Steelcase Inc (SCS) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to Steelcase's fourth quarter and fiscal 2009 conference call. As a reminder, today's call is being recorded. For opening remarks and introductions I'd like to turn the conference call over to Mr. Raj Mehan, Director of Investor Relations. Please go ahead, sir.

Thank you, Jamie. Good morning, everyone, thank you for joining us for the recap of our fourth quarter and fiscal year 2009 financial results. Here with me today are Dave Sylvester, our Chief Financial Officer, Mark Mossing, Corporate Controller and Chief Accounting Officer, Terry Lenhardt, Vice-President North America Finance. We typically also have our CEO, Jim Hackett, present with us, unfortunately he may not be able to join us today as he is dealing with a dental emergency. He asked that I express his sincere apologies for missing this call and looks forward to joining the next quarter's call.

Our fourth quarter earnings release dated March 31st, 2009, crossed the wires early this morning and is accessible on our website. This conference call is being webcast. Presentation sides that accompany this webcast are available on IR.Steelcase.com and a replay of this call will also be posted to the site later today. In addition to our prepared remarks we will respond to questions from investors and analysts.

Our discussion today will include references to non-GAAP financial measures. These measures are presented because management uses this information to monitor and evaluate financial results and trends. Therefore, management believes this information is also useful for investors. Reconciliations to the most comparable GAAP measures are included in the earnings release and webcast slides.

At this time we are incorporating by reference into this conference call and subsequent transcript the text of our Safe Harbor statement included in this morning's release. Certain statements made within the release and during this conference call, constitute forward-looking statements.

There are risks associated with the use of this information for investment decision making purposes. For more details on these risks please refer to this morning's release and form 8K, the company's 10K for the year ended, February 29, 2008, and our other filings with the SEC. This webcast is a copyrighted production of Steelcase Inc.

With those formalities out of the way, I'll turn the call over to our Chief Financial Officer, Dave Sylvester.

Thank you, Raj. Today, we reported a fourth quarter net loss of $65.7 million or $0.49 per share, which compares to net income of $30.6 million or $0.22 per share in the same quarter of last year. In addition to after-tax restructuring costs of approximately $11 million, these results included significant non-cash impairment charges and further reductions in the cash surrender value of company-owned life insurance, or COLI. The impairment charges after the related reductions and variable compensation expense and consideration of applicable income tax benefits had the effect of increasing our net loss by approximately $50 million. We have included a webcast slide to more clearly illustrate the impact of the impairments on our net loss in the quarter.

The impairment charges and additional reductions in COLI occurred largely as a consequence of the severe decline in the capital markets. As it relates to the impairment charges the majority were recorded in connection with the decline of the company's market capitalization and the related requirement to reconcile reporting unit valuations used for impairment analyses with the reduced enterprise value of the company. For COLI, our cash surrender values decreased again this quarter, consistent with the overall decline in the equity markets. Our earnings estimate for the quarter did not contemplate any increase or decrease in cash surrender value.

One other significant matter worth noting up front is related to income taxes which included a tax benefit of nearly $8 million in the quarter resulting from the favorable completion of a multi-year audit with the IRS in the United States.

Revenue declined by approximately 27% to $655 million in the quarter. The current quarter decline compares to a strong quarter in the prior year when revenue grew by more than 15% compared to the fourth quarter of fiscal 2007. As further detailed in our webcast slides the comparability to last year is impacted by an extra week of shipments in the prior year as well as divestitures and negative currency translation effects in the current year. Adjusting for these factors, we estimate the organic decline in revenue or same store sales approximated 17%. This decline was substantially less than the decline in orders we experienced during the quarter, as revenue benefited from a general reduction of backlog consistent with what we communicated during last quarter's call. The operating loss before restructuring costs of $79.8 million included $75.4 million of pretax impairment charges related to goodwill, intangible assets, corporate aircraft, and other investments. We have also included a webcast slide to illustrate the estimated impact of these charges on our operating loss in the quarter.

As you will note from the slide, we estimate our operating loss excluding restructuring costs approximated $10 million before the impairment charges and associated variable compensation expense. This $10 million loss, however, includes the additional reduction in COLI during the quarter, which aggregated $10.5 million and continues to be primarily charged to the North America segment.

In that same slide you will also note a variable compensation adjustment which had the effect of adding back a portion of the variable compensation impact of the impairment charges or increasing our operating loss in the quarter by approximately $19 million. This adjustment relates to the goodwill and intangible asset impairments which were driven by the recent reduction of the company's market capitalization. For calculation of variable compensation as it relates to substantially all employees, we have effectively spread those charges over a five-year period including fiscal 2009. The spreading of the impairment resulted in higher variable compensation in the current year and will result in lower compensation over the next four years. This methodology was recommended by management and approved by the compensation committee by our Board of Directors last week.

The recommendation was based on our belief these impairments had little to do with employee performance in the year but rather were driven by equity market forces and accounting rules, and our concern that removing these assets all in one year from the EVA capital charge could potentially result in excessive bonuses in the future as profits improve with no corresponding capital charge.

The amortization methodology is also consistent with past practice wherein the company spread the effect of significant impairment charges over several years for purposes of calculating variable compensation for employees.

In total, after taking into account this adjustment, variable compensation expense still decreased by approximately $30 million in the quarter and approximately $60 million for the year as compared to fiscal 2008.

Fourth quarter restructuring costs of $17 million primarily related to the actions communicated in March and December of 2008. You will recall the March 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 fiscal 2009 and 100 to 150 during fiscal 2010.

The portions of these actions planned for completion in fiscal 2009 are now substantially complete and we believe have achieved the targeted annualized savings of approximately $40 million, and at a much lower cost than originally anticipated or approximately $27 million. While some benefits have been realized to date, the majority will begin to provide economic benefits more fully as we start fiscal 2010.

The December actions included the consolidation of additional manufacturing and distribution facilities in North America, completion of the white collar reinvention initiatives, and further reductions of our white collar work force and other operating costs globally. We incurred approximately $14 million of restructuring costs related to these actions during the fourth quarter and continue to estimate the full costs to approximate $20 million to $25 million and to result in estimated annualized savings of an additional $40 million once completed.

The work force reductions were substantially completed during the fourth quarter and we expect to complete the consolidation activities toward the end of the first quarter. In addition to these actions we have significantly reduced the number of temporary or contract workers utilized throughout our industrial system, and we began implementing layoffs in the fourth quarter against the WARN Act notices previously issued to our hourly employees in North America.

Beyond restructuring impairments and COLI related charges the remaining reduction in operating income compared to the prior year was largely driven by lower volume. There were benefits from current-year cost reduction efforts but they were generally offset by reductions in the quarter associated with the extra week of shipments in the prior year, reduced operating income dollars resulting from divestitures in currency translation effects, and higher commodity cost inflation which continued to outpace recent pricing actions.

Commodity prices continued to retreat during the quarter from their recent historic peaks. We began to see the effects of the moderating prices in our operating results in January, but still experienced inflation for the quarter, albeit at the lower end of the $5 million to $10 million range previously estimated. In response to the decline in commodity costs, we eliminated the North American based commodity surcharge in January (technical difficulty) have been experiencing increased pricing pressures on existing business.

Other income and expense net decreased by $1 million compared to the prior year quarter. 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, and we also recorded $1.2 million of additional impairment charges related to our auction rate security investments during the quarter. These reductions were offset in part by a gain of approximately $4 million recorded in connection with the sale of a non-operating investment.

The effective income tax rate in the quarter and for the full year included the impact of deferred tax benefits of approximately $22 million associated with the non-cash impairment charges. It also included the effects of non-deductible reductions in the cash surrender value of COLI and the release of nearly $8 million of tax reserves, which resulted from the favorable completion of the multi-year audit in the US. We've included a webcast slide in order to illustrate these effects.

Looking forward it is difficult to estimate our effective tax rate for the coming year. While we continue to estimate our longer term effective tax rate will approximate the mid-30%s, the impact of tax credits, potential changes in valuation allowances and non-taxable items in general, can have significant impacts relative to lower levels of pretax income. Accordingly we are not providing any specific guidance as it relates to our effective tax rate for Q1 or fiscal 2010.

Next I'll talk about the balance sheet and cash flow. Our cash and short term investment balances approximated at $194 million at the end of the year, a $26 million decrease from the end of the third quarter. While we generated approximately $50 million of cash from the lowering of working capital during the quarter, a portion of this benefit was simply attributable to timing of our quarter-end compared to the third quarter, and the related effects on collections, disbursements and certain accruals such as accrued salaries and wages. We also used cash in the quarter for a number of seasonal disbursements, including semi-annual bond interest payments, calendar year-end incentives and promotions, property taxes and other obligations. Finally we paid approximately $6 million to the Internal Revenue Service in connection with finalizing the multi-year tax audit in the US.

Capital expenditures totalled $16.8 million during the fourth quarter bringing year-to-date investments to approximately $83 million. Capital expenditures were lower than expected in the fourth quarter and for fiscal 2009 as we did not make the final $13.5 million progress payment related to the purchase of a replacement aircraft due to scheduling delays. We expect to take delivery soon and have reached an agreement to transfer our existing aircraft to the manufacturer at or near the same time. Given the current surplus of used aircraft in the market, and the related pricing pressures, we impaired our carrying value of the existing aircraft by $8.5 million at the end of our fiscal year, which reflects the agreed-upon trade-in price. Looking forward we are targeting approximately $60 million in capital expenditures for fiscal 2010 including the final payment related to the replacement aircraft.

During the quarter we paid dividends of $10.6 million or $0.08 per share. We made no share repurchases in the quarter given the economic uncertainty and our intent to retain cash during this time of volatility. During fiscal 2009 we returned approximately $130 million to shareholders through quarterly dividends 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.

Our total liquidity position, which includes cash, short-term investments, COLI surrender value and credit facility access, approximated $550 million as of the end of fiscal 2009. Cash and short-term investments will reduce in the first quarter due to seasonal payments of variable compensation, retirement plan funding and other obligations.

In addition, we anticipate that our borrowing capacity under the unsecured credit facility could be reduced as our trailing four-quarter EBITDA levels decline with this recession. But at the same time we do not currently anticipate any need to access the revolver in the near-term. Accordingly we remain confident in our liquidity position.

Now, I will discuss the quarterly operating results for each of our segments and the other category. North America revenue decreased by 22.7% compared to the same period last year, which included an additional week of shipments due to the timing of our fiscal year end. Current quarter revenue included a $12 million negative effect related to the sale of Custom Cable in July 2008, and $5 million of unfavorable currency translation effects compared to the prior year.

Adjusting for the extra week last year and the negative effects of the disposition and currency translation in the current year, we estimate that the organic decline in the North America segment approximated 13% in the fourth quarter. This decline benefited from a significant reduction in backlog and was consistent with the low to mid-double-digit teen percentage decline we estimated during last quarter's call.

We experienced declines in revenue across most regions' vertical markets and product categories. In addition we experienced deeper declines in day-to-day business compared to project related revenue. Lastly, while sales to the federal government remain strong, we worked through significant backlog to sustain single-digit growth rates in revenue within the health care and higher education vertical markets. As noted in our last call, orders early in the third quarter adjusted for the estimated pull forward effect of the September 1st surcharge were tracking somewhat lower than the prior year. Then the equity markets dropped significantly and business capital spending fell off. We in turn began to feel the related effects in order patterns which progressively worsened through the end of the third quarter and into the first few weeks of the fourth quarter.

Over the balance of the fourth quarter the recession deepened and likewise our order patterns fell further, again across most geographies, vertical markets and product categories. Within the vertical markets the most significant declines occurred within information technology and FIRE, or finance insurance and real estate, while the smallest declines occurred in state and local governments higher education and health care. Orders from the federal government remained very strong. Backlog finished the quarter approximately 20% lower than last year and orders fell several percentage points further than that when adjusted for the extra week in the fourth quarter of the prior year. Despite the weaker order patterns we continue to host many visits from current and potential customers, particularly in the health care and higher education vertical markets. And in total the number of customer visits during the fourth quarter approximated the same level in the same period last year.

Operating income excluding restructuring costs was slightly positive in the quarter compared to $29 million in the prior year. The combined effects of lower volume, non-cash impairment charges, reductions in cash surrender value of COLI and commodity inflation which continued to outpace recent pricing actions more than offset the benefits of cost reduction efforts launched in March and early December.

Operating expenses in North America decreased by approximately $19 million. The comparison of fourth quarter operating expense dollars versus the prior year includes the favorable effects from the following -- lower variable compensation expense of approximately $18 million compared to last year; an extra week of operating costs in the prior year quarter; benefits of cost reduction efforts during the current year; and lower operating expenses of approximately $2 million in the current-year quarter related to the sale of Custom Cable in July 2008. These favorable effects were offset in part by current quarter impairment charges of approximately $12 million, which related to our corporate aircraft and a couple of dealer investments, and the reduction and cash surrender value of COLI which had the effect of increasing North American operating expenses by approximately $5 million.

In the international segment sales decreased by 35% compared to the prior-year quarter which also included an extra week of shipments. In addition currency translation and divestitures had the effect of decreasing revenue by approximately $31 million as compared to the prior year. Adjusting for the extra week last year and the negative effects of currency translation and divestitures in the current year, we estimate the organic decline in the international segment approximated 21% in the fourth quarter, which was somewhat higher than the mid-to-upper double-digit teen percentage decrease we estimated during last quarter's call. During our last call we highlighted that the international segment had suffered a low double-digit order decline in the third quarter. We also shared that the UK had experienced a dramatic decline in orders, Spain's ongoing weakness had intensified and order growth rates in Germany, Latin America, and various emerging markets had moderated compared to the prior year.

As the fourth quarter progressed we experienced increased volatility in our international order patterns with declines compared to the prior year accelerating in most emerging markets as well as Germany. France was a notable exception to the overall order trend in the quarter, as orders benefited from project business and ended essentially flat with last year. While office furniture demand in the UK market continued to be negatively impacted by broader economic issues, the declining order patterns are expected to be offset somewhat in the near-term by certain government business which was secured last fall. In total, adjusted for the extra week last year as well as currency differences and divestiture impacts in the current year, international orders in the fourth quarter declined by approximately 20%.

International reported an operating loss excluding restructuring items of $2.2 million or 1.2% of sales, compared to operating income of $17.8 million or 6.4% of sales in the prior year. You will recall that last year included a $4 million loss in Morocco during the fourth quarter due to a variety of issues.

Taking into consideration the improvements we have achieved in this market during the last 12 months the remaining decline in operating income was almost entirely driven by loss contribution margin associated with the lower volumes in the quarter. International operating expense dollars reflect approximately $6 million of favorable currency translation effects and the impact of divestitures completed within the past 12 months.

The other category which includes the Coalesse Group, PolyVision and IDEO, reported revenue of $108.2 million in the quarter, or a 27% decrease compared to the prior year. The decrease in revenue included the effects of our decisions earlier this year to exit a portion of PolyVision's public bid contractor whiteboard fabrication business and the transfer of premium whiteboards and certain other product lines to the Steelcase brand in the North America segment. In addition, we experienced decreases in remaining revenue of PolyVision as well as decreases in revenue across the Coalesse Group and at IDEO.

The other category reported a $73.5 million operating loss during the third quarter, including $63 million of goodwill and intangible asset impairment charges at PolyVision and $4.3 million of restructuring costs across the category. This compares to operating income of $4.4 million in the prior year, which included $900,000 of restructuring costs.

Excluding the impairment charges and restructuring costs, operating income decreased by approximately $11 million for the following reasons.

First, the Coalesse Group lagged prior year performance due to lower sales volume which decreased by 28% in the quarter or closer to 22% adjusted for the extra week last year; disruption associated with the consolidation of manufacturing activities; and commodity cost inflation offset in part by lower operating expenses due to cost reduction efforts and reductions in variable compensation costs.

Second, PolyVision results were negatively impacted by lower sales volume and the transfer of certain product lines to the Steelcase brand.

The non-cash impairment charges at PolyVision were primarily related to the deterioration in the general economic environment and the overall decline in the capital markets which lowered the company's share price and market capitalization. The impairment was recorded in connection with the requirement to reconcile our reporting unit valuations used for impairment analyses to the reduced enterprise value of the overall company determined by our current market capitalization. Of interest to note is that we completed a stand-alone assessment of PolyVision's goodwill in the third quarter and concluded that no additional impairment was necessary. However when forced to reduce their stand-alone value along with other reporting units in order to reconcile to the overall enterprise value of the company, an impairment was triggered.

Now I will review our outlook for the first quarter of fiscal 2010. 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 given the current economic environment. Nevertheless we feel it is important to share our current best estimates even though the potential volatility around these projections has increased.

Overall we expect revenue to be within a range of $525 million to $575 million, compared to $816 million in the prior year. This projected range takes into consideration the following factors.

Overall we -- excuse me, first, based on exchange rates at the end of the fourth quarter, our first quarter revenue estimates contemplate approximately $47 million of unfavorable currency translation effects compared to the prior year. This impact could be less if the recent strengthening of the euro compared to the US dollar were to hold for the balance of the quarter.

Second, we estimate the effect of divestitures to reduce revenue by approximately $11 million in the first quarter compared to the prior year.

Third, revenue estimates in the first quarter for North America and the other category are based on domestic order patterns which in total progressively weakened in the fourth quarter to down nearly 30% adjusted for the extra week in the prior year. While we hope the seasonal improvement we have seen in our order levels over the past several weeks will be sustained we are currently estimating organic revenue in our domestic market to decline in the first quarter by approximately 25% to 30%.

Fourth, revenue in the international segment stated in local currency is estimated to decline in the first quarter by approximately 25% to 30%. You will also recall that the first quarter of last year was a particularly strong quarter for International.

As I stated earlier we have nearly completed all of the restructuring actions announced last March as well as the headcount reductions announced in early December. In addition the salary reductions and changes to employee benefits announced in February were implemented with an effective date at the start of the fiscal year. You will also recall the February actions were targeted to reduce our annual operating costs by $25 million to $30 million while they remain effective. Accordingly, we estimate that approximately $80 million to $90 million out of the total of $105 million to $110 million in targeted annualized savings from the three sets of actions just mentioned, are beginning to accrue in our quarterly financial results go forward. In addition, commodity cost inflation has now reversed and is estimated to decrease our global costs in the first quarter by approximately $5 million to $10 million compared to the prior year.

While we eliminated the commodity surcharge within the US during January, and we are facing increased pricing pressures in the current environment, we expect the net effect of pricing and deflation to positively impact our first quarter results, potentially signaling the inflection point of the negative trend of inflation outpacing our pricing actions that we have experienced over the past several quarters. Taking into account our revenue estimates and the status of our cost reduction actions, we expect to report a net loss for the first quarter of fiscal 2010 within a range of $0.13 to $0.23 per share, including after-tax restructuring costs of approximately $4 million. We've reported net income of $22.1 million or $0.16 per share which included $4.7 million of after-tax restructuring costs in the first quarter of the prior year.

As we indicated in the release, we are not providing full-year revenue or earnings guidance. However, we have modeled various scenarios of revenue declines for fiscal 2010, along with the expected benefits of our cost reduction efforts and the reversing trend of commodity costs in recent months. We currently estimate that operating income excluding restructuring costs could stay modestly positive if revenue declines within a range of 20% to 25% compared to fiscal 2009. These estimates are contingent on the successful completion of previously announced restructuring actions over the next six to nine months, the implementation of salary reductions and employee benefit changes for the full fiscal year and net benefits from current deflationary trends.

While the last decade has forced us to manage through two unprecedented recessions in our industry, the company's industrial model is dramatically less vertically integrated and our top line is much more diversified than it was just five to seven years ago. And at the same time our balance sheet remains strong and we continue to return value to our shareholders through strong quarterly dividends.

Fiscal 2010 will undoubtedly stress our bottom line relative to the past several years, which have reflected continued improvements, but our strategy remains unchanged and we intend to stay focused on our longer term growth initiatives, as this business cycle like all others will pass and when it does we intend to be on the same track we have been on for more than five years, the track of expanding our operating margins through various operational strategies and the track of strengthening our top line through various growth and diversification initiatives. Now we will turn it over for questions.

Thank you. (Operator Instructions) We request that you limit yourself to two questions so that we may answer as many questions as possible in the time permitted. Please phrase your question directly and as briefly as possible.

We'll take our first question from Matt McCall with BB&T Capital Markets.

Good morning, this is actually Sean Connor for Matt. I was hoping -- could you -- you mentioned the commodity surcharge that you guys eliminated in January, I believe. Could you quantify how much of a benefit that was in the quarter, or was that $6 million of impact was net of that this quarter?

The $6 million was simply the inflation that we had in the quarter. And we have not quantified the benefit of the commodity surcharge although it was relatively small.

Okay. And then just trying to get an idea on, other than that, the pricing pressure that you guys were talking about, is that -- is there any more color that you can provide there as far as how widespread that is, which markets are seeing the most pressure, the most push-back?

About the only thing I'll give you, Sean, is that as you would imagine on the project business, which has declined significantly in the current environment, it's quite competitive, and as a result we find that in order to win some of that limited project business the pricing is just a little bit more severe.

Thank you.

Okay.

We'll take our next question from Budd Bugatch from Raymond James.

Thanks. This is actually TJ McConville filling in for Budd. Dave, I was hoping that you might be able to give us a bit more of a quantification of the difference in the commodity, well inflation that you saw in the beginning of the quarter versus the deflation you saw in the back half. Does the guidance assume that the deflation continues at that same rate? Maybe give me a little bit more color there.

I'd just reiterate what we said. We expect in the first quarter for deflation to approximate $5 million to $10 million.

Okay.

We also would expect that we would continue to realize some benefit of pricing actions that we implemented last year, albeit relatively small. So we would expect a good guy so to speak go forward which is (technical difficulty) (multiple speakers) trend of a bad guy for the past several quarters.

Okay. Got you. And then just that $11 million of divestitures, is that all in the North American segment, or is there any in international there?

(multiple speakers) I would say 90% is North America.

Okay. And one more, if I could, the CapEx for the first quarter looks like it is going to include that last airplane payment. For the full year, I know you haven't given guidance on any other of the other line items, but could you maybe give us some color on what you're expecting for the full year of CapEx and maybe depreciation?

We said CapEx will probably be around $60 million, that is what we're targeting, for the full year including the $13.5 million in the first quarter.

Okay.

The only other color I would give you, TJ is that we would expect first quarter to be a little bit higher than the balance of the year because we're in the midst of launching a number of new products.

Okay, guys, that's very helpful, thanks for taking my questions.

We'll take your next question from Todd Schwartzman with Sidoti & Company.

Hi, good morning, guys. First off, that latest $40 million piece of the cost savings, in which quarter should we expect to see you guys hit the full run rate?

I would say toward Q2, Q3 we should get almost all of it. There is really one component that will stretch over I would say the entire part of next year and that is the continuation or completion of our reinvention initiatives. The factory consolidation work should be done by the end of the first quarter, and as I said, the head count, the broader head count reductions were substantially completed during the fourth quarter. So just a little bit of the $40 million will trickle in through the balance of the fiscal year. But the broader head count reductions and the plant closures should be entirely done by end of the first quarter.

Okay. I know you -- regarding the revenues I know you mentioned that higher education and health care both were up into single-digits. What about shipments to the federal government in Q4?

Shipments to the federal government grew in the fourth quarter, and orders were strong in the fourth quarter, as well.

Okay. So a low single-digit kind of growth?

It's not a huge base, so the percentages can get a little bit out of control. So I don't -- to be honest, I don't have it off the top of my head. But it's a nice business to have right now.

Okay. Regarding customer visits, it sounds like the visits held up better than the revenue in Q4. If that is the case, and -- would you say that visits are maybe losing some of their predictive value, or is it just the macro environment that we're in?

I would tell you a couple of things. One is I think we're starting to lap the prior year decline in customer visits. But also there is a lot of interest in what we're doing in the health care segment, what we're doing in the higher education segment, as well as the new products that come to market that we showed at NeoCon last year. So even though the projects may not be in the absolute near-term, there is still a lot of interest to understand at a deeper level what we showed at NeoCon.

So due to some of these vertical markets, people are coming but maybe for different reasons than they did a couple years back?

Maybe. Hard to say, but I would -- the health care and the higher education areas still feel okay. I don't know that they're going to grow necessarily in the next several quarters, but none of us would expect them to decline at the same pace as the other vertical markets.

Last question is are there any potential debt covenant issues that we should be aware of?

No, I mean, other than what I said, as our -- as the recession continues to play out into our earnings, our trailing fourth quarter EBITDA is going to continue to come down and, therefore, our access could shrink. But we can imagine scenarios where there could be a covenant violation, but we're not forecasting one in the near term.

How high can you go with the debt to EBITDA?

It's three to one on trailing four quarter. And current EBITDA calculations currently include restructuring costs as well as COLI reductions, which are really a couple of large reductions in EBITDA.

Got it. Thank you very much.

Yes.

We'll take our next question from Mark Rupe with Longbow Research.

Hey, guys. Just had a question on order trends. I know you commented on (technical difficulty) briefly and your Q1 guidance obviously speaks for itself, but some of your peers had mentioned some stabilization in March. I'm just curious to see, albeit at a lower level that you would see any kind of stabilization in order patterns?

Thanks for the question. When you get into February/March you expect to see a seasonal uptick. And as we noted in our commentary, we actually have seen that. But, again, we are already at that 25%, 30% down so it's stabilized really (multiple speakers)

Stabilized at the lower level.

Yes (multiple speakers)

Okay. And then just as it relates to pricing, how rational is it versus the last downturn that you'd seen? It's obvious that the downturn's happened here real fast. Do you expect to see more aggressive pricing going forward or do you think it is at a level to where it is rational versus the last time?

I think it remains rational.

Okay. Thank you.

We'll take our next question from Barry Haimes with Sage Asset Management.

Yes. Hi, actually this is Fritz von Carp at Sage. I guess I was asking for some more color on some of the international markets. Two questions, I guess. One is, did I understand you say that the emerging markets had been holding up but just recently rolled over? Did I get that right?

And number, two, if you could give me some color more on France, and your expectations there? Why have the projects held up, and is that something that will sustain, or is it just a tail end of some other projects, or what do you think for France?

On the emerging markets you have the order pattern slowed considerably during the fourth quarter after holding up. They were moderating in the third quarter, but fell off considerably in the fourth quarter.

And on France I would tell you it's -- I'd say there's a little bit of a couple of things going on. First is that clearly some of the planning for these projects was relatively long term and that planning has not been entirely deferred. So we have some of that activity or that tail, to use your word, that's coming in. And the other is France has been in a decline for better part of a year or so, so they could be potentially stabilizing and starting to come out of it. But it is really too early to tell.

Thank you.

We'll take our next question from Matt McCall with BB&T Capital Markets.

It's Sean, again. I just had a quick follow-up again on the international order pattern. Just kind of wanted to get a general relationship to how quickly those market -- in your -- at least your largest markets react with -- in response to like the US. And those markets seem to have come down and weakened on a lag versus what you saw here domestically. Is that expected in a stabilizing environment, and even once we eventually see trends improve, or are there other dynamics there that can shift and drive that performance?

What to expect to go forward is a bit challenging to forecast, Sean, but what I would tell you from my experience when I was in the international business during the last recession, that the lag that we experienced in most international markets relative to the US decline seemed longer then than what we've experienced most recently in the current decline. This just felt much faster and steeper. Now, whether or not we'll see a different trend as we come out remains to be seen.

Great. Thank you.

Yes.

(Operator Instructions) It appears there are no further questions at this time. Mr. Sylvester, I'd like to turn the conference back over to you for any additional or closing remarks.

I would just thank everyone for participating in the call, and we look forward to updating you on our first quarter results in late June. Thanks very much.

That does conclude today's conference call. We thank you for your participation. You may disconnect at any time.