Steelcase Inc (SCS) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to Steelcase's second 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 all over to Raj Mehan, Director of Investor Relations.

Thank you. Good morning everyone. Thank you for joining us for the recap of our second 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 America Finance.

Our second quarter earnings release dated September 24, 2009, crossed the wires early this morning and is accessible on our website. 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 to the site later today.

I did want to mention in the spirit of increased transparency and simplicity we've enhanced the disclosures in our webcast slide so I would encourage you to review these in addition to our normal disclosures. 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 transcripts text of our Safe Harbor statement included in this morning's release. Certain statements made within the release and during this conference call constitutes 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 27, 2009, and our other filings with the Securities and Exchange Commission. Webcast are the copyrighted production of Steelcase Inc. Now with those formalities out of the way, I'll turn the call over to our President and CEO, Jim Hackett.

Thank you, Raj, and good morning. If you take time to compare our impressions of the second quarter with the transcript of this call after the first quarter, you're going to see a similar story. The effects of the global recession have not abated. However, we're pleased to be profitable this quarter before restructuring even though we didn't hit our revenue target for the quarter. The work we've done as a Company to enable us to make money even when our top line declines as far as it has is an indication of the outstanding efforts of the Steelcase people around the world. They truly exceeded our expectations in reducing and deferring costs. Three months ago, I told you we believe there was a good chance our industry had hit bottom in this recession. Even though there's still a great deal of volatility in our business, we continue to think it's possible that we'll be able to look back at Q1 of this fiscal year as a low watermark.

Certainly, in the financial sector, specifically the banking industry, where more than two-thirds of the stress test losses have been realized, there's signs that bode well for eventual stability in the economy. When you look back at where the economy was a year ago, and the potential precipitous decline that we all did experience, I think you can see our Company has fared pretty well in an extraordinary situation. The game now is to continue positioning Steelcase for the broader economic recovery. Here's just one indicator.

The number of customer visits to our corporate campus in Grand Rapids this fiscal year is holding steady compared to last year, despite the revenue decline. We've taken advantage also of the opportunity to strengthen our message with various groups, in this case, the design community. Architects and designers have recently made up a significant portion of our total customer visits and we're using this time to immerse them in our new products and the insights that support them. We expect this to pay off as new project business ramps up and a recovery and the design firms are driving the specifications.

We had a special opportunity that I should tell you about. It was to connect the A and D audience this month as we celebrated the 100th anniversary of the Meyer May house. This is a Frank Lloyd Wright design here in Grand Rapids that Steelcase purchased and restored about 22 years ago. I know some of you have been following our Company have heard the good fortune that we've had with this jewel of American architectural history. We hosted a symposium focused on Frank Lloyd Wright's enduring impact on design with a truly all-star collection of panelists and nearly 500 people locally in attendance. We were able to pull some influential people into Grand Rapids and we saw the delight in their eyes as they toured our new work lab space. This is a space where we demonstrate and show our new products.

The new products there are Seascape and Mediascape. The space that they sit in which is called the work lab has just earned a lead platinum certification. This is the highest ranking possible under the lead system and we have the first showroom in our industry to receive platinum status. Our focus on designing for the environment is another reason that we're making new connections with the A and D community. So we feel good about our preparation for recovery. And of course, everyone wants to know when that recovery will come.

Our employees who have taken a temporary pay cut want to know. Shareholders who have seen a reduction in the dividend are interested in the same question. We still don't feel comfortable making any kind of long-term forecast, given the uncertainty and volatility in the business today. But I believe that we could see modest growth in fiscal year '11. And the steps we have taken to remove costs, improve processes, and introduce new products are absolutely going to serve us well at that time. As we move into a more detailed discussion of our performance, I do want to call your attention to two highlights.

First, as I mentioned a moment ago, we were profitable before restructuring in the second quarter. And that's with or without COLI, which is the Company owned life insurance asset that we dial up and dial down with equity performance. We're profitable due to the actions we initiated as early as March 2008. Second, while our quarterly revenue was a little shy of our estimates, we did see a 6% sequential revenue improvement compared to the first quarter and that was driven by North America which increased 10% from the first quarter. So net-net, it's nice to see a little normal seasonality in the midst of unusual times. Now I'll turn it over to David Sylvester, our Chief Financial Officer. Dave?

Thank you, Jim. Today we reported breakeven net income for the second quarter of fiscal 2010, which was consistent with the estimate we communicated last quarter. Excluding restructuring costs, operating income of $16.4 million significantly exceeded our estimate of approximately breakeven results. These results were achieved despite second quarter revenue falling $22 million short of our $600 million estimate. Income from Company owned life insurance or COLI, played a large role by delivering approximately $10 million more than we typically expect in a quarter. In addition, we recorded a $3 million gain in connection with settling a domestic property tax dispute.

For COLI, consistent with the overall performance in the capital markets, our cash surrender values increased again this quarter following significant declines in the third and fourth quarters of fiscal 2009. Like any other quarter, our earnings estimate for the second quarter contemplated a $2 million increase in COLI, consistent with what we would normally expect over a longer term investment horizon. Setting aside COLI and the property tax gain, it's important to note that we remain profitable at the operating income line before restructuring costs, even though revenues came in short of our estimates. Strong cost control efforts, deferred spending patterns, and better than expected manufacturing performance served to offset the volume shortfall.

What I mean by deferred spending patterns is that we believe the first half of the year has benefited somewhat from deferral of activity to the back half of the year. Some of this effect is simply a function of project timing and some is likely due to the distraction of restructuring activities which have been very high for the past several quarters and are now starting to ramp down. While we won't quantify any specifics today, we do anticipate that operating expenses, primarily related to product development, may increase modestly over the second half of the year.

From a revenue perspective, we experienced a 6% sequential improvement compared to the first quarter. And expect this seasonal improvement pattern to continue into the third quarter. While the next several quarters will remain challenging for our industry, we continue to believe that the first quarter of this fiscal year may have been the low watermark for our revenues in this downturn. Compared to last year, the $39 million decrease in operating income before restructuring costs was largely driven by loss contribution margin relative to our fixed costs associated with the $324 million decline in revenues. Decreased variable compensation expense softened the contribution margin effect of lower volume as variable compensation is tied to levels of profitability and EVA, and accordingly was reduced by approximately $29 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, $12.4 million of COLI income compared to a loss of $2.1 million in the prior year, approximately $15 million of lower commodity costs compared to last year, and a benefit of of nearly $10 million from temporary reductions in employee salaries and retirement benefits which took effect March 2. As compared to the first quarter, operating income excluding restructuring costs increased by $19 million, driven largely by the seasonal improvement in North America revenue, lower commodity costs, and additional benefits from our cost reduction efforts. Lower COLI income offset a portion of these benefits.

We have substantially completed all of the restructuring actions announced in March 2008 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 temporary reductions to employee salaries and changes to retirement benefits announced in February and June of 2009 were implemented with an effective date at the start of the fiscal year. Therefore our results are benefiting from these temporary actions by nearly $10 million per quarter while these actions remain in effect.

Regarding the additional reductions to our global white collar workforce and the continuation of various smaller facility consolidations that we announced in June, we have substantially completed the white collar workforce reductions during the last three months. Including the completion of negotiations related to international workforce reductions, which occurred earlier than expected, pulling the associated restructuring costs forward into the second quarter. And we continue to make progress against the smaller facility consolidations.

You will recall that these additional actions in total were expected to decrease our annualized operating costs by $20 million, or $5 million per quarter. A small portion of these savings began to be reflected in our second quarter results, while the balance is expected to be realized over the third and fourth quarters. For your reference, we have included a supplemental webcast slide which summarizes all of the major actions we have taken since the start of this downturn. The cost of which is now expected to approximate $30 million for the full fiscal year 2010, slightly above the $25 million estimate communicated last quarter.

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 nontaxable income from COLI. As we said last quarter, 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 nontaxable items like COLI can have significant impacts relative to lower levels of pretax income or loss amounts.

Next I'll talk about the balance sheet, cash flow and liquidity. Our cash and short-term investment balances approximated $142 million at the end of the quarter, a $24 million increase from the end of the first quarter. As previously disclosed, we completed a $47 million financing of our existing corporate aircraft during the quarter, to further enhance our liquidity position. Significant uses of cash during the quarter beyond capital expenditures and dividends included the funding of restructuring actions and payment of semiannual bond interest. We continue to target approximately $40 million of capital expenditures for fiscal 2010, including a $3 million progress payment to replace a corporate aircraft which was placed in service during fiscal 2006. Thereafter, capital expenditures will include additional aircraft payments through April 2011, when we expect to take delivery of the replacement aircraft and sell the existing aircraft, plus incremental investments in our Grand Rapids campus as we consolidate our white collar workforce in Western Michigan in order to reduce future costs. Accordingly we currently estimate our capital expenditures for next fiscal year could increase by approximately $20 million. As of the end of the second quarter, our total liquidity position includes $142 million of cash and short-term investments, $202 million of COLI cash surrender value and $110 million of available capacity under our existing unsecured credit facility.

We are currently in discussions with our bank group regarding the renewal of our existing credit agreement which matures in July of next year. Due the recent dramatic increase in the costs associated with such a facility, we are planning to reduce the commitment size. Because our COLI investments provide an on balance sheet source of liquidity and we intend to continue to carry excess cash of at least $100 million, we are comfortable targeting a reduced commitment of $125 million under a renewed facility. We are pursuing a term of three years along with a net debt leverage covenant which will take into consideration our on balance sheet liquidity and therefore allow a higher level of assured access during the bottom of economic cycles. We expect to finalize the renewal of the facility by mid-November, provided the pricing terms and conditions meet our expectations.

In the meantime, we amended our existing credit facility as our increased level of long-term debt when coupled with our declining levels of trailing four quarter EBITDA in this recession would otherwise have put us slightly out of compliance with the leverage ratio covenant. The amendment which was supported by our bank group reduced the amount of the existing facility from 200 million to $125 million, and defers the calculation of our quarterly leverage ratio covenant until November 16. Now I will discuss the quarterly operating results for each of our segments and the other category.

While North America revenue decreased by 35% compared to the second quarter of last year, sequentially we experienced a seasonal improvement of approximately 10% compared to the first quarter. And we expect similar or slightly higher revenue in the third quarter. Compared to the prior year, orders in the second quarter were down approximately 36% and ending backlog was down approximately 33%. The decline in orders was felt across most regions and product categories, and similar to the first quarter we experienced deeper declines in day-to-day business compared to project related revenue.

Across vertical markets the US Federal Government order patterns continued to reflect strong double-digit growth, in part driven by the large multi-year contract with the Department of Defense we secured one year ago. Healthcare and higher education continued to decline at a rate much less than the rest of the business. We continue to be very pleased with the short and long-term prospects of our Nurture Healthcare and believe our efforts in higher education have the potential for similar results. Order declines in the financial services sector which entered the recession a full year prior to other vertical markets also moderated during the quarter. As we secured a couple of large projects and have seen some modest improvement in the level of continuing business across the rest of this customer segment.

Several important new products were launched during the past few months including Seascape and Mediascape furniture solutions and cobi and i2i seating. Dealer, designer and customer response has been favorable and early indications are that first year sales numbers will meet or exceed our initial expectations set in connection with early product development tollgates. Operating income excluding restructuring costs declined only $13 million compared to the prior year, despite a $177 million decrease in revenue. The positive effects of cost reduction efforts, higher COLI gains and lower commodity costs all contributed significantly to offset a large part of the negative contribution margin effects associated with the lower volume. We continue to strengthen our business model which will benefit greatly from sales growth when our industry recovers from the current downturn.

As compared to the first quarter, North America operating income excluding restructuring costs increased by $18 million, driven largely by the seasonal improvement in revenue, lower commodity costs, and additional benefits from our cost reduction efforts. Lower COLI income offset a portion of these benefits.

In the international segment, sales decreased slightly compared to the first quarter, and by 42% compared to the prior year quarter. Currency translation effects and divestitures in the last 12 months had the effect of decreasing revenue by approximately $22 million as compared to the prior year. Adjusting for the negative effects of currency translation and divestitures, we estimate the year-over-year organic decline in the international segment approximated 36% in the second quarter. International orders in constant currency declined at a slightly lower pace or approximately 33% compared to the prior year. Germany and most of Eastern Europe declined more than that while France and Latin America declined less. For France, a few project awards helped, plus we are beginning to lap prior year declines as France entered the recession early. While Germany is in a different stage of the decline, we're in the fall-off in day-to-day or continuing business is now driving larger declines as project activity runs off.

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 nevertheless were down significantly again this quarter. The Middle East remains a bright spot and we are encouraged by the prospects of increased activity in the Latin America and Asia Pacific regions. International reported and operating loss excluding restructuring items of $10 million compared to operating income of $13 million in the prior year. You will recall that international reported a 34% increase in revenue or approximately 22% in constant currency during the second quarter of fiscal 2009, setting a high benchmark for comparison purposes. The $23 million decrease in operating results compared to last year was largely driven by the reduction in volume which adjusted for currency translation effects and divestitures approximated $84 million. Cost reduction efforts were only able to offset a portion of the loss contribution margin from reduced revenue. As the pace of cost structure changes in our larger international markets is tempered by the process of negotiating with the related work councils.

The other category which includes the Coalesse Group, PolyVision and IDEO, reported a decline in revenue of 27% compared to the prior year. The Coalesse Group experienced a decline in revenue similar to the North American business while PolyVision and IDEO posted revenue declines closer to 15%. PolyVision performance benefited from an exciting new product called, [ENO] which we believe is a breakthrough advance in interactive white board technology. All businesses posted sequential or seasonal revenue growth compared to the first quarter.

Excluding restructuring costs, the other category reported a small operating loss, which compares to a $6 million operating loss in the first quarter and approximately $5 million of operating income in the prior year. Compared to the second quarter of last year, loss contribution margin associated with the decline in revenue was partially offset by the benefits of restructuring actions and various cost control measures implemented over the past four quarters.

Now I will review our outlook for the third quarter of fiscal 2010. Overall, we expect revenue to approximate $600 million. Compared to $811 million in the third quarter of the prior year which marked the beginning of the decline in our revenues in this recession. The estimate takes into consideration the following factors.

First, based on exchange rates at the end of the second quarter our estimate contemplates approximately $9 million of favorable currency translation effects compared to the prior year. Second, we expect to see modest seasonal improvements across our domestic and international markets. Taking into account our revenue estimates and the status of our cost reduction actions, we expect to report modestly positive operating income excluding an estimated $5 million of pretax restructuring costs, as well as approximately breakeven net income for the third quarter of fiscal 2010.

With respect to commodity costs, we are not expecting any sequential increase or decrease in the third quarter compared to the second quarter. Compared to the prior year, however, we estimate third quarter commodity costs will decrease our global costs by approximately $15 million. The third quarter net income estimate assumes we will record a tax benefit using an effective tax rate similar to the first and second quarters which again remains highly sensitive to changes in estimates related to nontaxable items like COLI in relation to relatively small pretax income or loss amounts.

As we indicated in the release, we are not providing full year revenue or earnings guidance. However, we have continued modeling various scenarios of revenue declines for the full fiscal year 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 we could achieve breakeven or better operating income for the full fiscal year, excluding restructuring costs, and year-to-date excess COLI income of approximately $26 million. Provided that revenue declines do not exceed 27% compared to fiscal 2009. These estimates are contingent on the successful completion of our current restructuring actions over the balance of the year, a full year effect of the temporary salary reductions and employee benefit changes we implemented and net benefits from current deflationary trends. In addition, COLI income remains subject to volatility in the capital markets and thus we have only modeled a normal level of COLI income for the remainder of the year for purposes of this modeling.

While the last decade has forced us to manage through two unprecedented recessions in our industry, our 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. No one can predict with a high level of certainty when our industry will recover. But we increasingly believe the chances are good for a recovery sometime next fiscal year. Now we'll turn it over for questions

Thank you, sir. (Operator Instructions). And we'll take our first question from Budd Bugatch with Raymond James.

Good morning everybody. This is actually [Chad Bohlen] filling in for Budd who is traveling this morning.

Good morning, Chad.

Couple of questions. Last quarter I think you said you saw a modest pricing benefit. Could you quantify what pricing was in this quarter and are you seeing any significant changes or anything new on the competitive front?

From a pricing perspective, we really didn't see any kind of benefit, additional benefit this quarter. Last quarter's was quite small. With respect to the second part of your question, I would say that -- I'll ask Terry to jump in here in a second, but I would say that we haven't seen any dramatic change in pricing patterns. It remains highly competitive, as you would expect, in a downturn, especially around the few projects that are out there.

That's right. It remains -- we talked about last quarter, market being competitive and that environment's pretty similar to last quarter.

Okay. And talking about operating expenses, it sounds like at least on a sequential basis and certainly through the back half of this year you'll get a more significant benefit from that last piece of cost reductions with the white collar workforce and facilities consolidations, but that will be offset to a certain extent by some of the deferred spending, maybe product development that you talked about. Could you perhaps help us maybe quantify what incremental savings you would see in the second half and maybe give us a sense of that in comparison to that increased spend?

Let me start with the restructuring actions that are yet to be completed. So if you go to that webcast slide that we included where we laid out all of the actions that we've taken since the beginning of the downturn, the actions are 100% in our run rate, as of this quarter and probably even as of the previous quarters. The December actions I would say are largely in, maybe a tad yet to be realized and I can't tell you whether those are coming in versus OpEx versus restructuring but very little of them, maybe an additional $1 million kind of quarterly benefit comes in from the December actions. The temporary reductions in employee salaries as well as benefits, those are in 100% and have been in since the beginning of the fiscal year. So it's just this last piece in June that we announced the workforce reductions and the smaller facility consolidations, were $20 million or $5 million a quarter. I'd say roughly $1 million is in our second quarter results and the balance of $4 million probably comes in evenly over Q3 and Q4. The split between OpEx and COGS, Chad, I mean, I'd be guessing. But I would -- 50/50 would be probably not too far off.

Okay. And can you give us a sense of the magnitude of any of the spending increase planned for the second half?

Well, I said we wouldn't quantify specifics but we do see operating expenses going up in the second half of the year, so if you're doing a sequential analysis you're going to take OpEx down a little bit next quarter for the cost reduction benefits but then you're going to take it back up something more in order to account for what we're saying is going to happen which is we think they're going to increase modestly.

That's very helpful. Thanks very much, guys.

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

Good morning. Thank you. Good morning, everybody.

Good morning, Matt.

Hey, Matt.

Okay. So Dave, you hit on that temporary costs. I think I ask this question every time I talk to you, but give us some -- maybe this is a question for you, Jim. As you look at the way you see the world, you said you see the business up next year. Talk about how we should anticipate some of these costs coming back into the model?

Well, Dave's not going to give a lot of specifics but I think -- let me broadly paint a picture for you of what causes that. For a moment, consider that the kinds of costs that the Company might expand are principally around product development and are in areas where we're seeing -- it's an important indicator, where we're seeing good results, even in a downturn with some of our new products. And they're just starting so they're kind of de minimus to affect a top line but you can just read this, being in the business as long as a number of us have that say these are products that are going to be of high acceptance. There's categories and products that are getting continued investment because of this early good start. They're on plan. They're hitting the projections that we imagined even in spite of the downturn. And so we have this touchy tipping point which is starting to expand investment in that, so that we have these ideas and notions ready to go when the market really picks up again. So that's the broadest view of why expenses come back. It's mostly because of product development.

What won't happen is that much of what we've built in terms of support structures and systems to help the business, I'm vaguely referring to the shared service structures that we've invented and created over the last two and-a-half years. Those costs that have been able to be shifted to those settings don't come back. And that's a good thing and it's making us globally very competitive. A third area, which is a temporary kind of reduction, is the employee salaries. And in Michigan, where of course we're headquartered, we saw where one automotive Company just announced that it was going to pull back -- increase the salaries or bring them back and I feel that pressure to address that and this isn't a quarter call where I am. There's a number of indicators that we're going to be using to make that decision. First people we've got to tell is our employees and that line item is a big number back in our business when it comes back. But the good news is, we have the choice of when to put it back so that we don't destroy value for destroy profitability. So those are kind of the three areas where I would have you think about product development, the shared service centers are going to allow us to have persistent cost reduction and then we have a decision, management decision of when to bring salaries back.

Okay. Thank you, Jim. That was helpful. You've talked -- I think you said there's a similar message this quarter versus last and it's kind of a message of stability. If you look a little deeper and you talk about maybe the order patterns that you're seeing, you mentioned, Dave, I think that day-to-day business is a little stronger. But is the volatility in the business stabilizing at all? Are we still kind of bouncing along a very volatile bottom?

Hey, Matt, let's let Terry take that because he's been studying that very question.

For North America.

For North America, good point.

Hey, Matt. Well, volatility does continue. We talked about that in our script. When you look at the volatility, though, you're not getting as severe volatility if you say look at our weekly order patterns, two week rolling average. They're not as severe as they were, say, prior to mid-first quarter. Saw a little less volatility since mid-first quarter. Then when that volatility hits, it doesn't last -- doesn't seem to last as long as perhaps it did last fall, last winter. You got a couple, three weeks a little more volatile then it gets back a little bit closer to a seasonal pattern. Volatility continues just a little less severe.

Okay.

If you go across the ocean and get into the international markets, you almost have to go country by country and I guess what I would call out is I think that Germany and most of Eastern Europe are still quite volatile and as we've said before, France, Spain and the UK who is now lapping the beginning of the recession, they're starting to see somewhat less volatility but still volatile. And I guess I'd stop there.

Okay. I'm going to sneak one more in. The amended facility, any costs associated with that in the quarter, Dave?

No, we -- we have a good relationship with our bank group and they've been very supportive in the way we're running the business and our capital structure and so they were comfortable giving us an amendment through the middle of November for free. I think they're going to try to make up for it in the new facility.

Nothing is free.

Short-term costs on the document.

Capitalism will prevail as we go down.

That's right. Okay. Thanks, guys.

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

Hi, good morning, guys. Will you quantify the second quarter year-over-year benefit in commodity pricing relative to the $15 million I think you said year-over-year benefit you expect to see in 3Q?

Yes, I think we -- didn't we quantify it? It's 15 in the second quarter and about 15 in the third quarter, again, compared to prior year. No sequential increase or decrease of significance going from Q2 to Q3. We did, however, see some sequential benefit coming into Q2 from Q1.

Okay. And the other question is can you update us on the restructuring actions going on in Europe?

Well, I would tell you that as I said, we completed our negotiations with the work council in France a little bit earlier than we anticipated which ended up pulling forward the restructuring from Q3 to Q2 and they are in the process of implementing now.

Nothing else major to speak of?

Really can't get into that on the call without first, if we had plans, we would need to first discuss them with the work council.

Okay. Thank you.

And we'll take our next question from Margot Murtaugh with Snyder Capital.

Thank you very much. So I was curious--?

Hello, Margot.

Hi. I was curious about renegotiation of the credit line, if you can talk to anything more about what kind of covenants might be put in place as opposed to where they are now, what interest rate you might expect, do you expect to dip into that line? What are your -- you address your liquidity situation more. What are your priorities. You've got cash, you've got COLI you can borrow against, when you look at your different scenarios, okay, can you tell me more about the sources of liquidity and the priorities?

Right now, what we are continuing to do is try to operate the business at breakeven operating income. You and I have gone through the math before. The reason we target that is we believe we are not burning any kind of significant cash if we're operating at breakeven before charges and that's been our objective and so far we're not too far from that. Especially when you factor in our guidance for the third quarter. So through three quarters, we'll be pretty close to that objective.

Restructuring charges uses cash but it also has -- so far, has had a relatively past payback so we've kind of held that aside. Our objective of cash is simply to continue to protect the strength of our balance sheet in this downturn so we've been taking actions in order to operate at the breakeven level in order to protect the already strong balance sheet which as you know includes a significant amount of cash and COLI and consistent with our efforts to protect the strength of the balance sheet, we've decided to pursue negotiations of a renewed credit facility. We've taken that number down, the amount of the facility down for two reasons, one is it's dramatically more expensive than it once was but morn more importantly, we don't see a need, it's more a cushion level of liquidity so we feel comfortable bringing it down to $125 million. The covenants on it, Margot, I would tell you we're pursuing covenants that will give us a higher level of assured access in the bottom of cycles. We're not through the negotiations yet entirely.

Okay. So you're saying you can -- operating income's at breakeven you can maintain your cash level, basically, and not dip into anything else? Or is that what you're saying?

Broadly speaking, yes. If you think about breakeven operating income before charges, if you add back $80 million of-.

Depreciation.

--depreciation and amortization, that gives you enough cash generation to cover CapEx at 40, expense at 20 and dividends at 20 on an annualized run rate.

Okay. So you can't say anything more about what rate you might -- interest rate you might expect on the renegotiated interest line or covenants?

Well, what I expect is a really low one but what the banks are willing to negotiate is not anywhere near that.

Do you have any estimate of how much they might -- what's the going rate? Or how much the--?

Spreads are continuing to tighten. I just really don't know but somewhere in the -- I wouldn't even hesitate to speculate. Let us finish the negotiations.

The capital markets are just starting to stabilize versus a year ago. It's amazing to think, it's just a short year ago when kind of the devil broke loose and seeing some data this week about the stabilization in the banking system, just getting better and better. As a Company, we still have to perform and have those discussions with our lenders about why Steelcase is as solid as it is. As you know, we have a very conservative balance sheet. So from that perspective it's not a hard discussion. Perspective is what are we willing to -- what kind of rate are we willing to take. We're highly motivated to keep that as low as we can, of course.

Well, thanks very much and good luck and appreciate it.

(Operator Instructions). And with no further questions, gentlemen, I'd like to turn it back to you for any additional comments or closing remarks.

Sure, it's Jim Hackett just thanking everyone for the call and remind you that as David was talking about the breakeven position, that this is an extraordinary achievement in an industry like ours, given that the top line did drop and so I'm really proud of the fact that the Company is focused on profitability. Our employees are very committed to that and the kind of decisions that we've made and the long-term strategy that we're taking, we're turning the Company towards a really nice recovery of profitability when the demand comes back with the recession abating. So I just want to underscore that and thank you for your time today.

This concludes today's presentation. Thank you for your participation.