Steelcase Inc (SCS) 2012 Q1 法說會逐字稿

Good day, everyone. Welcome to Steelcase's first quarter fiscal 2012 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, Jivar. Good morning, everyone. Thanks for joining us for the recap of our first quarter fiscal year 2012 financial results. Here with me today are Jim Hackett, our President and Chief Executive Officer, Dave Sylvester, our Chief Financial Officer, and Mark Mossing, Corporate Controller and Chief Accounting Officer.

Our first quarter earnings release, which crossed the wires yesterday, is accessible on our website. As a reminder, as of the end of the first quarter of fiscal year 2012 we realigned our reportable segments for financial reporting purposes, primarily as a result of the previously announced organizational changes to strengthen our position as a globally integrated enterprise. The prior period segment data contained in the news release has been reclassified to reflect this realignment. In addition, for the benefit of the investment community, supplementary tables, which contain reclassified quarterly information for the prior year and annual information for the last four years, can be found in our May 27, 2011 Form 8-K filing and in the Investor Relations section of our website under Events and Presentations.

As a reminder, this conference call is being Webcast. The presentation slides that accompany this Webcast are also available on ir.steelcase.com. And we'll have a replay of this call posted to the site later today. In addition to our prepared remarks we'll 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 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 the use of this information for investment decision-making purposes. For more details on these risks, please refer to yesterday's release and Form 8-K, the Company's 10-K for the year ended February 25, 2011, and our other filings with the Securities and Exchange Commission.

This Webcast is a copyrighted production of Steelcase, Inc.

And 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 to all. I just have some brief comments and most of them are on the themes that I've stayed with the last few quarters, all around good news. We're pleased to report a very strong quarter for the Company. And there's been some stress in the global economy; obviously, but we are seeing a rhythm to the recovery as it relates to our business, likely the industry, and it's great to feel the momentum continuing in the right direction. Dave Sylvester, our CFO, will provide the details in a moment but you're probably already aware that we exceeded the expectations for both revenue and profits. It was true that performance was strong across all of our business units and that includes global regions, as well. In fact, our Asia business is profitable for the second straight quarter. We worked hard on that and I'm proud to report that.

I think this news shows that with a decent rate of growth we have our business model tuned to produce the kind of results you're seeing. Now this was our fifth quarter in a row of organic year-over-year revenue growth, and that growth is ramping up nicely. This is the second consecutive quarterly increase above 20%. As I mentioned in earlier quarterly calls, we are executing the previously discussed strategy that was designed to give Steelcase this running start out of the recovery.

And there was evidence of this even throughout NeoCon last week in Chicago. To remind you, NeoCon is the trade show for our industry. It's held annually and it's a big deal. And I know some of you had the opportunity to visit us at the show where our Company received 4 Best of NeoCon awards. My biggest takeaway from the show was the upbeat mood of the customers, designers and dealers who came to visit. It wasn't just the quantity of visitors to the showroom which was very healthy, because the spaces seemed full throughout the show. It was the quality of those visitors. They were very serious about projects, serious about our topics, more than just buying new furniture. We're seeing project business, as a result, come back to life in large companies. And the people there were ready to talk about rethinking their work spaces which is what really enthuses me. And this is around the world. And, of course, that allows us to leverage our insights about how people are working today and where that will be in the future.

The theme of the Steelcase branded showroom this year centered around the interconnected workplace. And the technology-based solutions that we have offered are gaining traction because more and more of our customers are focusing on connecting people to each other, and connecting them to important information. And it provided a natural starting point for discussions about our product called media.scape. Media.scape actually has a new mobile version that makes it even more effective for collaboration. I urge you to go to our website to learn more about media.scape.

And as our NeoCon awards for Coalesse brand, Turnstone brand, and Details brand demonstrated, we're translating important insights from our research, as well, into innovation in all of our brands. This is also a big deal, because the Company is able to translate these kind of behaviors into the nature of the way products will respond to work in the future.

Now, another part of our strategy involves extending our reach into vertical markets. This is something, again, we've talked about many times. Just to report to you, our education solutions portfolio has expanded to the point where it merited a showroom of its own this year to help display our concept of learning labs. This is a new way of thinking about laying out classrooms. And ironically the same school districts that are under pressure around the country to reduce expenditures are also under pressure to modernize the education experience. My bet is they will learn they can do both. They can have better learning experiences that cost less.

You're seeing another aspect of our strategy reflected in the revised reporting segments in our financial detail. This brings our reporting in line with the way we think about our Company today, a global company. The EMEA segment of our international business now stands alone in its reporting, with Asia Pacific in the other category because, for the time being, I see Asia as more of a start up and we're managing it accordingly. What's more important to Steelcase, or I should say most important, is not which numbers go on which lines but that our global reach continues to support a significant commitment to the growing number of large companies that are operating globally today. I mentioned this to you in a previous call that the economists estimates there's something in excess of 30,000 businesses that now are really known as global companies. They count on us to make their vast operations simpler to operate and to improve the experience for their workers all over the world.

So in summary, you know what? It was a very good quarter. The level of activity at NeoCon improved my confidence about our outlook. And all of our constituents hold us accountable for executing these strategies. The same strategies we have shared with you many times. And the management team understands the responsibility of delivering improved shareholder value. Our results are proof that we're executing well.

I'm sure many of you will be taking some time off in the summer months, so I'll close by wishing you a great vacation. And I'll turn it over to Dave Sylvester, our Chief Financial Officer, for more information on the quarter.

Thank you, Jim. I will start with a few high level comments about the first quarter results and balance sheet, provide some additional color commentary around our order patterns and outlook for the second quarter, and then we will move to your questions.

Again, as Jim mentioned we are quite pleased with the results of the first quarter. Revenue and earnings exceeded our expectations, as order patterns strengthened significantly across the Americas following the low double digit growth rates we experienced in January and February. These stronger order patterns led to better than expected shipments which drove better than expected profits. Inflation was a big deal in the quarter but did not vary materially from our estimates. Compared to the first quarter of last year, adjusted operating income improved by $24 million, largely due to operating leverage associated with the organic revenue growth in the quarter which totaled $117 million or 23%. We also realized modest benefits of previous restructuring activities in the first quarter, specifically in the EMEA and Asia Pacific regions. But these benefits were more than offset by approximately $9 million of higher commodity costs which were only offset marginally by benefits from recent list price adjustments. And the deconsolidation of IDEO also lowered operating income by approximately $5 million compared to the prior year.

Sequentially, first quarter revenue approximated fourth quarter revenue on an organic basis, which was better than typical seasonal patterns that more often than not reflect lower first quarter revenue. And adjusted operating income was also relatively flat sequentially, decreasing by less than $2 million. As lower operating expenses and modest benefits from the completion of restructuring activities in France largely offset approximately $6 million of higher commodity costs. Restructuring costs in the quarter were somewhat lower than expected as we delayed a portion of our manufacturing consolidation plans in North America by one quarter in order to minimize the risk of customer disruption. Regarding the timing of remaining restructuring costs and related benefits applicable to these actions, we now estimate total restructuring costs will approximate $40 million, slightly lower than our original estimate of $45 million. We expect the remaining restructuring costs of approximately $23 million to be incurred over the next 4 quarters. And we now believe the estimated annualized savings will approximate $30 million to $35 million once these actions are completed. And begin to accrue starting next quarter, potentially reaching as much as $3 million to $4 million per quarter by the end of the fiscal year with the balance following in fiscal 2013.

Below the operating income line, we incurred higher interest expense compared to last year due to our recent issuance of 10-year notes to replace our 5-year notes that mature in August. Our effective income tax rate approximated 35% in the current quarter. As you know, many variables impact our effective tax rate, including non-taxable COLI income, geographic mix of income or losses that are taxed at different rates, and the size of tax credits and other items relative to the level of consolidated pre-tax income.

Moving to the balance sheet and cash flow, net cash used in operations during the first quarter totaled $39 million. And included annual payments of approximately $37 million associated with our EVA-based bonus programs. And we also used $20 million to fund working capital associated with the growth in the quarter. Although total revenue in the first quarter was similar to the fourth quarter, the month of May was much stronger than February, leading to higher levels of working capital at the end of the first quarter. Capital expenditures during the quarter included a $9 million progress payment related to the replacement of the corporate aircraft which we have mentioned previously. Plus a few million dollars related to our campus consolidation in western Michigan. We continue to track toward a full year estimate of approximately $70 million, including aircraft deposit payments and additional campus consolidation costs.

We also used $18 million of cash in connection with the acquisition of a large dealer in the northeastern US on May 2. We are combining this acquisition with our owned dealer office environments of New England, to create a regional enterprise that will offer a broadened portfolio of products and services and expanded geographic coverage in New England. In addition we returned almost $20 million to shareholders in the quarter. $11 million through repurchasing 1 million shares during the quarter and $8 million through payment of a quarterly cash dividend of $0.06 per share.

As it relates to order patterns, I will start with the Americas where we experienced broad based year-over-year order growth in the first quarter of approximately 34%. Last quarter, we shared that January and February order patterns had reflected low double digit year-over-year growth rates following December, which had remained surprisingly strong following a significant acceleration in advance of a November price adjustment. Our revenue estimate for the first quarter contemplated normal seasonal patterns, which typically reflect a modest improvement in orders compared to the seasonal lows of January and February, and result in modestly lower revenue in the first quarter compared to the fourth quarter. Actual order patterns in the Americas throughout the quarter were much stronger than our projections, reflecting year-over-year percentage growth rates in the 20%s during March, the 30%s during April, and approximately 50% during May. Which resulted in higher first quarter revenue than we estimated and an ending backlog that was approximately 50% higher than 1 year ago. Again, in total, first quarter orders in the Americas grew by approximately 34%.

The May 16 price adjustment in North America most likely had the effect of pulling forward some level of orders associated with day-to-day business. And also from marketing programs targeted towards small to mid size companies. But project orders, which are less impacted by price adjustments, were also very strong throughout the quarter, particularly during the month of May. We estimate that the pull forward effect on first quarter orders in total was relatively small, as the timing of the price adjustment was mid May and therefore some of the pull forward effect was simply orders moving from late May to early May.

Within our product categories, growth rates were the strongest in seating, wood, details, technology and Turnstone. And across our geographical regions, first quarter orders were up significantly across-the-board. Vertical market growth rates were the strongest in the IT, technical/professional, manufacturing, energy, and retail sectors. Healthcare, education and government, individually and as a group, grew nicely again this quarter. Even state and local government posted order growth compared to last year. Only a few vertical markets tracked lower than the first quarter of last year, which was more a function of prior year strength than anything else. While the Americas experienced broad-based order growth in the first quarter, EMEA order patterns in constant currency reflected more of a mixed bag, growing 3% in total compared to last year. Orders in France grew modestly again this quarter. While continued strength in Germany and the United Kingdom was essentially offset by first quarter weakness in Spain and the rest of Europe, as well as tough prior year comparisons in the Middle East and Africa.

Within the other category, Asia Pacific grew orders significantly in the first quarter and was profitable again this quarter. Exceptional growth in revenue and benefits of previous restructuring activities more than offset our ongoing strategic investments in this region. PolyVision generated a solid operating profit in the first quarter and we expect that trend to continue next quarter as schools take advantage of summer vacations to upgrade classroom technologies. Lastly, Designtex is doing okay but they did experience some softness in orders during the quarter following several months of growth.

Turning to our second quarter outlook, after taking into consideration the strong beginning backlog in the Americas and seasonal patterns that typically result in sequentially higher revenue in the second quarter, we expect to report revenue between $670 million and $695 million. Including a full quarter impact of consolidating the dealer acquired in May. This compares to $600 million in the second quarter of fiscal 2011 which included $35 million of revenue from IDO which is no longer consolidated. In addition, currency assumptions included in our revenue estimate represent a $15 million positive effect on the year-over-year comparison and a small impact on the sequential quarter comparison.

After giving effect to these items, we estimate organic revenue growth in the second quarter will approximate 13% to 17% compared to the prior year. Sequentially the second quarter revenue estimate translates to a seasonal increase in organic revenue of approximately 3% to 7%, which is a little lower than normal seasonality but understandable given the strength of the first quarter and the variable temperament of the broader economic recovery. With respect to commodity costs, our earnings estimate contemplates approximately $9 million of additional inflation sequentially compared to the first quarter, as our cost of sales will reflect a full quarter impact of recent spikes in steel prices and other commodities around the world. Compared to the prior year, commodity cost inflation in the second quarter is expected to approximate $11 million. We expect additional benefits from list price adjustments taken in North America last fall and in Europe earlier this calendar year. Plus we should begin to realize benefits from the 4% adjustment put into effect in North America during May. However, given the nature of project and annuity contract pricing, we expect inflation will outpace these price adjustment benefits again in the second quarter.

In addition, our earnings estimate also includes approximately $4 million of incremental interest expense associated with the 10-year notes issued in February. This additional interest cost will continue through the August 15 maturity of our 5-year notes. As a result of these factors, we expect to report second quarter earnings within a range of $0.06 to $0.10 per share including net restructuring costs of approximately $18 million pre-tax or $0.09 per share after-tax. The second quarter restructuring cost estimates include approximately $8 million of anticipated charges associated with the manufacturing consolidation in North America, plus $10 million of charges associated with 2 specific actions initiated in EMEA and at PolyVision earlier this month. As it relates to EMEA, we have begun discussions with our work council in Morocco regarding the closure of our local manufacturing facility. And PolyVision has signed a letter of intent to transfer its remaining low margin, whiteboard fabrication business in Europe to a third party. And the transaction is expected to close in the second quarter and result in a pre-tax loss which we expect to record as a restructuring item.

From there, we will turn the call back to the Operator for questions.

(Operator Instructions) Budd Bugatch with Raymond James.

Good morning, everyone. This is Chad filling in for Budd. Congratulations on a terrific quarter. First question, one of your competitors this morning discussed a bit of a moderation in the price discounting environment. Could you comment on what you're seeing from a pricing environment, the stickiness of the pricing actions that you've taken?

What we commented on in the scripted remarks, we did experience some benefits of our pricing actions that we put in place. And we expect a little bit more in the next quarter but they are still smaller than the pace of increased commodity costs.

Have you sensed any change in the competitive environment?

I would tell you year-over-year discounting is not a big part of our story. It hasn't been for the last several quarters in our discussions and that really didn't change this quarter that we just finished.

Okay. And it sounds like strength was relatively broad-based so I may be splitting hairs here. But, Dave, you called out outperformance in different product categories like seating, wood, technology. Could you put some numbers behind that, give us a sense of the magnitude of the outperformance?

Chad, I'm already pushing the envelope, frankly, giving you the level of detail that we do. So I better stop there or I might have some of my colleagues at Steelcase all over me.

Matt McCall with BB&T Capital Markets.

Good morning. This is actually Jack Stimac filling in. In part of your outlook, you said that project orders had strengthened in May. Is that mainly coming from an increase in commercial project orders as opposed to from the government? Is that what's driving that?

Yes, it was quite broad-based. There's some definite improvement in the federal government sector for us but it was very broad-based.

And how is the day-to-day business doing? I know you have some initiatives around small businesses. How are things going there?

Fine. The orders in the quarter actually were reasonably consistent in growth rates between project and continuing, and the marketing programs targeted towards smaller customers. So they all grew at a similar rate. The activity month to month was a little bit different. Projects seemed to strengthen as we went through the quarter, whereas you can imagine the continuing business, as well as the marketing programs, bounced around a little bit because of the price increase.

Okay. As far as indicators go, there were some things like that, is that still holding up strong? Or do you have any indication with some of the weakening macro indicators that things are slowing or are things remaining strong?

This is Jim. I'd like to back you up and just point out something I've said in other settings, I think is helpful with that question. If you just think about the nature of the recession, and in fact the dialogue around the problems in Greece, it's very interesting to me that the companies actually think of them as a broad group of companies, large companies mostly. The companies are in better shape than the countries are. And the reason is, that during the downturn, lots of companies took really important fast action that not only has improved their cash position but I think improved their competitiveness. So with that kind of umbrella to my comment, I 0want you to think that, these companies, I think, stare at what looks like stale growth in the western economies. And they ask themselves some fundamental questions about whether they believe, in their basic value proposition, do they see a big downturn looming. They don't. They just see the staleness of no growth or low growth. And they're sitting on these big cash positions. So it's my belief that they've decided to go ahead and start making the changes that you heard me infer in my comments about building and modernizing the spaces.

Now, let me add a piece to that. Many of these corporations in the western economies deferred investment in the last decade because they were investing in Asia. And in the startup way, they said we'll cover some of that investment by not doing in our core markets what we had been doing. They may not even have the same number of people represented in those core markets that they did. They tended to shrink. But now that the Asian businesses are self-sustaining, and they can rationalize investments there with the kind of revenues that they have, I'm thinking they're turning back now to their core enterprises and saying it's time to modernize them. So the data that you guys would crave, for a comment like that, has yet to follow because I'm looking out a windshield versus a rear view mirror. But I think it's a plausible way for you to think about why this industry I think will be healthier than the overall GDP rates that we're going to be reading about for the next 4 years.

That's helpful. Just if I could ask about it quickly, and you've mentioned it, you've said about $11 million year-over-year and inflation from commodities. How much pricing are you actually baking into the quarter from the new price increase?

That is a very rough estimate that we have and so I'd prefer not to quantify it.

Todd Schwartzman with Sidoti & Company.

Hi, good morning, everybody. I'm just wondering about project size and the change in the number of actual projects. I don't recall you ever really speaking in those terms to give a sense of just how broad-based in terms of number of customers just within the project activity. Is there any numbers that you could put forth on that?

I'll tell you, I looked at that again this morning, Todd. And in the quarter, there were not any mega projects that came in. And by mega, I would say anything at the $10 million level or higher. I'm not even sure there were even that many projects that were in the $5 million-plus range. It was, again, very broad-based strength in order business across vertical markets, and not being driven by 1 or 2 massive projects.

Is it too early to tell or do you think you're gaining share in the seating category?

Share in this industry is so hard to measure and we are always so cautious to talk about that until you've had several quarters to look at it through the rear view mirror. So I think we'll wait for a few more quarters to pass before we answer that question.

And I know you're not going to give numbers but just looking at the relative strength of the category in the quarter, how much of that is attributed to new products versus not?

For which category?

Your seating.

For seating? I would tell you that most of the growth that we continue to enjoy in seating is coming from our Live Back portfolio which is led by Leap, Think and EMEA. EMEA was launched, what, Jim? -- 3 years ago?

Yes.

And Think before that.

There's been enhancements to those products, too. So you've got to think of this as more like an Accord that gets a lot of improvement annually and so it creates demand. And then the Company continues to invest in new platforms, some of which haven't hit the market yet. But this is a category that we're very committed to, as you can tell.

Do you think that discounting helped the category more so than others?

I don't think it's in any telling way you imagine this is performing differently than it has.

Mark Rupe with Longbow Research.

Hi. Great quarter and outlook. Did you comment on the Americas backlog or was that an overall backlog that you talked about? Was that 50%, did you say?

Yes, Americas was up 50%.

Okay. So when you look at your 13% to 17% organic growth guidance for the second quarter, should I assume, then, the Americas will be above that, the European segment, or the EMEA below that? Is that the right way to think about it or no?

The Americas we would certainly expect to be higher than the EMEA region just because of the order levels that they experienced, but that's about as far as I'll go.

Okay, fair enough. And then on the recent actions that you cited on Morocco and PolyVision, how meaningful are they as it relates to the margin implications?

The PolyVision one, as you'll recall from us exiting a couple years back, the North American, low margin VCP business, really was a revenue story. It doesn't contribute significantly at the operating income line. But it does challenge the comparisons a little bit. So it's a low margin business, it will have an effect of increasing our gross margins in the other category once it's out. It will change revenue but not the bottom line that dramatically. And on the Morocco situation, it's a pretty small facility. It will be relatively expensive and be a relatively long payback, similar to some of our other European restructuring exercises. But maybe next quarter we'll be in a better position to quantify it for you.

Okay. And then on the Designtex business, I think you cited something about, I don't know if it was a relatively softer performance or pacing. Is that what you said?

Historically, we haven't said much about Designtex, not because it's not a great business but because it's been in a category with lots of other businesses. Now the other category includes Asia, PolyVision and Designtex. And we do talk a fair amount about PolyVision because of its historical turnaround and the strength of the new products more recently at PolyVision. And you all have been very interested in our longer term investments in Asia. So it just leaves Designtex hanging out there so I was just trying to let you know that it continues to be okay. Their orders were a little soft this quarter following several months of strength. But nothing meant to be meaningful there. Just trying to give you a little bit of color on that remaining business in the other categories.

That makes sense. And just lastly, I assume you're happy with the wood volumes that you're getting right now. Just curious to see if you're capturing the incremental leverage that you expected.

Yes. That business went through some significant restructuring efforts a couple years ago and we waited patiently at the tail end of the recession for volume to return. It's nice that it's returning now because it's like the broader business model. You put a little volume against it and it drops money to the bottom line nicely.

(Operator Instructions) Sir, I'm showing no further questions in the queue.

So thank you very much. I want to just emphasize that we are really proud of the quarter. It's been a lot of hard work. As people that represent our shareholders on this call, you know for the last decade there's been a lot of effort to redo our industrial model, get the product strategy right, get these positions around the world situated well. I'm really happy with the state of all that. But I also see the challenge in just getting better. We've got a management team that, as soon as this day is over, is thinking about the next challenge and the next opportunity to get you even better results. So I want to emphasize that and appreciate your time today.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.