Steelcase Inc (SCS) 2010 Q4 法說會逐字稿

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

For opening remarks and introductions, I would like to turn to the call over to Mr. Raj Mehan, Director of Investor Relations.

Thank you, Jeff, and good morning, everyone. Thank you for joining us for the recap of our fourth quarter and fiscal 2010 financial results.

Here we with me today are Jim Hackett, our President and Chief Executive Officer; Dave Sylvester, our Chief Financial Officer; Mark Mossing, our Corporate Controller and Chief Accounting Officer; and Terry Lenhardt, Vice President, North America Finance.

Our fourth quarter earnings release crossed the wires 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 on the site later today.

In addition to our prepared remarks, we will respond to 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. Reconciliation to the most comparable GAAP measures are included the earnings release and webcast slides.

At this time we are incorporating by reference into this conference call and subsequent transcript the text of our Safe Harbor statement included in this morning's release. Certain statements made within the release during this conference call constitute forward-looking statements. There are risks associated with the use of this information for investment decision-making purposes. For more details on these risks, please refer to this morning's release on Form 8-K, the Company's 10-K for year ended February 27th, 2009, and our other filings with the Securities and Exchange Commission. This webcast is a copyright production Steelcase Inc.

Now with those formalities out of the way, I would like to turn the call over to our President and CEO, Jim Hackett.

Thank you, Raj. Good morning to everyone on the call.

We are reporting to you the results of the fourth quarter at Steelcase. But I would like to establish that my comments from the third quarter in our last call still apply. On that call, I established a simple framework, that recessions progress through a beginning, middle and an end. We felt then, as we do now, that we are seeing signs that the recession is bottoming out in our industry, and that there are a number of factors indicating the start of a recovery.

My recent conversations with customers and decision-makers all over the world, frankly, support our belief that modest growth is possible in our coming fiscal year 2011. Now I'll talk about this confidence in a moment, but first let me address the quarter. Now as we consider the fourth quarter results, we do know going in that this is a season for suppression of demand due to the Holidays, potential bad weather and political wrangling. We feel that the effect of all of those in the past quarter did hit our fourth quarter results. That said, and despite my pride in our people managed through a very difficult year, and despite the anticipation of the better days I mentioned, I am disappointed in the fourth quarter. While we had expected that the seasonal decline we normally see in the fourth quarter would be larger than usual, this decline was even greater than we expected. We fell slightly short of our break-even goal for the quarter, and therefore the full year. Now as the details will show, some of this result also came from year-end tax adjustments, along with some unusual seasonal patterns. Thus, it should not be interpreted as dampening the earlier comments that the end of this recession may be near, or our business will improve in the future.

Our industry is always slower to come out of a recession. This is a truth, and there still are some troubling signs of the global economic recovery. But we feel good about our ability to benefit from the coming recovery. We have continued to invest in new products and new markets during the downturn, and we've enjoyed modest growth in North America in some categories like seating in the fourth quarter. and there is other evidence that demand is returning, albeit slowly.

I want to talk briefly about a few other things that inspire confidence. First, the continued interest in our products designed to support collaboration is very strong. We've invited some customers to test drive our newest product, mediascape. It's our platform for connecting with people, information, and the culture of a Company, in the way they handle conferencing, and this test drive has been highly affective. In fact, a solid majority of the customers who sampled mediascape didn't want to give it back at the end of the trial period. They wanted to buy it. We have one global customer who is busy putting mediascape rooms into some of its key locations around the world, to enable hi-def video conferencing. We've also had one of the top business schools in the country commit to using mediascape throughout their newly constructed facility. Look for this facility to get intense press coverage as they announce this transaction.

At the same time, we just launched our Campfire Collection from the Turnstone brand. This also about collaboration, but in a much more casual and, candidly, lower-cost way. Our dealer network is responding very positively to the range of solutions that we are offering right now between Turnstone and the Steelcase brand.

My second reason for confidence is the education market, and there are two proof points here. We have been very pleased with reaction to the new eno board introduced by our PolyVision subsidiary. It's creating a new interactive learning experience in the K through 12 classrooms, and we think there is going to be applications in corporate environment meeting rooms as well. There is a unique competitive advantage with this product. It's that the board is interactive, but the board itself needs no external power supply. Rather a unique technology embedded in the porcelain on the board allows the projected image to depict pen strokes from a special pen. Simply put, the environment doesn't have to be highly altered to adopt the board in a classroom.

We've talked about our intensified approach earlier to higher education, and this includes colleges and universities as noted, and they've been an important segment for us with our existing product portfolio. That segment is very healthy. Later this year, we will be rolling out Insight-based products that were specifically designed for the classroom, an area that has lacked any sort of meaningful innovation for decades. The old sage on the stage classroom I know that many of us were educated in, is going to change. And this is similar to our strategy in health care, where we started with the administrative office business and expanded into clinical spaces with new products, based on our ability to observe, analyze and deliver user-centered solutions.

Health care leads me to my next point, which is about the opportunities available in emerging markets around the world. We've invested in our distribution channels in this region, and it is paying off. We've won significant health care business in the Middle East, with our Nurture, or our health care division. Although -- excuse me, although Asia is relatively small part of our business, it's really clear that this part of the world has emerged sooner out of the recession than North America or Europe. Today we are better positioned than we were a year ago to increase share in China, given our acquisition of the Ultra brand in China. It look longer than I would have liked, but now we can report to you that we've integrated post the merger Steelcase and Ultra, both in sales and operations.

Adding to my confidence is the progress we are making in reinventing our business model, and improving what we call our fitness. Our reductions this past year in operating expenses are partially a result of these activities. We just held the grand opening of our second global tiered service center, and the Steelcase employees in Monterey, Mexico are helping us be more efficient, more agile and more committed to customers. Contributing significantly to the expense reduction were across-the-board salary reductions taken for a year by our people in many parts of the world. I am really proud of what they did to help the Company through the recession. In a year when the revenue declined by approximately 30% in one year, we made necessary reductions in our workforce, and we asked those who remained to take that salary reduction, and didn't have one complaint from one employee about that. They held their heads high, and remain committed to the Company, our customers and our shareholders. I thank them from the bottom of my heart.

We made the decision to restore the salary cuts after one year, because first we didn't feel it was fair to use their base salaries as a hedge against what is now going to be a slow recovery, and secondly, we are seeing improvements. We will make decisions on restoring other temporary cuts as we monitor the speed and the size of the recovery. Now as Dave Sylvester will discuss, we don't see the first quarter completely unburdened by the recession, but let's get it across that we are more optimistic that we have bottomed in this cycle, and have reasonably good prospects to post a little growth for the full year.

Thank you for your continued interest in Steelcase, and now I will turn it over to Dave Sylvester, our Chief Financial Officer. Dave?

Thank you, Jim.

As Jim stated, the fourth quarter results were challenging. Seasonal order volatility in some of our geographic markets was more severe than anticipated, resulting in lower revenue and operating results compared to the estimates we communicated last quarter. In addition, we adjusted our valuation allowances associated with deferred tax assets, and we incurred higher restructuring costs as we accelerated a few smaller initiatives. The result was that we reported a fourth quarter operating loss excluding restructuring costs of $10 million, and a net loss of $14 million.

As you know, we have dedicated ourselves during this downturn toward making a balanced approach between managing short-term cost reductions in our business model, and continuing to invest in our long-term business strategies. On the one hand, we have taken significant cost reductions, and rest assured, we continue to aggressively pursue opportunities to further reduce our cost structure. On the other hand, we remain intent on protecting our future through continued focus on our growth initiatives, and continued investment in driving unparalleled customer experiences. In our ongoing pursuit of global competitiveness, we continue to identify opportunities to improve our organizational fitness. In fact, we mentioned during last quarter's call a number of smaller actions which had been initiated in the third quarter, and during the fourth quarter we initiated a few others. While none of these actions are material on their own, in the aggregate we estimate that they will serve to reduce -- further reduce our cost structure in fiscal 2011 by $6 million to $8 million. We remain dedicated to our balanced approach, and are confident that it will position us to perform well in the upcoming industry recovery.

Turning to our fourth quarter results, from a top line perspective year-over-year revenues declined 17%, adjusted for currency differences and deconsolidation effects, which is less than the year-over-year declines experienced in the last several quarters, as our industry and Steelcase began to impacted by this recession in the third quarter of fiscal 2009. On a sequential quarter basis, our revenues in constant currency, as adjusted for deconsolidation impacts, decreased by approximately 9%, which was more than we anticipated.

Revenue in North America, and in our largest markets in Europe, France and Germany, was relatively consistent with our expectations; while revenue in Spain, Asia and the UK fell short of our internal estimates. In addition, revenue in the Coalesse Group suffered from very soft orders early in the quarter, but their order pattern has since improved.

The fourth quarter operating loss, excluding restructuring costs of $10 million, represented an improvement of approximately $70 million compared to last year, which included $75 million of non-cash impairment charges. In addition, the current quarter results included a $3 million benefit associated with increases in the cash or undervalue of COLI compared to $10 million charge in the prior year. Beyond the impairment and COLI impacts, the remaining decline in operating results was driven largely by the loss contribution margin from the significant decline in revenue. In addition, the fourth quarter of last year included $11 million of reversals in variable compensation accruals linked to impairment charges and overall results for the quarter.

Other factors which offset a portion of the negative volume effects included benefits from restructuring activities and strong cost control efforts, approximately $11 million of lower commodity costs compared to last quarter -- or last year, sorry, and a benefit of nearly $10 million from temporary reductions in employee salaries and retirement benefits.

As compared to the third quarter, the $30 million decline in operating results, again excluding restructuring costs, was driven largely by the seasonal decline in revenue. Lower COLI results accounted for approximately $2 million of the decline, while the balance was linked to increased operating expenses. You will recall our reference to deferred spending patterns earlier in the year, and our estimation that operating expenses in the first half of the year benefited somewhat from deferral of spending activity to the back half of the year. We described some of this effect as simply a function of project timing, and some as likely due to the distraction of restructuring activities, which has been very high for several quarters. Well, in the fourth quarter we began to feel some of this effect as project activity, primarily related to product development, increased. In addition, we incurred additional bad debt expense in the quarter in response to a few specific issues in North America, and we recorded higher operating expenses in the international segment due to the catch up of the one month's reporting lag at Ultra, plus we recorded various year-end accrual adjustments in North America and Europe.

The income tax benefit recorded in the quarter was reduced by approximately $6 million of charges related to valuation allowance adjustments associated with tax loss carry-forwards. This adjustment, along with lower operating results, had the effect of lowering our effective tax rate estimate from 100% at the end of the third quarter to 56% for the full fiscal year. This relatively high effective tax rate continues to be 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. In addition, the health care reform legislation in its current state would have a negative impact on our effective tax rate, as Medicare Part D subsidies are expected to be taxed under the current proposal.

As of the end of the fourth quarter, our total liquidity position remains strong, and includes $179 million of cash and short-term investments, $209 million of COLI cash or under value, and $86 million of available capacity under our new credit facility. Capital expenditures approximated $9 million during the quarter, or $35 million for the full fiscal year. Reported capital expenditures for fiscal 2010 exclude the final $15 million progress payment related to delivery of a new corporate aircraft in the first quarter, as we received net proceeds in connection with the trade-in of the aircraft which was replaced. For next year, we estimate our base level investments will approximate $40 million to $45 million. Plus we expect to make $9 million of progress payments towards replacement of our second aircraft, and we will incur incremental capital expenditures as we begin the consolidation of our white collar workforce in Grand Rapids to one campus.

Moving onto the operating results for each of our segments, and the other category, as I said, North America revenue was consistent with our expectations. Revenue decreased 20% compared to the fourth quarter of last year, with positive currency translation effects being essentially offset by negative dealer deconsolidation impacts. Sequentially, sales decreased by almost 11% compared to the third quarter, reflecting a somewhat larger than normal seasonal decline.

Orders in the fourth quarter compared to the prior year declined at a mid single-digit rate as expected, and patterns within the quarter also generally matched expectations. Orders remained at their seasonal lows throughout December and January, but rebounded in February, as the beginning of a seasonal uptick drove a double-digit increase over January. Orders have continued to strengthen through the first three weeks of March, similar to seasonal patterns we have experienced in previous years. Our March to-date average daily order rates are nearly 30% higher than the average for the fourth quarter, and almost 20% higher than the February average. More often than not, this strengthening pattern softens somewhat during the middle of the quarter, before rebuilding through the summer months.

Within our product categories, seating was the strongest performer during the quarter, with a number of project wins driving single-digit order growth over last year. Across vertical markets, our historical core office verticals appeared to firm up in the quarter, with orders declining at a more moderate rate than the North America average. High-tech was the leader within this group, posting solid order growth in the quarter, while the technical professional sector declined at a higher rate than average. The growth in high-tech was driven by an increase in orders from some of our largest customers in this segment.

Within our group of growth verticals, government, education, and health care, Federal Government orders decreased slightly compared to prior year. With sizable -- with several sizable projects won but not yet ordered, we remain confident that this vertical market will generate solid growth during the upcoming fiscal year. Total orders within the education and health care segments, which have grown into two of our larger vertical markets, declined at a higher rate than average in the quarter, as both were late entrants into the recession. We continued to invest in, and remain confident in, these two segments. Customer visits were up again during the fourth quarter as compared to the fourth quarter of last year, growing at a low single-digit rate.

Regarding pricing, project activity remains highly competitive, especially in the Federal Government sector. Compared to the prior year, we estimate pricing impacts in the fourth quarter reduced our year-over-year gross margins by a few million dollars. The decline was due to the removal of a temporary commodity surcharge that was in place last year.

Operating income, excluding restructuring costs, was flat compared to the prior year, despite a $74 million decrease in revenue. COLI played a role, generating $3 million of income in the current quarter compared to a $10 million charge in the prior year. We also incurred $12 million of asset impairments during the prior year quarter, but this was largely offset by reversals in variable compensation accruals linked to the overall results for the quarter.

Beyond COLI results and impairment charges, the positive effects of restructuring activities and cost reduction efforts, lower commodity costs, and strong plant performance, contributed significantly to offset most of the negative contribution margin effects associated with lower revenue. We continue to strengthen our business model, which will benefit greatly from sales growth as our industry recovers from the current downturn. As compared to the third quarter, North America operating income, again excluding restructuring costs, decreased by $19 million, driven largely by lower revenue and lower COLI income. Plus our operating expenses increased sequentially, due to product development activity, and $2 million of additional bad debt provisions recorded in the fourth quarter, related to a few issues within our dealer channel.

In the international segment, sales decreased by 9% compared to the prior year quarter. Adjusting for currency translation effects, we estimate the year-over-year organic decline in the international segment approximated 14% in the fourth quarter. International orders in constant currency declined approximately 15% in the quarter, compared to the prior year. Germany, France, the UK and Morocco declined more than that; while Spain, northern, eastern, central and southern Europe as a group, and Asia Pacific declined less than the average. The Middle East and Latin American were bright spots, posting order growth compared to the prior year, and we remain encouraged by the prospects of increased activity over the balance of the year in these two markets, along with the Asia Pacific region.

In addition, we are seeing increased project activity in France and the UK, and the stress of this downturn on the competitive landscape in Spain is beginning to result in some customers moving towards larger, financially-sound office furniture companies like Steelcase. The German market, on the other hand, remains somewhat uncertain, as it was one of the last to enter the recession, and as a result it could take another quarter or two to determine if it has found the bottom of its decline.

International reported and operating loss, excluding restructuring items, of $4 million compared to an operating loss of $2 million in the prior year. The decrease was largely driven by the reduction in volume, offset in part by cost reduction efforts, the pace of which is tempered in our larger international markets by the process of negotiating with the related work councils.

In addition, I want to highlight our results in the UK continued to be negatively affected by a weak pound sterling relative to the euro, as our supply leverages our eurozone manufacturing model. In addition, we continue to fund our expansionary efforts in China and India. In the aggregate, these three businesses reduced our fourth quarter and fiscal 2010 operating income on a fully allocated basis by approximately $6 million and $21 million, respectively, which compares to $8 million and $18 million of losses in the prior year quarter and fiscal year, respectively.

In the UK, we have taken significant actions to reduce our cost structure, though our results will remain susceptible to the pound to euro exchange rates. And in China, we have completed the consolidation of Steelcase and Ultra manufacturing in a single facility in [Donghuang], and we are in the process of merging the two sales organizations, showrooms and product development teams, which should reduce our losses at current volume levels.

The other category, which includes the Coalesse Group, PolyVision and IDEO, reported a decline in revenue of 12% compared to the prior year. The Coalesse Group experienced a 26% decline in revenue, while PolyVision grew revenue at 15%, and IDEO revenue was flat compared to last year. As I mentioned earlier, the Coalesse Group suffered from very soft orders early in the quarter, which have since improved. At PolyVision, their results continue to benefit from an exciting new product called eno. Compared to the third quarter, Coalesse experienced a 23% seasonal decline in fourth quarter revenue, while IDEO and PolyVision were much closer to flat.

Excluding restructuring costs, the other category reported a $2.5 million operating loss in the fourth quarter, compared to a $69 million operating loss in the prior year, which included $63 million of non-cash impairment charges. Setting aside the impairment, operating results improved year-over-year despite the decline in revenue, due to benefits of restructuring actions and various cost control measures implemented over the last four quarters.

Regarding our outlook for the first quarter of 2011, we expect to report revenue between $520 million and $540 million. This compares to $546 million in the first quarter of fiscal 2010, which included $14 million from dealers that have sense been deconsolidated. The revenue estimate is based on a euro to US dollar exchange rate assumption of $1.35, which compares to average rate of $1.42 in the fourth quarter, and $1.33 in the first quarter of the prior year. In addition, this estimate is based on seasonal patterns which typically result in first quarter revenue being flat to slightly lower when compared to the fourth quarter. For sequential comparison purposes, fourth quarter revenue included $14 million of revenue from dealers which will no longer be consolidated in the first quarter. Giving effect to the recent deconsolidations, and assuming euro to US dollar exchange rate of $1.35, we currently estimate the level of revenue necessary for us to generate break-even operating income before restructuring costs is proximately $550 million per quarter.

With respect to commodity costs, we are not expecting much of a sequential increase in the first quarter compared to the fourth quarter, and compared to the prior year we estimate frist quarter commodity costs will decrease our global costs by approximately $4 million to $6 million. As a result of these factors, we expect to report a first quarter net loss of $0.05 to $0.09 per share, including approximately $2 million of pretax restructuring costs.

As we said in the release, these estimates do not include any potential impact of the health care reform legislation recently approved by the US Congress. The proposed legislation includes a provision which will subject the Medicare Part D subsidy to taxation. If the legislation is enacted as proposed during the first quarter, the Company may be required to record additional deferred tax expense during the quarter.

It's been a long five-plus quarters since the recession was first felt within our industry, but we are finally seeing nascent signs of a recovery. Throughout the downturn, our goal has been to be ready to take full advantage of the eventual recovery. On the one hand, we have taken and will continue to take significant steps in leaning-out our business model; and on the other, we have launched a significant number of exciting, new and innovative product solutions during the past year.

Now we will turn it over for questions.

(Operator Instructions)

Our first question come from Budd Bugatch from Raymond James. Your question, please.

Hello, Jim, hello Mark, and everybody there.

Hi, Budd.

I guess I want to go to make sure I understand what the expense structure is going to look like as you go forward. As you said, there was some deferred spending and expenses that I guess didn't show up in the third quarter that did in the fourth. It looks like, at least to our expectations, took the numbers below what we were looking for. Can we talk a little bit about what -- I think you had said before about $140 million were cost savings done, and it looks like now you may put back about $20 million of temporary employee compensation cuts, is that right? And what's the kind of run rate of operating expenses going forward, and how should we think about the variable nature of those and the fixed nature of those?

Let me -- I'm going to let Dave help you walk through the numbers, but let me give you an abstract level as principal. Please don't take it as a lecture at all, it's just I want to share with you the way I think about this, that the nature of global competitiveness is such that, as you know, in five years it's so different that it was then versus now. In fact, it's a talk I give all over the Company about what fitness is. Charlie Rose constantly has CEOs on his show, and I'm finding it interesting how many of them are endorsing that, in the last five years being global then versus now is different. It's that incessant shift in or requirement to have the business model not just cost less but be able to do more for less.

So the design that we've imparted is we have taken the globe and said, where can we optimize the geography for the whole system? So think of that as anywhere in the network that we sit today, that geography can serve its own constituency or its own proximate customers; but if it has other some kind of advantage that the whole system can take advantage of, we are going to use it. So you saw us implement in this downturn, I'm really proud of couple of people in the Company, two shared service structures, a third is in contemplation right now, and those have allowed us to not just arbitrage labor, because we are changing some of the value that we are delivering to customers.

And let me stop there and just say that's an example of thinking about fitness on a global scale; you know, what's the definition of that? So that gets down to this quarterly call, and what are your expenses going be, Jim Hackett, for the next quarter and the next year; I'm going let Dave take you with where we can on that today. But understand the bigger challenges to design this system so that its fit beyond the recession. So Dave?

Budd, I will try to respond to your questions; you may have to follow-up, because I'm not sure I grabbed all of them here, taking some quick notes. I think we reported $168 million of operating expenses in the fourth quarter. So let's use that as a baseline. What we just said in the scripted remarks is, there were a couple of million dollars of bad debt charges in North America related to a couple of specific issues. We hope that those are not recurring, but there continues to be stress on our distribution channel as we navigate through the end of this recession. But if we thought this were going to be additional charges, we would have booked them in the quarter, so I'm not aware of any going forward. So there were a couple of million in that $168 million.

We also talked about some year-end adjustments, and I'm not going to get into the details of those, but as we close our fiscal year end and go through every single account reconciliation to get ready for the full audit, we ended up usually with a net push, but this time a few million dollars of additional adjustments. You normally wouldn't expect those to be recurring go-forward.

On the project activity, we said that that was a little bit low in the first half of the year, because of timing and -- but also because of restructuring activities kind of overwhelming the organization. We have since repositioned some of our energy back towards the product development initiatives, and getting ready for Neocon and other things, and so that could be up a little bit for a few quarters go-forward. So that's kind of the current quarter.

So now go forward. So you get a sense that there is a few million dollars that you wouldn't expect to be recurring, and we have the dealer deconsolidation effect, so you should definitely anticipate operating expense dollars in the first quarter to come down, but that's about as far as I will go.

On the couple of other issues you asked about, salary reinstatement, we will definitely -- by the decision that we made March 1st, our operating expenses will go up by its portion of the salary reinstatement. We said in previous discussions that reinstating salaries would cost us $13 million annually, so think of that as $3 million or so a quarter, and probably two-thirds of that is in operating expenses. Beyond that, the balance of temporary actions -- or the reinstatement of temporary actions is linked to profitability. So we certainly hope to be accruing variable compensation in the coming year, and profit sharing or 401(k) matches, which were also included in our reductions, are subject to the level of profitability that we generate.

Okay. And the question about the variability of OpEx to sales, in your $550 million break even, what kind of variability do you have in terms of contribution margin to the EBIT line, but also then to the OpEx line or to the cost of sales line?

Well, to be honest, I think of all of our operating expenses as variable. But at the same time in the short-term, as you are trying to model contribution margin, I would say a very small percentage actually fluctuates with sales on its own. So it would be less than 10%, would be my estimate.

Thank you very much.

Thank you. Our next question comes from Matt McCall from BB&T Capital Markets. Your question, please.

Good morning this is Sean Conner for Matt.

Hi, Sean.

I wanted to ask about the revenue trajectory, If we are talking about -- it sounds like you had some decent order patterns here coming out of the February month and into March, yet our outlook for Q1 is kind of below normal seasonality, and -- which would take us below the previous cyclical trough in Q1 of 2010, which we had kind of thought might hold going forward. But yet we're talking about modest growth for the full year. I guess are we seeing more pricing pressure expected in Q1, or are we just going to see the top line kind of ramp stronger once the stronger seasonal summer period comes to the forefront?

The answer to the last part of your question is, we don't entirely know what the summer order pattern is going to do. What we are guiding in the Q1 is really, as I said, it's that we expect normal seasonal patterns. The issue that maybe I should have included in the script is the level of backlog. So I'm not going to -- I don't know exactly, looking at Terry, what our level of backlog is verses last year. I imagine it's flat to down a little bit. But the lower level of backlog going into the first quarter is what I'm a little nervous about, in contrast to your question.

I would also say, too, that three weeks don't make a quarter. As we seen in the past, we have definitely had a moderating effect more often than not in the middle of the quarter, before orders begin to restrengthen through the summer months. So that's really what we are anticipating, is that it will follow that pattern. It could be stronger, certainly, but it also could be worse than what has been typical, just because we are not out of the woods entirely from a recession standpoint. Does that help?

Yes. It does, thanks. Then I guess kind of the China and the India investments, I think you were talking about reduction on the operating income line, I think $8 million and $21 million I think, higher than last year; what has to happen for you -- that starts making a positive contribution?

There is a number of things going on. First of all, it is -- those losses are getting smaller sequentially, because of all the actions that those teams are driving. But we are also intentionally continuing to invest in China and India because of the longer-term growth prospects. The reason that I share that data is more to give you an insight into the rest of the international business. That -- what sometimes we do, is we assume that the whole business is functioning at the level that we report. And so what I ask you to do is separate the business into two buckets, kind of Western Europe, excluding the UK, and the rest of the international world, really the point being that it's operating at a little better level.

In the UK in particular, what we need right now is the combination of volume, and for the pound to strengthen relative to the euro. As we said, we are seeing increased activity in the UK, and so we are counting on that.

Sean, it's Jim. I would add that Dave did a great job of characterizing that the context of thinking about the Steelcase business, versus others that you follow, is the nature of the global footprint we are in. And recent visits by myself and the Executive that's in charge for China would confirm to us that these are really smart investments. The Company is doing better today than it was a year ago, I mentioned that in my comments. The changes that we've made in the back end of the business, from factory consolidation to the merger of the sales organizations, between Ultra and Steelcase, are proving to be meeting metrics and yielding the results that we want.

The greatest risk of course in the country there in China is, is its economy sustainable at the growth rates? So you read a lot about bubbles. We see a tremendous amount of demand in that market versus North America and Europe right now.

In India, the interesting challenge there is that as much demand, but the logistic systems and evolution of the country isn't this far along in supporting that. But likewise, the progress that we've made versus five years ago there is significant. So both of these markets are really important today and in the future.

Thank you.

(Operator Instructions)

Our next question comes from Todd Schwartzman from Sidoti & Company.

Good morning, everyone. Just to follow-up on Budd's question with respect to the Op expenses in fourth quarter that are effectively one-time in nature, you mentioned that it was a few million dollars adjustment, totalled a few million dollars; was that more like $2 million or $3 million, or is it closer to $6 million or $8 million?

How about if it's less than $5 million?

Perfect. Perfect. On commodity costs, I heard what you said sequentially; I didn't catch your year-over-year expectation for Q1?

I think I said $4 million to $6 million. Yes, $4 million to $6 million versus the first quarter of fiscal 2010.

Okay. Increase, right, got it.

Lastly, with respect to what has been going on in Washington these past few days, what are your thoughts on potential impact on Nurture in particular as far as demand, seeing that hospitals and nursing homes its being speculated and potentially seen as the early winners there?

Just to be clear on the commodity, and then Jim will answer your Nurture question. Compared to the prior year, we estimate first quarter commodity costs will decrease our global costs by approximately $4 million to $6 million, not increase.

Thanks for the clarification.

Todd, the Nurture business is like the China and India discussion, in the sense of the vibrancy; the demand has been higher than the other markets during this recession, hasn't shrunk as much, and the activity is very high. We have we have been running the trap, so to speak, on what the regulatory environment in the US might do. I would turn your attention to the a Fortune article that has Dr. Cosgrove in it from Cleveland Clinic, where he kind of describes after President Obama was there, that what the affect on his system is that the growth rates slow in health care, but we aren't going to see reduced costs over time. So we think the investment in health care will continue to be attractive, as we have been saying since 2006, when we made the first leap into this market. The good news in that there is no excise tax on our equipment, as there were other health care manufacturers. Never imagined that would happen, but I was glad to see that didn't happen.

Okay. Thanks.

Thank you, our next question comes from Mark Rupe from Longbow Research. Your question, please.

This is Leah Villalobos in for Mark.

Just wanted to clarify some of the cost reduction initiatives that you talked about that you completed in the third and fourth quarters; are those incremental to the $140 million that you've talked about in the past?

Yes.

Okay. And when should we start to see the benefit of those actions?

Throughout next year. A little bit maybe in the first quarter and the balance thereafter.

Okay. And I believe you said $6 million to $8 million; is that correct.

Yes.

Does that include what you are doing in the international business as well?

Related to?

Some -- I believe you had commented on some of the initiatives maybe taking a little bit longer to see the benefit of those savings in the international business?

Well, what we have -- we mentioned last quarter that we were in the process of transferring our metal bending business to a third party.

Right.

That's included in the $6 million to 8 million.

Okay, great. Then as we sort of see commodity costs rising going forward, and in the context of a weak demand environment, is there opportunity to raise prices at all to capture any of those increases?

I would say right now what we are not seeing is significant sequential increase. I will probably -- I'll stop there.

Okay. Thank you, good luck.

Thank you.

I just want to make one comment, too, before the next question, if there are additional questions on -- just to follow-up with your question about sequential revenue, I want to make sure that in your modeling what you are doing is taking our fourth quarter revenue of $552 million, you're backing out the dealers that will no longer be consolidated, roughly $14 million, and based on the comments that I made about the euro exchange rate, we will have some lower revenue consequence or unfavorable currency translation effects between fourth -- Q4 and Q1. So if you back out the dealers and you back out the currency translation, and then you look to the top end of our guidance of $540 million, you would see revenue growth. So we are saying within the range of $520 million to $540 million, that the organic sequential revenue growth could be slightly down to slightly up.

So we are recognizing that the order patterns are a little bit stronger, but at the same time we have seen this before, and what we've seen is -- more often than not is that the order patterns soften before they start to rebuild going into the summer. So I hope that clarifies.

Our next question is a follow-up question from Budd Bugatch from Raymond James. Your question, please.

With trepidation, I ask a question about tax. First of all, as you look at the fourth quarter, what would be the taxable impact on the restructured items, and I guess on COLI there is no tax impact, is that correct?

Correct.

That's right.

And the restructuring -- tax shield impact on the restructuring, is that at an effective overall rate or would we have a separate rate for that?

It would be the typical effective rate, Budd.

It was something around 70%-some this quarter, if we did the math right, because of taking out some of the other adjustments, the increase in valuation allowance.

Yes. The way I get my head around this, and the way I explain to others in the Company, is that you put a little spreadsheet together that breaks the pretax income into three columns. One is -- it's kind of what's left over, it's the taxable loss. The next column is COLI income, which is nontaxable. The next column are the valuation allowance adjustments. And when you do that, you see the effective tax rate in the first column is around about where you would expect it to be, in the 30s.

Okay. So that's the way we should model it going forward?

Well, I mean, to the extent you're tax-effecting items, that's what I would do; but I'm not a totally familiar with the context of what you are doing.

I'm just trying to ask -- just trying get a modeling question to try to get us an ability to put out a model that at least has some degree of rationality.

And on the dealer deconsolidations, it's $14 million for the first quarter; for the full year, do I just simply assume it's something on the order of $50 million?

Hang on just a second. Mark has that data, and we can give it to you.

We are going to give that in the 10-K. So it will be roughly $50 million to $55 million.

Okay. And that's -- some of that was impacted already in the fourth quarter and third quarter, right? Fourth quarter.

Just -- about $5 million was the fourth quarter. So in total, the one will fall off, so with the one dealer is the full year, the other dealer is for three quarters, and that should be about in the $55 million range.

Okay. You gave the currency translation I think for the first quarter at $6 million; is that right? And full year, if currency rates were now what they --

Versus last year.

That's versus last year. If you are doing sequential comparisons, it would be an unfavorable affect. Actually something in the same neighborhood, I think.

For the full year, Dave?

I haven't done the math on that.

Okay. We can follow up. Thank you.

Thank you. Our next question comes from Jeff Matthews from Ram Partners. Your question, please.

Thanks. I think you said that your break-even point on sales basis -- a quarterly sales basis was $550 million; is that right?

Yes, at the euro to dollar exchange rate of 1.35.

Okay. What would that have been five years ago, roughly?

I don't have it in front of me, but it would have been dramatically higher. Maybe even as close to -- I don't have it -- if you follow up with me, we can -- but it would have been significantly higher.

Like $100 million or $200 million higher, something like that?

At least $100 million.

Yes, okay. And then, so is there a reason why your peak operating margins in the next cycle should be lower, better or even with the past peak?

I tell you what, you tell me what the volume is going to be and I will answer that question. If we were to get back to the same level of volume, and assuming pricing didn't behave in a wildly significant way, you would expect our margins to be better.

Right. Okay.

The question is the volume.

Right, well, no-one can control that. But I mean, we are going to have a cycle. Because your gross margin I think was something like 30% this last quarter.

Yes.

And it struck me that looking back at previous February quarters, that was close to peak; I think your peak was 32% gross margin, and yet your volumes are dramatically lower, so it does seem like your variable cost structure has been shrunken a lot.

Well, when you go back and start comparing us to five, six years ago, we have reduced our cost structure dramatically, and continue to try to variablize the nature of our costs. I just don't have the detail in front of me to react to.

Understood. But there is no extraneous factor that would make the comparison ridiculous?

You mean in terms of coming back?

Right.

I don't think so.

No.

Okay. All right. Thank you very much.

Thank you. There are no further questions in the queue at this time. I would like to turn the program back to you for any further remarks.

It's Jim Hackett, and I think a lot of us toasted on New Year's Eve the fact that the year was passing and the new one was coming, and with this fiscal year completion we are delighted to be able to move forward, and start in a year that the optimism is higher. So I want to thank the employees again for their hard work and dedication, helping the Company through a very difficult recession, and emphasize that the future is bright. Thank you very much.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.