Steelcase Inc (SCS) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to Steelcase's third 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 call over to Mr. Raj Mehan, Director of Investor Relations.

Thank you, Karen. Good morning, everyone. Thank you for joining us for the recap of our third 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 third-quarter earnings release which crossed the wires yesterday, December 17, 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.

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 value 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 yesterday's release. Certain statements made within the release and during this conference call constitute forward-looking statements.

There are risks associated with use of this information for investment decision-making purposes. For more details on these risks, please refer to this morning's release, Form 8-K and 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 will turn the call over to our President and CEO, Jim Hackett.

Thank you, Raj, and good morning to all. As I begin my comments this morning, I want to point to the obvious truth that is recessions have a beginning, they also have an end. And it's a universal truth that as a recession nears its end, there are heightened expectations from all who have struggled through it.

I mean for example, investors are looking for news that demand is picking up or in the interim that we're aggressively moving to improve profitability from the current breakeven status. Our employees are looking for news that the workforce has stopped shrinking. They want us to remove some of the anxiety they feel. In our case, at Steelcase, they also want to know when we will restore base salaries back to their pre-recessionary levels.

Dave tells me that many of you have asked the same question. That decision isn't a simple one that we can tie to a specific line in the sand. It's actually more a matter of my judgment of whether we are through the worst of it. And therefore, it would be time to return pay to normal when I understand that.

For your forward modeling, you should assume reinstatement. It remains too uncertain to commit right now to a specific date. There's a third group with high expectations. These are customers.

They want us to be able to respond quickly and with high quality because they've delayed some important work during the downturn. Now they might be ready to go.

The challenge now with all these groups is to manage the needs of each of them and in turn, keep our eye on the long-term strategy and growth of our business. Let me address some of the variables that shape the expectations I have highlighted here.

Recall our industry lags going into a recession. It takes longer to emerge as well. We used to think about two quarters for this to happen both ways. But this recession was faster on the way in in our industry.

What happens on the way out remains to be seen. I can however confidently say we are beginning to seek factual evidence of trends moving in the right direction. We expected our normal seasonal improvement in the third quarter and that's generally what we saw, although demand was somewhat softer than expected in North America and better than expected in the international segment.

It was our second consecutive quarter of sequential growth in revenue for Steelcase and it drove another quarter of operating profitability even after factoring in restructuring charges this quarter. We are also seeing higher demand at the end of the calendar year, particularly in our seating business.

This is a familiar effect of companies coming out of their doldrums and releasing funding to complete much needed projects and trying to beat the deadline on their budget years. The one caveat to this influx of orders is that the boost is still more muted than in previous years. You know what? It's far stronger than what we experienced a year ago and we take that as good news.

We're also seeing in our release the expectation of a fourth-quarter seasonal dip. Now if you studied our history, the seasonal decline may appear larger than normal but it shouldn't be confused as a complication of our rebound.

Instead, it's a reflection that our business hasn't fully returned to normal. We think we can stay in the state of this improvement, the economy coming back, hit the seasonal downturn and be on the curve of return that we talked about.

We're confident in our ability to finish the year at breakeven operating income before restructuring costs and even before the better than expected rebound in the (inaudible) and this is despite the continuing volatility in the global economy and the associated decline in revenue. A breakeven is only acceptable this time due to such a tremendous hit to our top line.

This is an unusual number. The more I get around other businesses, the more I realize that our people have done a marvelous job of managing through treacherous waters as demand dropped -- you have got to hear this -- 33% from two years ago. Just an amazing change in the top line in a very short time. And throughout this downturn, we've been disciplined about our spending while continuing to invest in our growth platforms.

We expect to meet our breakeven target even with this big downturn in sales from two years ago, while continuing to make important future oriented investment that ensure our position as a global leader in this industry. And my travel recently has been intense and primarily in Europe and Asia to ascertain whether these markets are in a similar timeframe for recovery.

I know you are tracking these other economies, but as it relates to our business, I can suggest that demand in both of these geographies, which likewise were significantly down to the recession, have begun to improve in line with our overall business.

On the demand side again, we have launched a number of new products globally that were previously featured at NeoCon. Woven through these launches is an ethic we strive toward which is to improve our ability to build products on similar platforms while allowing for diversity of features around the world to accommodate local market tastes.

You can get [lost in a recession that you have] some hot products and we think we do right now. In fact these launches in Asia and Europe have been some of the best received new product launches in our history. So while we've been working hard on the cost side of our business, we're also working on these global platforms.

I left China last week having seen that our momentum around this cause is greatly improved. I was really impressed with what they're doing there. Simply put, Steelcase people around the world are making solid sustainable improvements as we continue to prepare for the economic recovery.

But we still believe it's possible that Q1 of this year was the low watermark and we think there's also the possibility of modest growth in the next fiscal year, FY 2011. So we're going to proceed with caution until the visibility improves. You would expect nothing less of us.

Now before Dave takes a closer look at our performance, I just want to make sure that you realize as we approach this holiday season that there's a best wishes to all because so many people have gone through so much kind of suffering this year. The commitments that they had to deal with during this recession have been extraordinary.

So we appreciate your continued interest in our Company and we look forward to better news for all of us as we move into 2010. Now it's my pleasure to turn it over to David Sylvester, Chief Financial Officer, Steelcase. Dave?

Thank you, Jim. Today, we reported breakeven net income for the third quarter of fiscal 2010 which was consistent with the estimate we communicated last quarter. Excluding restructuring costs, operating income of approximately $20 million significantly exceeded our modestly positive estimate. Three factors played a role.

First, sequential revenue growth was better than expected as seasonal patterns pushed third-quarter revenue to $616 million compared to our estimate of approximately $600 million. Second, income from Company-owned life insurance, or COLI, again played a role by delivering $3.8 million more than we expected in the third quarter.

And third, the anticipated increase in operating expenses compared to the second quarter did not materialize due to strong cost control efforts by our employees around the world. From a top line perspective, we experienced sequential revenue growth again this quarter which we believe along with stabilizing day-to-day order levels and the return of modest calendar year end business is further evidence that the first quarter of this fiscal year may have represented the low watermark for Steelcase in this recession.

Compared to last year, revenues declined 24% which is less than the year-over-year declines experienced in the last three quarters, as our industry and Steelcase began to be impacted by this recession in the third quarter of fiscal 2009. While operating income excluding restructuring costs approximated $20 million in both the third quarter of this year and the third quarter of last year, current quarter results included a $5.3 million benefit associated with increases in the cash (inaudible) value of COLI; in the prior year included a $27.5 million charge associated with COLI.

Beyond the COLI impacts, the decrease in operating income was largely driven by loss contribution margins relative to our fixed cost, associated with the significant decline in revenues. Factors which offset a portion of the negative volume effects included benefits from recent restructuring activities and strong cost control efforts, approximately $18 million of lower commodity costs compared to last year, a benefit of nearly $10 million from temporary reductions in employee salaries and retirement benefits which took effect March 2 and $5 million of lower variable compensation costs.

As compared to the second quarter, operating income excluding restructuring costs increased by $3 million. You will recall the second quarter included $12.4 million of COLI income compared with $5.3 million in the third quarter plus the second quarter also included a $3 million benefit associated with a property tax settlement.

Beyond COLI and the property tax gain, the remaining $13 million improvement in operating income excluding restructuring costs was driven largely by the seasonal improvement in revenue and additional benefits from our cost reduction efforts. For your reference, we've included a supplemental webcast slide which summarizes all of the major actions we've taken to reduce our cost structure since the start of this downturn.

While we have substantially completed all of these previously announced actions, which we estimate have reduced our annualized cost by approximately $140 million, we continue to look for additional smaller ways to optimize our cost structure, including the recent opening of an additional white collar shared service center in Monterrey, Mexico; the opening of a small manufacturing facility in Reynosa, Mexico which will assemble various seating projects currently produced in several other facilities; the launch of additional post-merger integration plans related to the Ultra acquisition in China; and the planned fourth-quarter transfer of our metal fabrication business in France to a third party.

In addition, we continue to focus on lea principles in our manufacturing facilities as well across our third-party supply base and within our offices. And we continue to target a global product portfolio that is increasingly based on platform architecture.

The income tax expense recorded in the quarter approximated income before income taxes. This 100% effective tax rate continues to be driven in large part by significant non-taxable income from COLI recorded during the first nine months of the fiscal year.

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 of non-taxable items like COLI can have significant impacts relative to lower levels of pretax income or loss. We are also monitoring various tax related discussions in Washington, including Medicare Part D subsidies, COLI and LIFO; any of which if ultimately enacted in the form of new tax legislation could have a negative impact on our effective tax rate.

Next I'll talk about the balance sheet, cash flow and liquidity. Our cash and short-term investment balances approximated $183 million at the end of the quarter, a $41 million increase from the end of the second quarter which was primarily driven by cash generated from operations. Capital expenditures continue to track toward our target of $40 million or less for fiscal 2010.

For next year, we currently estimate our capital expenditures could increase by approximately 10 to $15 million compared to fiscal 2010 due to progress payments to replace a corporate aircraft and spending associated with the consolidation of our white-collar work force under one campus in Grand Rapids in order to reduce future facility costs.

The aircraft we expect to replace was placed in service in fiscal 2006 and we expect to take delivery of the replacement aircraft in fiscal 2012 and target selling the existing aircraft near the same time. Earlier this week, we completed the negotiations with our bank group regarding the replacement of our revolving credit facility which was set to mature in July 2010.

The replacement facility is unsecured, has a term of three years and provides for borrowings up to $125 million. The facility's financial covenants take into consideration our on balance sheet liquidity, including cash, short-term investments and COLI (technical difficulty) and therefore provide a higher level of access during the bottom of economic cycles.

Specifically, the facility includes a maximum net debt leverage ratio covenant of three to one and a minimum interest coverage ratio covenant of 3.5 to one. Additional terms and conditions are more fully described in the credit agreement included in our Form 8-K which was filed in connection with our earnings release yesterday afternoon.

As of the end of third quarter, our total liquidity position remained solid and includes $183 million of cash and short-term investments, $207 million of COLI cash surrender value and $110 million of available capacity under the new facility after a $15 million reduction for outstanding letters of credit. We anticipate setting up a separate bilateral credit agreement in the coming months in order to provide for letter of credit capacity outside of the revolver which will serve to further enhance our liquidity profile. Now I will discuss the operating results for each of our segments and the other category.

North America revenue decreased by 26% compared to the third quarter of last year which reflected an 11% decline from fiscal 2008. Sequentially we experienced a modest improvement compared to the second quarter but it was mostly fueled by growth in consolidated dealer revenue where profit margins tend to be lower than the North America average.

Orders in the third quarter decreased compared to prior year at a rate similar to the revenue decline. Ending backlog was down slightly more than that as we ate into backlog early in the recession one year ago. The decline in orders was felt across most regions and product categories.

Our day-to-day business in the quarter showed signs of firming up. After three straight quarters of falling faster than our project business, on a percentage basis compared to prior year, day-to-day orders declined at a more moderate rate than project orders and approximated the second quarter in terms of total dollars.

Across vertical markets, growth in federal government orders moderated during the third quarter after several quarters of double-digit growth. However, we was pleased to win several large high-profile projects that we expect to be ordered and shipped in future quarters, mostly next fiscal year. And note that only a portion of our revenue growth in this sector has driven by the large multi-year contract with the Department of Defense we secured one year ago as we anticipate much of the volume from that contract will begin shipping next year.

Health care and higher education orders declined at a higher rate than year-over-year comparisons in recent quarters, while order declines in the financial services sector which entered the recession a full year prior to other vertical markets continued to moderate during the quarter. We remain bullish on the prospects of our Nurture health care brand and believe our efforts in higher education have the potential for similar results.

On customer visits, Terry can get into more color if you're interested. But in total, they were up again this quarter, both versus prior year and sequentially versus the second quarter.

Regarding pricing, project activity remains highly competitive, especially in the federal government sector. Compared to the prior year which included a temporary commodity surcharge in North America, we estimate pricing impacts in the third quarter reduced our year-over-year gross margins by a few million dollars.

Operating income excluding restructuring costs increased $14 million compared to the prior year despite a $115 million decrease in revenue. COLI played a big role as North America results included $5 million of COLI income in the current quarter and a $28 million charge in the prior year.

Beyond COLI results, the positive effects of cost reduction efforts and lower commodity costs contributed significantly to offset a large part of the negative contribution margin effects associated with the lower revenue. 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 second quarter, North America operating income excluding restructuring costs decreased by $13 million, driven largely by lower COLI income and a favorable property tax settlement in the second quarter. The sequential improvement in revenue did not generate a significant amount of additional contribution margin as it was entirely driven by low profit consolidated dealer revenue.

In the international segment, sales decreased by 24% compared to the prior year quarter. Currency translation had the effect of increasing revenue by approximately $14 million as compared to the prior year. Adjusting for the positive effect of currency translation, we estimate the year-over-year organic decline in the international segment approximated 28% in the third quarter.

International orders in constant currency declined approximately 26% compared to the prior year. Most of Northern and Eastern Europe, Africa and Latin America declined much more than that while France, Spain and Morocco declines were much less than the average.

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. Germany experienced order declines close to the international average during the third quarter but we believe that market is beginning to stabilize, finding a bottom in this recession.

International reported operating income excluding restructuring items of $3 million compared to operating income of $20 million in the prior year. The $17 million decrease in operating results compared to last year was largely driven by the reduction in volume adjusted for currency translation effects approximated $71 million.

Cost reduction efforts were only able to offset a portion of the lost 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. In addition, I want to highlight that our quarterly results in the UK continue to be negatively affected by a weak pound sterling relative to the euro, as our supply chain leverages our eurozone manufacturing model.

In addition, total international results continue to fund our expansionary efforts in China and India. In the aggregate, these businesses reduced our third-quarter operating income by approximately $6 million on a fully allocated basis.

The other category which includes the Coalesse Group, PolyVision and IDEO reported a decline in revenue of 17% 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 of 6% and 15%, respectively.

PolyVision performance continues to benefit from an exciting new product called eno which we believe is a breakthrough advance in interactive whiteboard technology. Compared to the second quarter, Coalesse revenues were higher but almost entirely offset by a decline of PolyVision which was coming off its peak summer period as school renovations often occur during summer vacations.

Excluding restructuring costs, the other category reported a small operating profit which compares to small operating losses in the second quarter as well as in the third quarter of the prior year. Compared to the third quarter of last year, loss contribution margin associated with the decline in revenue was more than offset by the benefits of restructuring actions and various cost control measures implemented over the past four quarters.

We are still experiencing some disruption associated with the consolidation of manufacturing activity in the Coalesse Group. In addition, PolyVision recently finalized the exit of its remaining public bid contractor whiteboard fabrication business in North America and is in the process of shedding a small breakeven business. Thus we believe additional benefits may accrue over the next few quarters in the other category. Now I will review our outlook for the fourth quarter of fiscal 2010.

Overall we expect to report approximately breakeven operating income excluding an estimated $6 million of restructuring costs. We currently estimate revenue to reflect a somewhat larger than normal fourth-quarter seasonal decline and approximate $570 million which we estimate represents our current breakeven point. Based on a euro to US dollar exchange rate assumption of 1.45, this revenue estimate includes approximately $20 million of favorable currency translation effects compared to the prior year.

In addition at the end of the third quarter, we de-consolidated a dealer which will have the effect of decreasing revenue by approximately $5 million in the fourth quarter compared to the prior year. It is possible that revenue could follow a more normalized seasonal pattern and decline less than our estimates compared to the third quarter but it's also possible that ongoing economic uncertainty could result in a seasonal decline that is higher than we have estimated.

Taking into account our revenue and operating income estimates, we expect to report approximately breakeven net income for the fourth quarter of fiscal 2010. This net income estimate assumes we will record a tax benefit to using an effective tax rate similar to the first nine months of the fiscal year which again remains highly sensitive to changes in non-taxable items like COLI income in relation to relatively small pretax income or loss amounts.

COLI income remains subject to volatility in the capital markets and thus we have only modeled a normal level of COLI income or approximately $2 million in the fourth quarter estimate. With respect to commodity costs, we are expecting a modest second sequential increase in the fourth quarter compared to the third quarter but compared to the prior year, we estimate fourth-quarter commodity costs will decrease our global costs by approximately 10 to $12 million.

Now we'll turn it over for questions.

(Operator Instructions) Budd Bugatch, Raymond James.

Good morning, Jim, Dave, Raj, Terry, Mark. Happy holidays to everybody. The day-to-day business you say has gotten a little bit of the decline in moderated versus the project business. Could you maybe put a little bit more color on that in terms of percentage of revenues and how you're thinking about that for the fourth quarter and maybe for next year?

Terry?

Sure; hey, Bud. We had about three straight quarters of [falling] faster than our project business on a percentage basis versus prior year and then that moderated in the third quarter. And that's because the total continuing orders on an absolute dollar basis were held up versus second quarter and actually higher than fourth quarter last year [into] first quarter. So it does feel like we've seen a bottoming out of that business. We actually saw a little bit of the typical year-end surge in continuing seating order orders that we didn't see last year.

And percentage of business -- and I've got another question.

Yes, percentage of business of continuing a project, if you look at our business in three buckets; you have continuing day-to-day business, you have project business and then we have marketing programs that people can order off of. When you think about how they break down, roughly 35 to 45% continuing and project, they both fall in that range. They differ between the time of year but within that range.

With the balance being the marketing programs?

Yes.

(technical difficulty) talk about customer visits being up. That perked my ears up with some other recent information that I've gotten. Can you kind of give us some color on that?

I will let Terry get into the details. It's certainly been driven by -- broadly across our sectors? But Terry, why don't you share with them some more color?

Sure (technical difficulty) total customer and (inaudible) visits, they were up by high single digits versus prior year and strong double-digit sequentially from the second quarter. We've been talking a lot about our growth verticals.

Growth vertical visits remain strong and we're flat versus second quarter, although down some from a really strong quarter last year. But the big news in the quarter is that outside our three largest growth verticals that we track, we saw strong double-digit growth both sequentially and versus the prior year.

I'm not sure I would equate that to an immediate increase in project activity, but what we see going on is our customers are very interested in our new products and the insights behind them. And therefore while things are a little bit slower and they have not definitively canceled or indefinitely deferred their projects, they're spending the time to come in and hear about it.

So given the fact that many T&E budgets have been cut by organizations, I know ours is looking at it more carefully and I suspect others have over this last year, what accounts for that? Were you bringing the customers in with the airplane? Was that something that helped to drive the positive year-over-year comparison?

That could be a factor. They don't all come in through our corporate aircraft but it could be a factor.

It was probably a small factor in some of the A&D business. We've got a lot of interest in our new showroom here and our new products and having a plane may have helped that a bit.

Well thank you and good luck. Again, happy holidays to everybody there, Jim and Dave and Raj and Terry and Mark -- who did I forget? I can't remember.

Matt McCall, BB&T Capital Markets.

So, Jim, I think I heard some modest change in some language maybe. I think you said we still think it's possible that Q1 was the low watermark. I know we're all trying to predict the future here. But if I remember, we have talked in the past that we really felt like that Q1 was the low watermark here. Did you change that language on purpose or am I reading too much into it?

I think you are following the sense that I'm trying to leave which is this lagging effect that we get going in and coming out of the recession is a bit vexing when it comes to trying to predict our next two quarters. And as you heard me say, we went in faster, the precipitous nature of that financial problem which tangentially I just should say to everybody, in speeches to employees we talk about how really dramatic a year ago was.

We tend to forget how close our system was, that being the financial system, to being in a mess and how much better it is a year later. I mean it's really back on its feet and importantly, going to be part of how we get this thing back going again. So if you just kind of think about that, if you can step back and think about the contrast of how tough it was and how much more stable it is and you couple that with the lagging effect we tend to have, you add a little mix of what happens with seasonality which I talked to my peers in the industry and we will feel that; you add a pinch also of the sobering comments that are coming out of the job market and the federal government's attempt to stimulate jobs and you start to say well, this recovery is going to be slower than all would have wished for a year ago.

But we're happy that our wish was granted, that we're stable and we see now even though it's slower, it is actually starting to pick up. And so that's why we want to kind of declare that we think it was a low watermark. We're telling our board, our employees that and we are seeing evidence in these customer trips, in the activity from large global accounts in terms of the things they're talking about doing, in terms of the plans we hear them starting to engage in.

So now when does it all convert? I've got to let the smart people, Dave and Mark, kind of help me understand when that starts to show up in the numbers. But that's my top level view of why I'm optimistic today of where we are in this last year.

Matt, just to be clear, we have never said definitively that we thought first quarter was the low watermark. We've said we think it may have represented the low watermark based on what we were seeing and we continue to see evidence that suggests that's a real possibility. But we just can't comment in a definitive way because we're still a bit in the mix of things here.

Sure, sure I was just making -- that's what I was asking. I know we can't predict the future. I was making sure that there wasn't any change in lanes there on purpose and trying to say any more than what you just said. I definitely get it. Thank you.

I want to switch to health care. So one of your competitors made a big acquisition a couple quarters ago. From a product perspective, I try my best to get a good comparison on what you offer, what they offer, what everyone else offers.

Trying to ramp the learning curve or move up the ramp of learning curve here on health care. Can you talk about maybe your strategic gains here too? (inaudible) how far along the Nurture product lineup has come, are there still gaps there or can you pretty much serve all the needs of your clients?

Well let me say, Matt, that when you are in business and you see a move by a competitor, you do obviously see that and understand that, but we're focused on what we can do and what we can control. It validates that this segment which we invested in -- and remember, in the last recession, we were starting investment in Nurture. So that made us feel pretty good that we were on the right strategic track.

The results of Nurture have been very good. We're glad we have it in this recession. One of the unique things -- the guy that actually started Nurture for us, Mike Love, is retired just now and we've handed this off to Kyle Williams, a very able guy in the Company.

And Mike -- we were just reminiscing with the board this week about Mike's accomplishments. One of the things that Nurture did very uniquely was bring the inspiration of understanding user behavior and perspective in what we learned in office design and office product development into health care.

The categories at large needed a lot of work. And so there's still lots to mine there in terms of potential and we systematically have been attacking parts of it. So, yes, there's more to come; more using those principles and this is why that segment is one of the segments that Terry was referencing where the visits were very high to see us. So I think Nurture's future is very bright and I think there's a lot more to gain there as we continue the strategy that got it started.

Okay, okay. And I apologize for breaking the two question rule but I just wanted to follow up on one of the previous questions, so maybe that doesn't count.

So when we're talking about the continuing day-to-day versus the project, can we then take it a step further and then say that are projects necessarily synonymous with large corporations? And I don't think day-to-day necessarily means it's a small business. I'm trying to get an idea of what your trends look like from a small business perspective and maybe you can speak -- maybe it's Turnstone that's the answer there.

But versus those large corporations, you have seen some separation (technical difficulty) sentiment indicator small business optimism is still very weak. So your confidence have strengthened. So are you seeing those types of sentiment trends play out in the different customer groups from a size perspective?

You're at a level of detail that I'm not entirely familiar with. I'm looking across the table here at Terry (technical difficulty) anything concrete enough that he wants to share. But, Terry?

You remember, Matt, the last downturn, the small-company business fared better than large company. We haven't seen that in this downturn. We haven't gone into great detail, but it feels pretty comparable on how large versus small companies are performing.

Comparable meaning small business has performed better?

About the same as large business.

About the same this time, so would that be in [lifetime] it outperforms? Is that what you said?

No, about the same -- small companies performed about the same as large companies. The stories are more about vertical markets in this downturn where some of the vertical markets performed better or worse.

Mark Rupe, Longbow Research.

Good quarter. As it relates to fourth-quarter revenue guidance, do you expect similar trends from kind of a geographic point of view? I know you kind of mentioned on the call -- I believe you mentioned on the early part of the call that you experienced softer demand in North America than you expected and a little bit stronger internationally. Just curious to see if you have any color on kind of the fourth quarter thought process for those two segments.

(multiple speakers) willing to share in great detail. The only thing I would say is December tends to be very strong in Europe and it's similar in North America and then both tend to fall off in January and February. So, no, I wouldn't take what we highlighted about the third quarter and continued to run it out.

Okay. As it relates to the pricing environment, has that changed in the third quarter at all? Does it accelerate at all? Does it relate -- you mentioned federal government. I didn't know if there was kind of a seasonal mix thing that's going on there or do you expect that kind of price environment to kind of maintain at current rate?

I would say if it changed, it changed modestly. It modestly became more competitive relative to the second quarter.

Is that predominately North America or is that going on everywhere?

It's everywhere.

Okay, perfect. Thank you. Good luck.

(Operator Instructions) Todd Schwartzman, Sidoti & Co.

Just a couple of points for clarification. First, pardon me on this, but when you talk about day-to-day versus project business, are those characterized -- is that defined by order size or by customer size or is it a mix of the two?

It's really defined by many of our customers have ongoing contracts that they could price off of small orders and they have contracts that get renewed annually or biannually. So we track what gets sold off of those specific continuing agreements.

So is the line in the sand the $0.5 million, $1 million, something north of that or what?

No, it's really about the nature of the buy, that we have a continuing agreement where people can buy one desk or workstation or 100s. But once it gets to be a certain size, it depends on the customer (inaudible) go above to a project, special kind of quote.

So it's the nature of the order?

Right, so if you are selling out or changing on a floor, that's probably going to be a continuing agreement. If you're renovating a building, that's probably going to be a project and get a special quote.

When you talk also about customer visits and the growth that you have seen both I believe you said sequentially and year-over-year, is that to all facilities?

It's predominantly to the Grand Rapids work lab here in Michigan.

You haven't in recent years changed your way of measuring that, it's been predominately to Grand Rapids?

We do measure our European trips and they have been very strong as well. The data that we gave you is primarily Grand Rapids trips. When Bud was I think comparing that with others, he's probably thinking domestic. But we built a new headquarters in Europe about 2.5, three years ago. It's been very active in customer visits.

That's good to hear. And the orders from the federal government you mentioned moderated after several quarters of double-digit growth. Did you mean to say that the growth slowed or is there somewhat of a year-over-year decline there?

It's more year-over-year comparison percentages. So the growth rate moderated from the high double digits we had seen over the last couple of quarters. That said, we won some fairly significant projects in the quarter that we expect to be ordered and shipped in future quarters (multiple speakers) digits.

So you did see growth year-over-year?

Oh, yes.

Okay, great. Lastly, as far as product development, what can we look forward to hearing about next June at NeoCon? Anything specific by either individual product or categories?

Well there's a little bit of drama there that we love to keep under wraps. But I would share with you that what you have seen come in successive sessions from us at NeoCon is that in the visual language of the product -- this is a term we use that frankly has been a concerted effort to change and ramp up the quality of design, effective design in our product engineering and conceptualization has gotten much better.

So there's some categories that needed fix where we didn't think they were very good and those have improved. There's also things like (technical difficulty) which you know about which were new category ideas and there's other things that we can do off of that platforms that we are excited about. Then finally, there's categories like seating and storage which continue to have opportunities for growth and anything innovative in there does well. So I would leave you broadly like that and then ask you to come see it.

At this time, there are no further questions. I would like to turn the conference back over to Mr. Hackett for any additional or closing remarks.

I kind of left that impression in the beginning which was to just ask us to remember it is holiday season. I want to wish the best holiday season to all. Remember those that had a tough year, as a lot of people that have suffered. You have a lot of people overseas that have dedicated their life to the military and they are away from their loved ones and so we want to think of them and people at Steelcase have had a great impact on our results this year and so I appreciate all they've done as well. Best to all.

Thank you. Once again, that does conclude our conference for today. Thank you again for your participation.