revenue were incurred in other sectors beyond financial services.

Healthcare recorded a modest decline in revenue, but built backlog during the quarter as orders were relatively strong.

During our last call we noted that orders early in the third quarter, adjusted for the estimated pull-forward effect of the September 1, surcharge, were tracking somewhat lower than the prior year.

At that time, the Dow Jones industrial average was still above 10,000.

Shortly after our call, however, the equity markets dropped significantly and business capital spending weakened.

We in turn began to feel the related effects in our order patterns which progressively worsened through the end of the quarter and into the first few weeks of the fourth quarter.

The decrease in third quarter orders was once again led by double-digit declines in project business.

Financial services orders continued to deteriorate, though at a lower rate as we reached the one year anniversary of the decline in this sector and began lapping lower comparisons during the second half of the quarter.

And the declines became more broad-based in the quarter.

Negatively impacting many other vertical markets and most regions throughout the US.

We also began to see a notable increase in project deferrals and cancellations in the marketplace.

On the other hand, continuing business remained relatively resilient, experiencing only mid single digit percentage declines.

Other bright spots within our order patterns during the third quarter continued to include strength in higher education, government, and healthcare.

Which now collectively represent one-third of year-to-date revenue in the North America segment.

Backlog finished the quarter at a level approximating last year, in part due to various presurcharge orders that we expect to ship in the fourth quarter.

We continue to host many potential customers in the healthcare and higher education vertical markets, but in total customer visits during the third quarter declined compared to a very strong comparison in the prior year.

Operating income excluding restructuring costs was $5.1 million or 1.1% of sales compared to $52.9 million or 10.6% of sales in the prior year.

The effects of lower volume and increased commodity cost inflation, which continues to outpace recent pricing actions, combined were the largest drivers of the decline in North America profitability.

However, lower CSV on COLI was also significant.

Which as you will know from our accompanying webcast slide had the net effect after adjustments for related variable compensation expense of reducing third quarter operating income by approximately $18 million in the North America segment compared to the prior year.

In addition, North America operating income in the prior year benefited by reductions in variable compensation expense associated with the impairment charges reported in the other category, again, as more clearly illustrated in our webcast slide.

While operating expense dollars in North America were essentially flat with last year, the current quarter includes the following items as compared to the prior year.

Lower variable compensation expense and lower operating expenses related to the sale of Custom Cable in July of this year, which in total were essentially offset by lower CSV on COLI and approximately $2 million of spending related to our sales and dealer conference which typically occurs every 18 to 24 months.

In the international segment, sales increased 2.3% compared to the prior year quarter.

Somewhat lower than the estimated growth rate of mid single digits provided last quarter.

We experienced growth in a number of countries again this quarter, including the UK, Mexico, India, Algeria, the region encompassing the former Soviet Union, Germany and the Middle East.

Currency translation had the effect of decreasing revenue by approximately $13 million as compared to the prior year, and current year revenue also included approximately $8 million from net acquisitions completed during the past 12 months.

For the first two quarters we have talked about international orders stated in terms of local currency and adjusted for net acquisition impacts, reflected mixed results.

That is, strength in Germany and a variety of other markets is being offset in part by weakness in three core markets (France, Spain and Japan).

And, we expected this pattern to continue into the third quarter.

Following our conference call last quarter, however, the UK suffered a dramatic decline in orders and weakness in Spain intensified, compared to the prior year.

Further, order growth rates moderated in Germany, Latin America and various emerging markets.

Therefore, in total, our international segment suffered a low double-digit order decline in the third quarter, compared to the prior year.

International operating income excluding restructuring items was $19.6 million, or 8.3% of sales, compared to $19.7 million or 8.6% of sales in the prior year.

Increases in cost of sales as a percentage of sales were offset in part by improved operating expense leverage.

In addition to recent increases in inflation, international cost of sales continues to be impacted by negative currency effects in our UK business and the dilutive impact of consolidating ultra.

International operating expense dollars include approximately $3 million of favorable currency translation effects, offset by approximately $3 million from net acquisitions completed within the past 12 months.

The Other category which includes the Coalesse Group, PolyVision and IDEO, reported revenue of $132.2 million in the quarter, or a 14.8% decrease compared to the prior year.

The decrease in revenue included the effects of our decision earlier this year to exit a portion of PolyVision's public bid contractor Whiteboard fabrication business as well as a a recent decision to transfer premium whiteboards and certain other product lines to the Steelcase brand in the North America segment.

In addition, we experienced decreases in revenue at Design Techs and IDEO.

Finally, the transition of financial services residual activities to our North America segment at the start of the current fiscal year on a prospective basis also had a $3 million negative effect on the year-over-year revenue comparison.

The Other category reported a small operating loss during the third quarter, excluding $2.6 million of restructuring costs.

This compares to a $12.8 million operating loss in the prior year, which included the $21 million impairment charge referenced earlier.

Excluding the impairment charge and restructuring costs, operating income decreased by approximately $9 million for the following reasons.

First, while profitable again this quarter, the Coalesse Group lagged prior year performance due to lower volume, operating expense investments related to the launch of the Coalesse brand and variety of new products, inefficiencies associated with the consolidation of manufacturing activities and commodity cost inflation.

Second, strong performance in our financial services subsidiary last year contributed approximately $2 million of operating income in the other category during the third quarter of fiscal 2008.

And third, PolyVision results were negatively impacted by the transfer of certain product lines to the Steelcase brand, large project business in Europe last year which did not repeat during the current quarter, and commodity cost inflation.

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

There is always uncertainty associated with providing revenue and earnings guidance as our quarter end backlog of orders is only a piece of anticipated quarterly revenue.

And the uncertainty is obviously at a higher level than normal in the current economic environment.

Nevertheless, we feel it is important to share our current best estimates, even though the risk in making these projections has increased.

Overall we expect revenue to be within a range of $650 million to $700 million, compared to $901 million in the prior year, which included an extra week of shipments approximating $65 million due to the timing of our fiscal 2008 year-end.

The projected range takes into consideration the following factors.

First, based on exchange rates at the end of the third quarter, our fourth quarter revenue estimates contemplate approximately $35 million of unfavorable currency translation effects compared to the prior year.

This impact could be less if last week's strengthening of the euro compared to the US dollar were to hold for the balance of the quarter.

Second, we estimate the effective dispositions completed within the past 12 months to reduce revenue by approximately $16 million in the fourth quarter, compared to the prior year.

Third, North America revenue estimates in the fourth quarter are based on domestic order patterns which in total have progressively weakened to down approximately 20% over the last two months.

Offset in part by an expectation that revenue will benefit from a general reduction of backlog as well as the shipment of various presurcharge orders in backlog at the end of the third quarter.

Therefore, we are currently estimating North America organic revenue to decline in the fourth quarter by low to mid-double-digit percentages.

Fourth, revenue in the international segment adjusted for the extra week currency differences and disposition impacts, is estimated to decline in the fourth quarter by mid-to upper double-digit percentages or in the mid-to upper teens.

You will also recall that the fourth quarter of last year was a particularly strong quarter for international.

As you know, we are in the midst of implementing the strategic actions we announced in March and earlier this month.

As a result, we expect some level of the operational inefficiencies we experienced thus far in fiscal 2008 to continue for at least the next few quarters.

We continue to expect the actions announced in March to begin generating approximately $40 million of annualized pretax savings by the end of fiscal 2009.

While some benefits have been realized to date, offsetting a portion of the inefficiencies, the majority will begin to provide benefits in the fourth quarter and more fully as we start fiscal 2010.

In addition, we announced earlier this month that we expect to consolidate additional manufacturing and distribution facilities in North America, and further reduce our white collar workforce and other operating costs globally.

These actions, which are expected to result in approximately 20 million to $25 million of pretax restructuring costs over the next six to nine months are estimated to generate annualized pretax savings of an additional $40 million, once completed.

Commodity inflation is estimated to increase our global costs in the fourth quarter by another 5 million to $10 million compared to the prior year.

While we implemented a commodity surcharge in the third quarter within the US, in addition to second quarter list price adjustments around the world, incremental inflation compared to the prior year is expected to outpace the benefits of our recent pricing actions again in the fourth quarter.

While we have been encouraged by recent declines in the spot prices for certain commodities including steel, these lower prices will not begin to benefit our cost of sales until the latter half of the fourth quarter.

We expect to report a net loss for the fourth quarter within a range of $0.04 to $0.10 per share including after-tax restructuring costs of approximately $9 million.

We reported earnings of $30.6 million or $0.22 per share, which included minimal restructuring items in the fourth quarter of the prior year.

Regarding the overall US economy and the spillover effects around the globe, we believe that the slowing of the global economy and related uncertainty will lead to a significant reduction in industry demand for the next several quarters.

Accordingly we have been preparing for a difficult year in fiscal 2010.

Typically, we would update our three-year plan during the third quarter of each fiscal year.

While the strategic direction of the Company has not changed, at this time we are no longer providing a longer term target for operating income margin, given the current economic environment.

With the economic uncertainty we plan to behave conservatively.

Maintaining the strength of our balance sheet, and modestly building cash levels for the foreseeable future.

At the same time, we will behave aggressively towards implementing our announced restructuring plans and we at this time anticipate continuing to invest in longer term growth initiatives aimed at diversifying our top line and strengthening our leadership position in this industry.

Now we'll turn it over for questions.

(Operator Instructions) Our first question is with Budd Bugatch with Raymond James.

Please pose your question.

Good morning, Jim, good morning, Dave, good morning, Raj, good morning, Gary.

Hello, Budd.

Mark, I suspect you're there too, I think.

Good morning and happy holidays to everybody there.

Couple of questions.

I want to make sure I've got -- understand where we're going now.

You've got a number of restructuring and reorganization actions ahead.

Can you go through what's left to be done and what the financial impact is in total of each one of those, where you are?

Yes.

It's Dave, Budd.

I'll summarize Mark's actions and where we are and then give you a replay of the actions we announced earlier this month.

On the March actions, if you recall, we announced the closure of three facilities, the City of Industry plant in Corona and also a plant in Oakland, California.

The Corona facility related to PolyVision has been closed for more than a quarter and the City of Industry and Oakland facilities are nearing closure sometime later this quarter.

We also announced back in March the launch of the reinvention initiatives as we've termed them around white collar initiatives.

And that part we expected to eliminate up to 100 jobs in the fiscal 2009 and another 100 to 150 next fiscal year.

And that is progressing -- has been progressing throughout the fiscal year and is on track to accomplish the 100 by the end of the fiscal year.

How many--?

It will be another 150 next year, which is included in the announcement that we made earlier this month.

Which included, broadly, a number of white collar jobs as well as further consolidation of manufacturing and distribution center activities in the south.

So what we said for the March actions is we would spend 40 to get 40 of pretax costs and savings and while we think we'll spend somewhat less than the 40, we still think that we'll get the savings of around 40, some of which have started to accrue benefits during the fiscal year and then the actions that we announced in December, we were planning to take action on the white collar headcount reductions during the fourth quarter and the facilities in the south are expected to close and consolidate over the next six to nine months.

Okay.

Think of that second $20 million to $25 million of restructuring costs of being spread somewhat over the fourth quarter and the first two quarters of next year.

And the benefits in a similar way.

Okay.

And the reinvention, is that in the 40 for 40?

The first 100 of the targeted 200 to 250 was in the 40 to get 40.

Wasn't that a three-year program?

No, 18 to 24 months is what we said in March.

Okay.

All right.

Talk a little bit about what you think you're getting in pricing and what kind of realization you will have, kind of at the midpoint of guidance.

I think we're calculating sort of a 1% kind of number for the fourth quarter.

As I said in the scripted remarks, inflation continues to outpace our pricing actions.

We did the surcharge effective September 1, and we had list price increases in the summer and you know how the list price changes go into work their way into our results over several quarters.

During the third quarter, inflation continued to outpace the benefits of those pricing actions and we expect that to continue into the fourth quarter.

Beyond that, I'll let Terry comment.

Budd, we, as you know, we had price adjustments worldwide in the second quarter, July time frame.

Those take upwards of a year to get fully implemented.

And to date, they are progressing about as expected, so as we get into next year we would expect to continue to accrue similar prior year patterns.

And the qualification of all of the actions of both the price list and the surcharge, how should we think about that?

As not being enough to offset inflation in the third quarter and fourth quarter.

Can you give us relative numbers on both or?

I mean, it's not double-digit.

Okay.

Absolute dollars.

So are you going to -- but not in the fourth quarter, but in the first quarter of next year you think you'll start to offset both?

I mean, you should, because inflations got to be moderating now as you reset contracts and renegotiate.

Yes, we should.

Okay.

All right.

If you would, let Gary talk a little bit about what the future looks like for the CSVand the COLI.

Obviously, that's -- I guess you might want to ask more and I sure don't know the answer.

Yes, that is -- yes, that is kind of a little bit of a who knows but I can give you a mix of what's in those policies, just to give you a sense.

So you can see in the earnings release, we put a chart in there that shows the difference and the two types of policies.

So on the whole life policies, there are floors on the dividend rates such that we'll expect a positive return.

Then the variable life policies are the ones that we have allocated across the capital markets in a 75% equity, 25% debt or fixed income mix and you should think about that as being roughly representative of the broad capital markets.

So I guess you can see kind of the base of the CSV assets and each of those two categories and you'll get a sense that the largest piece at this time is the whole life policies that we'll see positive growth on and then it's going to be dependent on how the capital markets move for the other -- for the variable life policies.

Are there any changes you can or have made to those policies, the variable life, to take some of that volatility out of them?

Well, the way we think about it is we want to keep a long-term view there, because there -- as you know, they're earmarked to fund long-term obligations and so it's our belief that we should keep a long-term allocation of assets and so it does mean it could be a little more volatile in the short run, hopefully we don't see anything like we've seen in the last number of months.

But for that base of variable policies we will still experience the volatility of the capital markets.

There are some things you might do to take the volatility out but you give up the upsides on the returns as well and so it's -- we decided it just doesn't make sense to do.

The accounting of that is it has to flow through the operating income as opposed to going against other current -- other comprehensive income?

Is that right, Dave?

That's the way that that has to work?

Did I lose you?

Hello?

Operator, are we gone?

One moment, sir.

Ladies and gentlemen, please remain on the line .

(Technical Difficulties) Ladies and gentlemen, please remain on the line.

Your conference call will restart momentarily .

Ladies and gentlemen, we ask that you please remain on the line.

Your conference call will begin again momentarily.

Thank you.

Gentlemen, you're once again in

We had a little technical difficulty.

We were talking about the COLI structure, Dave and Gary were explaining the nature of why it isn't in the balance sheet, placed in income.

Dave, you want to go back to that?

Yes, I was just saying because the COLI is earmarked to fund the longer term employee benefit obligations that are expensed in cost of goods and in operating expenses, we're required to allocate the income in a similar fashion.

Historically, it has been in a 5% of kind of a return neighborhood.

Little bit higher in some quarters and a little bit lower in other quarters which we've called out in our transcripts over the last several quarters when it's varied.

This is really the first time that I can recall that it varied dramatically.

Just a couple of other quick questions.

The dispositions you guided for $16 million in revenue impact this quarter, Custom Cable was I thought $8 million last quarter.

Was there anything else in the dispositions and how much more of that to run off?

Budd, the bulk of it is CCI.

They had a strong quarter last year and there was some small international acquisitions so think of it is at about 75% with CCI and the remainder is international.

How many more quarters do we have?

What do we have to come off of?

CCI was sold in the second quarter so we'll have something in the first quarter but it will be probably closer to the number that you cited for the last quarter, the $8 million number.

And I think the international dealers are about done.

Yes.

Okay.

That's already run off.

Those international dealer revenues are done?

I think the fourth quarter might be the last quarter.

It's either that or the first quarter.

But it's not meaningful -- not sizable.

Lastly, the auction rate securities, where are we?

Can you recap where we are on that and what's -- you had to take a bit of a charge this quarter.

Hey, Budd, this is Gary.

In terms of the charge this quarter, we take a look at those each period and we at the valuations and we sure we're monitoring the underlying assets and we made a determination this quarter that in one of the pieces, one of the securities that we own, it's a piece having to do with insurance reserves.

As we looked at the way those underlying insurance reserves were reinvested, we thought there had been some degradation in the quality of those underlying investments and so we made the determination that it was other than temporary, the impairment that we had taken and so we moved that to P&L.

And how much left, is there left in auction rate securities now?

We still got the--?

On the balance sheet, Budd, it's 20 -- just under $24 million.

Par value is 26.5, I think.

And then the Canadian commercial paper is at $4 million we had taken a $900,000 impairment a few quarters ago.

And you still think that's an accurate valuation for the balance?

Yes, we do.

Thank you very much, good luck and again, happy holidays to everybody.

Hope you do as well.

Thank you.

Our next question is with Matthew McCall from BB&T.

Please pose your question.

Thanks, good morning, everybody.

Hey, Matt.

I have two questions.

I'm going to follow the instruction.

Just kidding, Budd.

Let's see.

First, you mentioned there was some Q3, some of the March $40 million recognized in Q3 and some expected to be recognized in Q4.

Can you give us a little more detail there as to how much you've recognized thus far?

Of the 40 -- of the $40 million of savings targeted from the March actions, I would say that through the third quarter, we've realized less than 25% of that.

Okay.

That's about as -- that's a rough estimate.

And I would tell you that the majority really starts to kick in in the latter half of the fourth quarter as the larger manufacturing facilities that we're closing will impact, close.

So within the roughly break-even guidance, there's 15 million, $20 million maybe included in that number.

I'm not trying to pin you down.

Just kind of leads to the next question.

Looking at the--?

Annualized benefit, right Matt?

Yes, yes, I'm sorry.

I should have said that word.

So looking at the guidance for Q4, roughly break-even on a -- I know we can adjust for the FX and say it's a 700 or 650 to -- roughly $700 million number, breaking even about that level, I looked back and it looked like break-even was a little bit below that, maybe in the low 6s in the prior downturn.

I know there's a lot of changes to the model changes to the situation, but just help me understand what would impact the break-even level that dramatically, I guess getting the break-even this quickly was a little surprising.

I'm wondering if there was something structurally in the model that I'm not thinking about?

There's a couple different things.

First, currency is certainly a contributor.

The euro to dollar was significantly different back in the last downturn than it is today.

We also have inflation working against us relative to our pricing actions which we've talked about a couple of different times, that's another factor.

And we've been talking about these dealer consolidations and some of our business turnaround efforts for a number of quarters.

That's contributing modestly as well.

But I would also tell you, Matt, that we have been, as I said in the last three calls or so, we've been investing in our growth initiatives, expanding our presence in Asia, as well as in Eastern and Central Europe and launching a number of new products this year which we were not doing in the downturn last time.

And so all together, that's pushed our break-even up, which we pay close attention to.

But we also are going to -- we're going to try to hold firm on continuing to invest in our future.

I would add, Matt, it's Jim Hackett, that you can also look at the break-even as a function of let's just call it enterprise growth in headcount, didn't have that from the last downturn to now.

We actually were able to generate the growth in the core business without adding any people back and so as Dave just said and I won't be redundant that we isolated most of the change was variable comp plus the investment in new ideas and new notions.

We just did a summary of all those in our quarterly Board review last week, just to look at how each of the investments are doing, and I feel really good that they are -- they're smart ideas based on where they are in their toll gates right now.

Okay.

Thanks for that.

And with that, Dave, I guess taking into account the headcount and the expected reductions and the total of the cost savings, is that -- and also maybe some expected deflation with some pricing yields, should we expect that break-even to continue to move lower as we move into 2010, taking into account of course the continued growth spending?

Absolutely.

And can you summarize the magnitude of that break-even.

I mean, right now you're looking at roughly $700 million.

Where does that, all the puts and takes go?

It will take us down less than 700, how's that?

That will work.

Those are my three questions.

Thank you all.

Thank you.

Our next question is with Todd Schwartzman.

Please pose your question.

Hi, good morning, guys.

Are you happy with Nurture's existing price points or might you swim upstream or downstream, perhaps both, in the not too distant future.

When you say that, I want to make sure, when I hear price points, do you mean -- you mean more of a luxury or do you -- are you talking about range of applications?

What's your instinct when you ask that?

The former, in other words, becoming more inclusive, hitting what you may perceive to be relatively underserved initiatives and price points both lower and higher for a particular product category that you are now?

I think the way I'd have you think about that is that the healthcare segment in this -- as it parallels the office segment, don't directly connect that way, in a good, better, best way.

And the reason is, in the office, because of the historic contribution of very famous architects, luxury and great design and iconic design, and high price point were all kind of bolted together.

And healthcare, I think that one of the notions will be around performance and great design and price point.

So to the degree, for example, that you have a chair that articulates in a number of different axis because a patient needs more assistance than they would getting out of an office chair, let's call that higher performance, then you're going to have higher engineered solution that will cost more, than them buying let's call it a simple office task chair, if you could transfer what we made now for offices into a patient room, some of the newer healthcare ideas will cost more.

But I don't want to correlate it to the offices segments as I just described because I'm not sure that transfers.

Now, let me leave one other instinct for -- insight for you, which is as much of the opportunity that you might see in niches going up and down, there are so many areas in healthcare that have performance potential, performance improvement potential.

It just wasn't the kind of dedication in my mind of the kind of engineering and design capability that we can bring to this segment.

As we now look like at the Sync award that I just talked about and some of the new stuff on the drawing boards here.

I believe there's still lots of potential, as you just look at the opportunity for us to bring higher performance, higher engineered and designed performance to healthcare.

Just to refresh us, how much of the brand's revenue is outside North America?

Nurture, we're talking about?

Yes.

Relatively small.

It's a relatively small thing and it's an opportunity that could take some of our consideration as well.

Okay.

You realize that the social system for healthcare in Europe, for example, changes the nature of the market's behavior.

But there's other segments, other countries that look to mirror the way North America behaves.

Got it.

Thanks.

Last question was did you give the dollar amount of the auction rate security impairment taken in third quarter?

Yes, $900,000.

Great.

Thank you.

Thank you.

(Operator Instructions) Gentlemen, we have no further questions.

This concludes today's conference call.

We will now return to Mr.

Hackett for closing comments.

They are very quick and brief.

I want to wish everyone a happy holiday and it is a time of the year where it's worth all of us to take a moment and reflect on the blessings that we have and the opportunities that sit in front of us, spend more time with our families and those closest to us and thank you all for your time today.

Thank you, ladies and gentlemen, this does concluded today's conference call.

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

Thank you for your participation.