Steelcase Inc (SCS) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to Steelcase's first quarter fiscal 2010 conference call. As a reminder today's call is being recorded.

For opening remarks and introductions I would like to turn the conference over to Mr. Raj Mehan, Director of Investor Relations. Please go ahead, sir.

Thank you, [Dana.] Good morning, everyone. Thank you for joining us for the recap of our first quarter fiscal year 2010 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; and Terry Lenhardt, Vice President, North American Finance.

Our first quarter earnings release, dated June 23, 2009, crossed the wires earlier this morning and is accessible on our Web site. This conference call is being webcast. Presentation slides that accompany this webcast are available on IR.Steelcase.com and a replay of this call will also be posted on 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 slide. 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 (inaudible) 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 27, 2009, and our other filings with the Securities and Exchange Commission. This webcast is a copyrighted production of Steelcase Inc. With those formalities out of the way, I'd like to turn the call over to our President and CEO, Jim Hackett.

Thank you, Raj, and good morning to everyone. I am pleased to report that Steelcase continues to weather this incredible series of economic challenges. In fact, I tell people in the elevator that we are a very good Company in a very, very difficult economy. We are reporting a better than expected quarter as we're coming off a strong NeoCon show last week.

And although uncertainty remains high there are signs that the worse of this recession is starting to stabilize. Given the question of how the world comes out of the recession we are working hard to be agile and fit in various outcomes. Earlier this morning, I put out a note to our employees around the world to address what seems like a contradiction in our announcement today. Things are looking up, yet we are also announcing additional cost reduction actions including job reductions.

So I want to share some of those same thoughts with you. I know some of you who follow our Company were also at NeoCon last week. This is our annual trade show for the whole industry held in Chicago's Merchandise Mart. Steelcase Inc. won five product and two showroom awards, including some awards for non-traditional products from our Coalesse brand and our Turnstone brand.

Overall attendance was lower than the previous two years, but we still had a steady flow of serious customers in our showrooms. Our federal government and healthcare sales teams were especially busy. I also want to point out that the financial services industry, which we have discussed on some of our past calls, is one of the our larger customer segments, and, yes, as would you expect it's been affected by this downturn. In fact, it's been dramatic.

But here's the part of the story that maybe isn't being told. We are working hard to help many of these financial companies consolidate, be smarter about the use of space and create environments that help connect. That's the story we told at NeoCon this year and it continues to resonate.

Among the other themes at the show, there's a continued focus on sustainability and that can only be good for Steelcase because we have a very, very strong story about sustainability. [Several] of our products have already earned the new BIFMA certification. This will bear consistency to how we measure environmental performance in this industry.

But now we move forward from NeoCon to today's announcement of a breakeven quarter when we had anticipated a loss. We didn't want a loss, we don't like a loss, but we had anticipated that given the prospect of volume dropping. As Dave will detail in a moment, revenues significantly declined compared to the previous year, but we saw better than expected cost control activities. We've worked so very hard on this. I'm happy to declare the impact of that savings and most of all thank employees for their sacrifices.

There's another reason that we exceeded expectations. We've been conservative about what to expect from our COLI investments that negatively impacted our performance in Q3 and Q4. Remember the COLI is company-owned life insurance and those investments along with the rest of the market outperformed our estimates.

As I wrote to our employees today, if things are looking up are additional cuts really necessary? It's a fair question and a bit paradoxical. But I believe the answer is, yes, and in order to preserve our ability to grow in the future and because there's still a great deal of uncertainty in the market we have to take these actions.

We've identified an additional $30 million in annualized cost reduction this year through a combination of headcount reduction, suspension of the Company's annual retirement contribution and additional consolidations of some smaller manufacturing facilities. You will recall that this is on top of previous actions detailed in your webcast slides.

We recognize the need to reinvent our processes and structures so that we can continue to execute our strategies with the smaller workforce. We've been working on that for more than a year. We have some successes and there is more work to do.

So in summary, we feel that we are building momentum but we know lit take time to come off the way out of this recession. We are taking additional steps aimed at staying profitable and preserving cash balances at the reduced level of revenue.

Now I will turn it over to Dave Sylvester, our Chief Financial Officer, for additional detail on our performance this quarter. Dave?

Thank you, Jim. Today we reported breakeven net income for the first quarter of fiscal 2010 which was significantly better than the estimated net loss of $0.13 to $0.23 per share we communicated last quarter. Before I dive into the details let me try to net out the story as follows.

The headline is clearly that results exceeded our expectations. And COLI played a large role. Both by delivering $16 million more than we would typically expect in a quarter and also by playing a large role in the estimation of our 100% effective tax rate for the quarter. Beyond the headline, however, there are two additional points of significance.

First, on a volume adjusted basis relative to our revenue estimates for the quarter and after setting aside the additional COLI gains one might have expected our adjusted earnings to have fallen closer to the middle of our estimated range. But strong cost control efforts served to offset the volume impacts.

And, second, order patterns were volatile in the middle of the quarter. And while we are seeing some positive indicators in support of a potential economic recovery later this calendar year signals remained mix and thus uncertainty remains high.

Therefore, in pursuit of our target to protect our growth initiatives and remain modestly profitable at the operating income line before restructuring costs we decided to do take additional actions which included elimination of any contribution to the Steelcase Inc. retirement plan for fiscal 2010, further reductions in our white collar workforce by approximately 200 positions globally, and the continued consolidation of a number of smaller manufacturing facilities across our global operations network.

Now on to the details. Revenue of $546 million was within the estimated range of $525 million to $575 million published last quarter. As further detailed in our webcast slides, the comparability to last year's impacted by divestitures completed during the last 12 months and negative currency translation effects in the current year.

Adjusting for these factors, we estimate the decline in organic revenue or same-store sales approximated 29%. This decline was broadbased, significantly affecting most segments, geographies, vertical markets and product categories. The operating loss before restructuring costs of $2.4 million in the current year compares to $44 million of operating income in the prior year.

This $46 million decrease was largely driven by loss contribution margin relative to our fixed costs associated with the $270 million decline in revenues. Decreased variable compensation expense, or employee bonuses, softened the contribution margin effect of lower volume as bonuses vary with levels of profitability and EVA and, accordingly, were reduced by approximately $19 million in the quarter as compared to the prior year.

Other factors which offset a portion of the negative volume effects included benefits from recent restructuring activities and strong cost control efforts, higher COLI income compared to last year of $15 million, temporary reductions in employee salaries and retirement benefits which took effect March 2 and totaled approximately $10 million in the quarter, lower commodity costs of approximately $6 million compared to last year, and improved price yield from customers continuing to migrate from old price lists.

We have nearly completed all of the restructuring actions announced last March as well as the headcount reductions announced in early December. Each targeted to reduce our annualized operating costs by approximately $40 million, or $80 million in total. In addition, the reductions to employee salaries and changes to retirement benefits announced in February, and again today as it relates to retirement contributions, were implemented with an effective date at the start of the fiscal year.

With today's announcement of additional reduction inside our white collar workforce and the continuation of various smaller facility consolidations we have increased the estimated structural or longer-term benefits from our restructuring actions to approximately $100 million annualized. In addition, we now estimate the annualized savings related to temporary reductions in employee salaries and retirement benefits to approximate $35 million to $40 million while they remain effective.

For your reference, we have included a supplemental webcast slide which summarizes all of the actions we have taken since the start of the downturn. Total pre-tax restructuring costs for these actions are expected to approximate $25 million for the full fiscal year 2010.

For COLI, consistent with the overall performance in the equity markets our cash surrender values increased this quarter following significant declines in the third and fourth quarters of fiscal 2009. Our earnings estimate for the quarter contemplated a $2 million increase in COLI consistent with what we would normally expect over a longer term investment horizon.

Other income and expense in the quarter included $2.4 million of net gains related to various non-operating investments offset by a $2.5 million charge recorded in connection with the liquidation of an unconsolidated joint venture. The income tax benefit recorded in the quarter approximated the loss before income taxes. The resulting effective tax rate of 100% was driven in large part by significant non-taxable income from COLI.

While we continue to estimate our longer term effective tax rate will approximate the mid-30s the impact of tax credits, potential changes in valuation allowances and non-taxable items like COLI can have significant impacts relative to lower levels of pre-tax income or loss amounts.

Next I will talk about the balance sheet and cash flow. Our cash and short-term investment balances approximated $118 million at the end of the quarter, a $75 million decrease from the end of fiscal 2009, but in line with our expectations. Consistent with last year we had a significant use of cash related to changes in operating assets and liabilities.

This is a normal seasonal change resulting from cash payments in the first quarter of each fiscal year associated with variable compensation, contributions to employee retirement funds and other employee benefit obligations. Capital expenditures totaled $23.9 million during the first quarter including the final progress payment of $13.5 million related to the purchase of a replacement aircraft.

We took delivery of the new aircraft in April, trading in our existing aircraft with the manufacturer for $18.5 million. Looking forward we are targeting capital expenditures of approximately $10 million per quarter for the balance of fiscal 2010.

During the quarter, we paid dividends of $10.7 million or $0.08 per share and we repurchased 1 million shares of common stock at a total cost of $4.3 million or at an average price of $4.28 per share. As of the end of the quarter, we had $211 million remaining under the $250 million share repurchase authorization we announced in December 2007.

As of the end of the first quarter, our total liquidity position includes $118 million of cash and short-term investments, $190 million of COLI cash surrender value, and approximately $179 million of borrowing capacity under our unsecured credit facility. In order to further enhance our liquidity position, we completed a $47 million financing shortly after quarter end through the support of various banks who participate in our revolver, plus Wells Fargo who led the transaction.

The financing is secured by our corporate aircraft and includes variable interest at 335 basis points over 30-day LIBOR and a 20-year monthly amortization schedule with a $30 million balloon payment due in seven years. There are no financial covenants, cross default considerations or material adverse change clauses.

However, this financing does increase our level of long-term debt which when coupled with our declining trailing four-quarter EBITDA levels in this recession could significantly reduce if not eliminate our current borrowing capacity under the unsecured revolver depending on future results. But at the same time we do not anticipate any need to access the revolver in the near term. Accordingly, we continue to maintain a strong liquidity position.

Now I will discuss the quarterly operating results for each of our segments in the North America category. North America revenue decreased by 32% compared to the second quarter of last year. Prior year included $9 million of revenue related to Custom Cable which was subsequently divested in July 2008. In addition, the current quarter included $6 million of unfavorable currency translation effects compared to the prior year.

Adjusting for the negative effects of the disposition in currency translation in the current year we estimate the organic decline in the North America segment approximated 30% in the first quarter which was consistent with the down 25% to 30% range we estimated during last quarter's call. As many of you know, incoming order rates within our industry typically hit a seasonal trough in January before rebounding through the spring months.

We saw strong signs of that in February and into early March as orders strengthened thanks to improved project business across several vertical markets. However, toward the end of March and throughout most of April volatility returned and orders softened considerably consistent with the April BIFMA data. Thereafter, orders restabilized and have since been seasonally building through mid-June.

As a result of these order patterns during the quarter total orders were down approximately 37% and ending backlog was down approximately 31% compared to the prior year. The May uptick in orders drove the first meaningful increase in backlog in several months. The significant decline in orders during the quarter was felt 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 order rates from the federal government remain strong, we experienced declines within the state and local government, higher education and healthcare vertical markets, albeit to a much lesser extent than the rest of our business. Despite the weaker order patterns we continue to host many visits from customer and potential -- current and potential customers, particularly in the healthcare and higher education vertical markets.

And we have also hosted many A&D fly-ins in an effort to deepen their knowledge and understanding of our major new products and related insights. In total, the number of visits to Grand Rapids during the first quarter exceeded the prior year by approximately 10%.

Operating income, excluding restructuring costs, decreased by $24 million to $14.2 million or 4.8% of sales compared to the prior year. The positive effects of cost reduction efforts, higher COLI gains, lower commodity costs and improved price yield were not enough to offset the negative contribution margin effects of lower revenue which totaled $137 million in the quarter.

When considering price yield remember we discontinued our commodity surcharge during the fourth quarter of fiscal 2009. Operating expenses in North America decreased by approximately $27 million compared to last year primarily due to lower variable compensation expense of $8 million, higher COLI gains of $6 million, benefits of restructuring activities and cost control efforts, and temporary reductions of employee salaries and retirement benefits approximating $4 million.

In addition, the divestiture of Custom Cable in July 2008 had the effect of lowering operating expenses by approximately $1 million. In the International segment, sales decreased by 40% compared to the prior year quarter. Currency translation effects and divestitures in the last 12 months had the effect of decreasing revenue by approximately $36 million as compared to the prior year.

Adjusting for the negative effects of currency translation and divestitures we estimate the organic decline in the International segment approximated 30% in the first quarter which was consistent with the down 25% to 30% range we estimated during last quarter's call. International orders, adjusted for currency differences and divestiture impacts, declined at a similar pace compared to the prior year or approximately 32% in total.

Our largest markets, France and Germany, declined less than that but for two different reasons. For France, they are beginning to lap prior year declines as they entered the recession early, while for Germany they are in a different stage of the decline wherein the fall-off in day-to-day or continuing business remains partially propped up by remaining project activity. The Spanish and UK broader economies seem to be in similar states as France, beginning to lap the start of the recession.

But orders in these markets were nevertheless down significantly again this quarter. And we continue to experience significant declines in many of the emerging markets across Eastern and Central Europe, Latin America and Asia Pacific. International reported an operating loss excluding restructuring items of $5.9 million compared to operating income of $12.7 million in the prior year.

The $19 million decrease was largely driven by the reduction in volume which adjusted for currency translation effects and divestitures approximated $65 million. Cost reduction efforts were only able to offset a portion of the loss contribution margin from reduced revenue. The $20 million decrease in operating expenses reflected approximately $10 million from favorable currency translation effects and the impact of divestitures completed within the past 12 months, plus various benefits from cost reduction efforts in the nature of sales commissions and other variable expenditures.

The other category which includes the Coalesse group, PolyVision and IDEO reported revenue of $100 million in the quarter, or a 25% decrease compared to the prior year. The decrease in revenue included the effects of our decisions during fiscal 2009 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 a 27% decrease in revenue in the Coalesse group as well as decreases at IDEO and in the remaining revenue at PolyVision. The Other category reported a $6 million operating loss excluding restructuring costs which compares to a $1 million operating loss last year. Lost contribution margin associated with the decline in revenue was partially offset by the benefits of restructuring actions and various cost control measures implemented last year.

We are still experiencing disruption associated with the consolidation of manufacturing activities in the Coalesse group and thus believe additional benefits may accrue over the next few quarters. In addition, PolyVision recently finalized the sale of its remaining public bid contractor whiteboard fabrication business in North America. The purchaser is an existing vendor of PolyVision's ceramic steel surfaces business with whom we hope to expand our relationship in the years to come.

The sale includes inventory and backlog only and, thus, we expect to incur restructuring costs in the second quarter associated with the closure of the small manufacturing facility.

Now I will review our outlook for the second quarter of fiscal 2010. As we have said during each of the last two calls 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 remains high. Overall, we expect revenue to approximate $600 million compared to $902 million in the prior year, which was the highest quarterly revenue in more than five years. The second quarter estimate takes into consideration the following factors.

First, based on exchange rates at the end of the first quarter our second quarter revenue estimates contemplate $35 million of unfavorable currency translation effects compared to the prior year. Second, we estimate the effect of divestitures to reduce revenue by approximately $5 million in the second quarter compared to the prior year.

Third, revenue estimates in the second quarter for North America are based on the continuation of recent order patterns which have shown signs of seasonal improvement in the past several weeks. Fourth, revenue in the International segment stated in local currency is estimated to decline in the second quarter somewhat less than the first quarter order patterns we experienced as we expect to ship a few large projects from backlog during the summer months.

Taking into account our revenue estimates, the status of our cost reduction actions and additional commodity costs deflation which is estimated to decrease our global costs in the first quarter by approximately $10 million to $15 million compared to a very high prior year. We expect to report approximately break even operating income excluding an estimated $10 million of pre-tax restructuring costs, as well as approximately break even net income for the second quarter of fiscal 2010.

The second quarter net income estimate assumes we will record a tax benefit using an effective tax rate similar to the first quarter which, again, remains highly sensitive to changes in estimates related to non-taxable items like COLI in relation to relatively small pre-tax income or loss amounts. We reported net income of $31.4 million or $0.23 per share which included $9 million of pre-tax restructuring costs in the second 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 for the full fiscal year, excluding restructuring costs, could stay modestly positive provided that revenue declines do not exceed 25% compared to fiscal 2009 which began to reflect the recessionary declines in the third and fourth quarters.

These estimates are contingent on the successful completion of our current restructuring actions over the balance of the year, 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. While fiscal 2010 will undoubtably stress our bottom line relative to the past several years which reflected continuous improvements, 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) And we'll take our first question today from Mark Rupe with Longbow Research.

Good morning. Congratulations on the execution. This is Leah Villalobos in for Mark Rupe today.

Hi, Leah.

Just a quick housekeeping question on the restructuring that you announced this morning. When will we start to see the benefit of that?

Well, on the webcast slide, Leah , you would you notice that we broke the restructuring benefits into two buckets, the temporary which is associated with the retirement plan contribution elimination of $10 million. That went into effect at the start of the first quarter.

Okay.

And the remaining $20 million are spread over the balance of the year. What I would tell you is that we roughly would say that we will implement 40% of the actions throughout the second quarter, maybe another 40% in the third quarter. And probably the final 20% in the fourth quarter. So will you start to see benefits in the third and fourth quarter and into next year.

Okay. Great. Then just sort of, clearly you guys have done such a phenomenal job of cutting costs throughout the downturn. Are there more opportunities out there if this does kind of go on longer than we're expecting right now?

Leah, I would tell you that the way we are running the Company right now is as we implement our contingency plans we build additional contingency plans. So we will be prepared to take additional actions as necessary. The big question is where does it go from here. And it's still pretty fuzzy out there, so I'll stay away from giving kind of a perspective on the full fiscal year.

Sure.

We've gone down a heck of a lot very quick.

Right.

Already.

Okay. Thank you very much. Good luck.

Thanks.

Thank you.

And we will take our next question from Budd Bugatch with Raymond James.

Good morning, everyone. This is actually Chad pinch hitting for Budd who is on the road today. A couple of questions, could you quantify for us the pricing benefit that you saw in the quarter in isolation, not including the commodity deflation, and, I guess, we are getting fairly close to lapping that price increase that I think was maybe second quarter of last year. How much longer will we expect that to persist?

Well, I guess what I would tell you, Chad, is that the pricing benefit in the quarter was modest. It was related to us continuing to move customers from old price lists. And you know how that works in our industry.

So you kind of each quarter have a little bit of opportunity to do that and we accomplished some of that again in the first quarter. Going forward, it's competitive out there, so I'm going to stay away from any kind of outlook on what we might expect.

Sure. Fair enough. And in regards to your debt covenants, I think if I remember correctly, you've got a 3:1 maximum leverage ratio. First, confirm if that is correct, and then if so could you share with us exactly how the components of that are calculated and maybe where you stood at the end of the quarter?

You're right, they are 3:1 and it is debt to EBITDA and the debt levels include outstanding letters of credit. So the first number is in the, a little over $300 million. On the EBITDA calculation I would have to pull out the bank agreement because it is quite long and complicated. But generally it takes pre-tax income or loss, it excludes interest expense and depreciation and amortization and any large non-cash charges.

Okay. And I guess kind of going along that, maybe with the cash flow theme, you talked about $10 million a quarter in CapEx for the rest of the year. What do you think D&A will be and if you assume sort of a 25% down sales number where would you think working capital would come in and then what would the priorities for cash flow be at that point?

You may have to remind me as I go through this, some of those questions.

Sorry.

I will start with D&A for the balance of the year. I don't really see any dramatic reason why it would be different than what we saw in the first quarter. I think it was a little less than $20 million. So that's probably reasonably safe.

On working capital, well, it's going to vary a little bit. Typically we would see Q2 and Q3 be the stronger quarters of the fiscal year and then Q4 falls off a little bit. So from here to the end of the fiscal year I would imagine we would use a little cash and convert it into working capital, so receivables might go up a little bit if we were down 25%. And what was your other question?

Last was priorities for cash, what do you do with cash generation here?

Well, I mean there's nothing different in how we think about it. I would tell you that we continue to reinvest in the business. We've said since day one or even minus day five before the recession hit as we knew it was coming that we were going to do everything we could to protect our growth initiatives.

And to maintain some powder on the balance sheet just in case there was an opportunity that we wanted to do take advantage of. So that's going to always be our first priority. And beyond that we are going to continue to target paying a strong quarterly dividends to our shareholders and returning cash in other ways like through repurchases.

Well, thank you very much, guys, and good luck for the rest of the year.

Thank you.

Thank you. And we'll take our next question from Matt McCall with BB&T Capital Markets.

Hey, good morning, everybody.

Hi, Matt.

Just following up on that last question, hopefully this won't count in my two, but, Dave, of the charges what is cash and what is non-cash for the rest of the year?

I will defer to Mark, but I think it's largely cash, isn't it, Mark?

Yes, for the most part, Matt, it would be cash. Obviously, there's no charges associated with the reduction of the contributions, but, I, over time it will end up being converted to cash so that $20 million to $25 million will turn into cash eventually.

Okay. Just looking at that EBITDA calculation, okay. Then, Dave, you said that you've run several models and the down 25% gets you a modest profit in that same scenario, or are you using a different scenario? What does down 20% to down 30% look like trying to understand the variability, the variable contribution margin at this point?

It would be more profitable at down 20% and less profitable down 30%.

Thank you, Dave. (laughter) Any more granularity, please?

Matt, you just used a question on that one.

I know, but you didn't answer it. (laughter)

(inaudible). You know the way our contribution margin historically has worked in the 35% to 40% range. We think we are closer to the high end of that range right now, especially as profit sharing has been pulled down to zero and bonuses are significantly less. But that's about all I'm going to give you.

Our employees positively surprised us on how well they maintained our costs and reduced some of our spending that we weren't even anticipating was going to be reduced. So it remains to be seen just how well we can continue to manage when you've got several thousand people all working toward the same objective.

Okay, okay. And then the final one, you talked about protecting your growth initiatives, you are taking out 200 additional heads and then can you talk about where those are focused, and just trying to understand how you are going to protect the growth initiatives making sure those aren't focused on any of those areas?

Matt, this is Jim. I think that that's the work that we've started with the executives so it's a little premature. But I would say that because we've got the experience of doing this before, you can see more than half of that kind of out of North America and the support functions and the other half out of the global side of the International side of the business.

And in doing that what we find is that we are able, with the shared service structures that we've built, to take what was dedicated to one geographic region in the past and now put it in the shared setting and have it apply across the broader part of the world. And so that's one way we've been able to achieve some of the results.

Regarding the focus on the future investments and the innovation, much of the work that we protected so far has been things that have been multi-year efforts and so you make a lot of progress in prototyping and design and so we are seeing those through. And the teams that are assembled for that might lose a person or two, but the initiative would go on and so we are able to kind of declare, as Dave said, that that would continue.

Okay. All right, I am going to hop back in line. Thank you.

(Operator Instructions) We will take our next question from Todd Schwartzman with Sidoti and Company.

Good morning, gentlemen. On the, the gross margin sequentially was up 160 basis points, I think it was, from Q4 on volume that was $100 million lower. Can you talk about what size role input prices played in that and what other factors were responsible and also what costs from here for the balance of the year?

I have to answer that by asking a few questions of clarity. Are you talking about just what we reported or are you adjusting it for COLI and other factors when you reference the sequential improvement?

Maybe you can refresh on an as adjusted basis what do you see as the sequential change?

I don't have that quantified in front of me. The thing I would tell you, remind you of is in the fourth quarter we had large COLI charges, or additional COLI charges, and in the first quarter we had COLI benefits. We also had the tail end of inflation, I think, in the fourth quarter which flipped to deflation in the first quarter.

The base salary reductions that we implemented as well as the restructuring actions that we continued to implement. So there's a lot going on in that sequential reference.

Got you. And just isolating commodities, things, does your model assume things are stable here on out or what's your thinking there?

I would tell you the largest part is just relative to how our contracts work. A large part of our steel buy, as an example, is based on contracts that reset every 90 days. And so as the market price has been coming down we haven't realized the entire benefit associated with that lower market price until our contracts reset.

So it's largely based on that. And then somewhat based on projections of stability. For the next 90 days, anyway.

The last question is on SG&A, if Q1 does ultimately represent the revenue trough how should we think about quarterly operating expenses going forward incorporating today's latest announcement of layoffs?

For next quarter, Todd?

For next quarter and the balance, if you could speak for the balance of the year by quarter? I'm assuming that you do see volume ramp due primarily to seasonal factors?

Yes, I mean, I'm hesitating because it's a tough question. Again, you've got COLI coming through the current quarter. I don't know what COLI is going to be next quarter. We've assumed in our outlook another modest few million consistent with what we would normally expect over the longer term.

And the other factor is as you think about operating expenses and margins go forward you have to keep in mind that second column that we put on the webcast slide around restructuring actions at some point we would imagine those coming back in which would affect our margins and our operating expenses.

And, again, like I told Matt, I don't know yet exactly how much our employees are going to be able to deliver on continued cost control. It's a tough one for me to answer.

Got you. Thanks.

And we have a question from Matt McCall with BB&T Capital Markets.

Thanks. The earlier question on pricing, Dave, I think you said modest benefit in Q1 and it's competitive out there. Is there the potential for pricing to be negative year-over-year in Q2 or going into the back half?

I'd say there's potential. But I -- hard to imagine.

Okay. So your guidance assumes kind of that modest flat to up modestly?

Yes, I mean if you think about it we are continuing to try to move customers to more recent price lists. And then there's increased competition, obviously, for fewer numbers of projects and the like. How those ultimately offset I don't know exactly, but it's probably somewhat positive next quarter.

Okay. And then, so is the benefit, I think, as you anniversary that price, the price increase will you still see those customers migrate so there will be incremental benefit in the back half as well?

Potentially, but to a smaller extent.

Okay. And then by segment you talked about, I think, Jim, you talked about bringing the break even down for the business.

Can you provide some granularity about what the break even is going to look like across the three segments so as we look at the different top line trends we can get a picture on the profitability?

We don't disclose that for obvious reasons, but I want to leave you with the confidence that every one of the leaders, all the leaders of those various businesses have participated in this improvement in the break even. So there's not any business that's not addressed it or gotten better through this period.

Okay. All right. Thank you all.

The only thing I would add, Matt, as you know about our break even, so we said approximately $600 million in the second quarter leads to approximately break even. That includes the benefit of the temporary reductions which are in the neighborhood of $35 million annualized. So very roughly speaking you would say if those things come back in you would imagine a $625 million break even on a go forward basis.

But you would also expect that to come down somewhat because of the other more permanent actions that we launched this quarter. You follow?

The $20 million?

Yes.

Got it. Okay. Thank you, all.

Okay. Thanks, Matt.

And we will go next to Margot Murtaugh with Snyder Capital.

Yes, thanks. I wonder if you could you provide a little more detail on what you are doing in Europe, your restructuring plans there, and also for the outlook in Other, when you might get that to break even? So?

In Europe, all I can really say, Margot, is that we are continuing to discuss with the various work councils what opportunities we may be able to implement and I have to leave it at that. In the Other category, we actually have implemented a number of restructuring actions across all of those businesses including even IDEO which has remained profitable throughout the downturn.

But PolyVision has implement a number of restructuring activities including the recent sale of the remaining part of the VCP business. And we, last year, consolidated manufacturing activities within the Coalesse group which we think has a little bit of additional upside once we stabilize the disruption in those factories. But we have lost a lot of volume at the same time, so it's, it may require us to come out of the recession and rebuild a little volume before that whole group is back to positive.

Okay. Would the sale of this PolyVision business -- was that losing a lot so you are going to make some improvement by selling that?

It wasn't that it was losing so much, it was that the margins were very low. So we are basically unloading some low margin fabrication business.

Yes, it's a division in the brand.

Okay. Okay, thanks.

And, Mr. Hackett, I will turn the call back to you for any additional or closing remarks.

I just want to thank everyone for your attention today and as we started the discussion, we think that Steelcase is a good Company in really tough times and we look forward to reporting continued results to you. Thank you.

Thank you. And that concludes today's conference. Thank you for your participation.