Steelcase Inc (SCS) 2013 Q4 法說會逐字稿

Good day, everyone and welcome to Steelcase's fourth quarter and fiscal year 2013 conference call. As a reminder, today's call is being recorded. For opening remarks and introductions I would like to turn the conference over to Mister Raj Mehan, Director of Investor Relations. You may begin.

Thank you, Mimi. Good morning, everyone. Thanks for joining us for the recap of our fourth quarter 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-Finance for The Americas and EMEA.

Our fourth quarter earnings release, which crossed the wires yesterday, is accessible on our website. This conference call is being webcast and this webcast is a copyrighted production of Steelcase Inc.

The 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.

Our discussion today may include references to non-GAAP financial measures and forward-looking statements. Reconciliations to the most comparable GAAP measures and the risks associated with the use of forward-looking statements are included in our earnings release and webcast slides. We are incorporating by reference into this conference call the text of our Safe Harbor Statement included in yesterday's release. Following our prepared remarks we will respond to questions from investors and analysts.

I will now turn the call over to our President and CEO, Jim Hackett.

Thank you, Raj. Well, the news is that Steelcase continued its positive momentum both from an operating standpoint and from a reputation standpoint. And it shouldn't be obscured by all the adjustments in the past quarter because as you read our earnings release, you will see there is a higher degree of complexity involved as a series of significant accounting charges and adjustments led to a reported loss for the fourth quarter, and I do say reported loss because the actual underlying economics of the business are quite positive.

But these charges and adjustments are taken very seriously and each one has underlying detail that Dave Sylvester will cover for you in a few moments.

Now our revenue was better than the outlook we shared last quarter as both the Americas and EMEA segments posted organic revenue growth. The Americas segment continues to be our strongest performer with just over 10% adjusted operating income margin and 5% organic sales growth in this last fourth quarter. This made the 12th quarter in a row of organic revenue growth following the financial crisis.

From our own surveillance, this continues as an important trend of Steelcase leading our industry from a growth standpoint. The confidence that we have been feeling about our performance has been reflected this quarter by press outside the Company. For example you may have seen the media coverage of our new seating product, the Gesture chair, G-E-S-T-U-R-E, and of note is our related research about new postures emerged with the adoption of mobile smartphones and tablets.

We deliberately took a new approach to this global product rollout. Our strategy was to begin building interest well before the traditional NeoCon positioning, where we traditionally launch new products and where Gesture will be one of the several new products featured in our showroom in June. In fact the Gesture launch has been extremely successful, with press coverage ranging from the Wall Street Journal in the US to the leading consumer magazine in Germany, and dozens of articles and posts on important blogs around the world.

A product like Gesture benefits from social media as the smartness of its design actually becomes a key part of the message. When this kind of buzz builds around its makeup, it does make the desirability of the product much higher. And this was a considered approach that works best when you really do have something great to promote. And I will submit to the listeners that this will be the single most comfortable chair folks have ever sat in and we will look forward to showing it to you at NeoCon.

We are pleased with inclusion this month in the Fortune Magazine list of Most Admired Companies where we were fourth in the sizable home equipment and furnishings section and the only office furniture company mentioned at all. Now, while these lists do come and go, it is rewarding to see the resurgence of our Company make its way into the consciousness of those who vote on these rankings.

In another publication that evaluates our more traditional competitors, Steelcase was ranked among the top three brands in 11 different categories by Contract Magazine which put us at the top level more often than any other company. And our continuing US market share gains, which we talk about often, have provided additional evidence that our brand is making significant strides with renewed strength.

Well, this brings me back to the strength of our brand and our business in EMEA. As the recent news from Cyprus shows us, economic conditions in Europe remain highly volatile and unpredictable. And our business results in recent history, of course, confirm that.

In the longer term, however, we believe we can be profitable in this market and that Europe is key to our ability to support global customers. I am certain of this. The role of management in an environment like Europe where the sands are shifting is to make sure that the business model is defined for fitness, to ensure its ability to compete, support our customer requirements, and attract and retain quality employees and build shareholder value.

As you know, we have been working on our business model in EMEA for the past several quarters. It began two years ago when we expanded Jim Keane's responsibility to include EMEA oversight. And this was an important first step to globally integrate our marketing, product development, engineering, and design teams.

Our time today doesn't allow our broader discussion but there is evidence that the higher performing global companies that you would follow in all business are the ones who have mastered the integration of these functions as they do business around the flat world.

Jim's ascension to COO last fall allowed us to further consolidate focus and direction which helps expedite the proposed improvements.

Now, despite all the economic volatility, we did grow revenue organically in EMEA in fiscal 2013. Now granted, it was only 1% growth, but any growth in this environment is a testament to our people, our strategy, and an improving business model. There's more than a strong coincidence of this improvement tied to the appointment of Gil Malvarez as the leader of sales and distribution in EMEA approximately 18 months ago.

Now in addition, we have nearly completed the implementation of our new distribution strategy in Paris and are already seeing signs of renewed strength in this important market. And at the same time we reduced year-over-year operating expenses, and this was before these Parisian acquisitions, by approximately $4 million and this was not an easy feat in the midst of the business model transformation and certain wage increases that were negotiated with most work councils in the region.

There is another important point in the EMEA results and it has to do with variable compensation. We have chosen to use a global metric for incentive comp, so bonuses in EMEA and the Americas and Asia are all based on Steelcase Inc. performance. Now we have done this for the past several years, but it is even more important now as we do what I just mentioned a moment ago in leverage global platforms to compete around the world. It also serves to keep our people engaged on our broader strategies.

First is kind of simply hunkering down, limiting investment to ride out the storm. For fiscal 2013, this amounted to a $10 million in EMEA expense or approximately $2 million higher than the prior year. So it is a real cost. And we are not asking that it be set aside or discounted in any way, but it is important that you understand our comp strategy.

These costs are like our activity to launch Coalesse in the EMEA region or expansions in emerging markets certainly investments for the long-term. And that also affects any assessment of our current results.

Now with that said, I want to make you aware that over the past few months we have reduced headcount in EMEA by approximately 60 full-time equivalent positions. These eliminations resulted from local actions taken in a few countries and it included attrition, expiration of what we call temporary contracts and workforce reductions. These were largely driven by the deep recession that you saw in Spain and the consolidation of these recently acquired dealers in Paris.

In addition though, we began consultations just yesterday with the Works Council in France on a project to restructure sales marketing and some important support areas which could lead to elimination of approximately 30 additional positions. With the ongoing uncertainty in EMEA, we are still confident about global growth in this new fiscal year.

Well, our industry is now professing it will grow and we expect Steelcase to grow even faster. Our first quarter outlook reflects some customer hesitancy around both domestic and international fiscal issues, but it does appear the impact is fading and we will tell you that our project pipeline is robust.

We are continuing to expand our opportunities by making these new inroads in markets like education, expanding the Coalesse brand in Europe, and the introduction of new products like Gesture. So, we are looking forward to a strong year.

And on that note, I will turn it over to our Chief Financial officer, Dave Sylvester.

Thank you, Jim. I will start with a few high-level comments about the fourth quarter results and balance sheet, provide some additional color commentary around our order patterns and outlook for the first quarter of fiscal 2014 and then we'll move to your questions.

As Jim mentioned there are many things to understand as it relates to the results of the fourth quarter, but when you sift through the complexity we believe there are four important takeaways.

First, The Americas achieved organic revenue growth for the 12th consecutive quarter and continued to gain market share in the US. And this was accomplished despite the general challenges of fourth quarter seasonality in our business, the effects of the fiscal cliff in the US over the last several months and a tough prior-year comparison which included $9.5 million of initial revenue from two particularly large projects in the energy sector. I will mention these two orders a few different times in my remarks today as they are relatively material to our year-over-year comparisons and we believe the information may be helpful to you in completing your analysis of our results.

Second, The Americas posted an adjusted operating income margin of 10.1% in the fourth quarter representing a 370 basis point improvement compared to last year. We grew the top line by 5% organically and expanded our gross margins due to year-over-year pricing benefits and net savings associated with our manufacturing consolidation in North America, which is now substantially complete. Plus we reduced spending compared to the prior year which was relatively high, due to the level of investments in product development and other initiatives we were making at that time, many of which are coming to market now through NeoCon in June.

Third, while we remain concerned about the overall results in EMEA, our fourth quarter organic growth of 3% and adjusted operating income of $0.8 million was somewhat better than expected. However, we did post a full-year adjusted operating loss of $10.8 million this year and we expect losses in the first quarter of fiscal 2014. Accordingly we have continued to reconfigure the EMEA business eliminating approximately 60 full-time equivalent positions during the fourth quarter. These eliminations, as Jim said, resulted from local actions taken by a few countries and included attrition, expiration of fixed term temporary contracts, and workforce reductions. And the actions were largely driven by the deep recession in Spain and consolidation of the recently acquired dealers in Paris.

In addition, yesterday we initiated formal discussions with French Works Councils regarding a project to improve our global competitiveness by reorganizing the sales, marketing, and support functions in France which could further reduce our organization by approximately 28 positions.

Fourth, we completed a legal entity reorganization in EMEA during the fourth quarter which resulted in a $56.7 million foreign tax credit benefit, which can be used to offset US taxes on foreign source income. We booked the benefit during the fourth quarter and expect to utilize approximately $20 million of the credit in connection with the completion of our tax return for fiscal 2013.

To summarize, our performance in the Americas remains strong and we continue to face a challenging environment in EMEA. However, we took more significant steps this quarter to improve our EMEA business model and we implemented a legal entity reorganization that is expected to result in significant cash benefits for Steelcase over the next couple of years.

Now I will cover some of the other significant items we recorded during the fourth quarter beyond the foreign tax credit benefit I just summarized.

First, we recorded goodwill impairment charges related to EMEA and Designtex totaling $59.9 million. The EMEA charge was driven in part by the operating loss we recorded this year which compared unfavorably to the expectations we had at the beginning of the year. In addition, the near-term outlook for Western Europe remains heavily challenged by macroeconomic headwinds, which are likely to negatively impact the level of near-term profitability we would expect to achieve with our current business model.

Regarding Designtex, the impairment was largely driven by lower than expected operating performance in the current year and significant future investment required to strengthen our product offering, marketing and overall brand image.

Second, we recorded net unfavorable adjustments to our valuation allowances associated with tax loss carryforwards and other deferred tax assets in EMEA, which totaled $42.4 million. For reasons similar to those driving our goodwill and permit charge in EMEA, we increased our tax valuation allowances to 100% of our net operating loss carryforwards and other deferred tax assets primarily in France, which resulted in a $47.3 million charge in the fourth quarter.

Currently we are allowed to carry forward the net operating loss benefits indefinitely but their utilization in any given year is limited to 50% of taxable income. Because of our recent losses in France and the uncertain outlook for Western Europe in general, we increased our valuation allowances associated with these carryforward benefits and other deferred tax assets to 100% during the quarter.

However, our allowance position does not limit in any way our ability to utilize these benefits, once our legal entity in France is profitable. Partially offsetting the $47.3 million charge was a $4.9 million reduction to our tax valuation allowances in the UK, which was driven by more consistent levels of profitability and certain legal entities associated with our UK business.

Third, we recorded a $3.6 million increase in reserves for environmental remediation costs associated with a previously owned manufacturing site. While the sale occurred more than six years ago, we retain responsibility for environmental remediation associated with pollution which we believed occurred sometime during the 1960s or 1970s. We have included a webcast slide which summarizes the income statement consequences of these items which, when aggregated with the foreign tax credit benefit, had the net effect of reducing earnings in the fourth quarter by approximately $0.31 per share. The effect of these items in that aggregate [on] variable compensation expense in the fourth quarter was relatively small as the impact of the goodwill impairment charges will be recognized for compensation purposes over a five-year period, beginning in fiscal 2013, consistent with prior practice.

Restructuring costs in the quarter were higher than our expectations, primarily due to a $12.4 million real estate impairment charge in the Americas and a $4.2 million relating to restructuring activities in EMEA. These activities were initiated during the quarter and are expected to yield annualized savings beginning in fiscal 2014 of approximately $3 million.

We did not incur any restructuring costs in the current quarter associated with our formal discussions with French Works Councils which began yesterday as these potential actions require consultation with them prior to implementation. These consultations could lead to additional restructuring costs and result in a few million dollars of additional annualized savings in subsequent quarters.

As it relates to the remaining restructuring costs in the quarter they were related to the North American plant consolidations which are now largely complete. We estimate annualized savings will approximate $30 million once the remaining savings are realized and local supply chains have been more completely established, which we estimate will take place over the next two quarters.

During the fourth quarter, year-over-year benefits realized of approximately $7 million will reduce by approximately $2 million of additional freight costs linked to supply chains which have not yet been localized to the new manufacturing locations.

That is a lot to digest, there's no question about it. But we believe it is important to absorb this information separately in order to better understand the underlying operating results of Steelcase as adjusted operating income which excludes both restructuring costs and goodwill impairment charges of $34.6 million or 4.8% of sales, represented a year-over-year improvement of $11.6 million or 150 basis point related to sales.

The improvement was driven largely by the following factors. First the 4% consolidated organic revenue growth in the quarter included volume benefits as well as improved price yield compared to the prior year while our global commodity costs reflected modest deflation.

Second, net savings related to our North America plant consolidations contributed approximately $5 million.

Third, spending in the current year was lower compared to the prior year. These year-over-year benefits were muted by the fact that we continue to experience a higher mix of large project business globally which continues to be somewhat offset by a lower mix of federal government business in the US.

In addition, the current quarter results included the additional environmental reserves I previously mentioned.

On a sequential basis, fourth quarter adjusted operating income declined by $9.8 million compared to the third quarter. Higher corporate costs, which included the additional environmental reserves, were the biggest driver of the lower profitability. In addition we experienced a higher mix of large project business and higher manufacturing overhead in the fourth quarter as compared to the third quarter.

One other quick comment on income tax expense in the quarter. In addition to the taxed items I already mentioned, we also recorded a benefit associated with the retroactive reinstatement of the US research credit, but this was largely offset by a few unfavorable discrete adjustments during the quarter.

Moving to the balance sheet and cash flow, we generated $58 million of cash from operations during the fourth quarter with more than one third coming from working capital reductions linked to typical seasonality. Capital expenditures totaled $24 million during the fourth quarter and $74 million for the full fiscal year. We expect similar to slightly higher levels of capital expenditures in fiscal 2014 as investments in manufacturing technologies and product development are expected to remain relatedly high.

We returned approximately $11 million to shareholders in the fourth quarter through the payment of a cash dividend of $0.09 per share. Yesterday, the Board of Directors approved a quarter dividend of $0.10 per share to be paid mid-April. We did not repurchase any shares during the quarter.

As it relates to order patterns I will start with The Americas where our quarters in the fourth quarter were flat with the prior year which included orders from two particularly large projects in the energy sector. Adjusted for orders from these two organizations, The Americas experienced approximately 4% year-over-year order growth in the fourth quarter. Order patterns in the quarter reflected single-digit growth in December and single-digit declines in January and February but grew in February, adjusted for the orders from the two large energy companies.

Also total order growth in the current quarter continued to be negatively impacted by declines within the US federal government sector, which marks the seventh consecutive quarter of year-over-year declines in this vertical market.

Customer order backlog for The Americas ended the quarter down approximately 3% compared to the prior year or up approximately 5% adjusted for orders associated with the two large energy companies. Across quote types, orders from continuing agreements and from our marketing programs grew modestly while project-related orders declined approximately 2% or were up approximately 4% adjusted for orders associated with the two large energy companies.

Vertical market order growth rates in The Americas were the strongest in the insurance services, information technology, manufacturing, and financial services sectors while education, healthcare, state and local government, and US federal government posted notable percentage declines this quarter. The energy sector declined significantly, due to a very strong prior year comparison which will continue through the first quarter of fiscal 2014 given the two particularly large products one last year.

Switching to EMEA, order patterns in constant currency remained mixed, growing by approximately 1% in total compared to the prior year. We experienced high single-digit growth, percentage order growth in Germany and low single-digit percentage order growth in France and the export markets of Eastern, Central, and Southern parts of Europe as a group. Orders in Iberia and the Middle East and Africa as a group declined modestly while Northern Europe declined by a more significant percentage compared to the prior year.

Across the quarter, orders were quite strong in February following weakness early in the quarter which help to drive customer order backlog for EMEA at the end of the quarter up approximately 18% compared to the prior year. However, through the first three weeks of March, orders have returned to weaker patterns, reflecting ongoing volatility across the region.

Within the other category, orders grew modestly at Designtex while orders at PolyVision declined modestly. For Asia-Pacific, orders for the quarter were down a little more than 10% due to a weak December. For the balance of the quarter, order growth was pretty good and through the first three weeks of March the trend has continued, suggesting that headwinds we had experienced for the past 12 months may be subsiding.

To summarize, our order patterns and quarter end backlog in The Americas remains solid though the calculated year-over-year growth rate is tempered by the strength last year in the energy sector. And we continue to face a challenging environment in EMEA, but the volatility in our order patterns netted to relatively flat again this year, this quarter. And within the other category, Asia seems to be strengthening.

Turning to the first quarter, we expect to report revenue between $680 million and $705 million, including approximately $2 million from dealer acquisitions net of a divestiture. This compares to $675 million in the first quarter of fiscal 2013, which included revenue of approximately $20 million from the two large projects in the energy sector mentioned previously. Currency assumptions included in our revenue estimate represent insignificant effects on the year-over-year and sequential quarter comparison.

After giving effect to these items, we estimate organic revenue growth in the first quarter will approximate 0 to 4% compared to the prior year or approximately 3% to 7% before consideration of the two large projects in the energy sector last year.

Sequentially, the first quarter revenue estimates represented organic decline of between 2% and 6%, somewhat higher than typical seasonality. We expect the mix of project business in general across The Americas, EMEA, and Asia-Pacific to remain relatively high and, thus, continue to negatively impact our gross margin and operating income in the first quarter. And we expect the costs associated with our product development efforts and other initiatives to increase our operating expenses somewhat, compared to the fourth quarter.

As it relates to our North America plant consolidations we expect the final savings to be realized in the first quarter and start-up and other related costs to reduce modestly compared to the fourth quarter, resulting in year-over-year benefits in the first quarter of approximately $5 million.

In addition, our first quarter earnings estimate anticipates year-over-year improvements in price yield associated with pricing actions taken in prior years. With respect to commodity costs, our earnings estimate contemplates modest commodity cost inflation, whether compared sequentially to the fourth quarter or versus the prior year.

Finally our first quarter earnings estimate contemplates an effective tax rate of approximately 35%. As a result of these factors, we expect to report first quarter earnings within a range of $0.09 to $0.13 per share including restructuring costs of approximately $0.02 per share. This compares to $0.10 per share in the first quarter of the prior year, which included restructuring costs of approximately $0.03 per share.

For fiscal 2014 in total, we believe the US contract office furniture industry will reflect modest growth and we are continuing to target growth rates in excess of industry averages. We believe our growth in The Americas will continue to be driven by business from our largest corporate customers as the number and estimated size of large projects in our pipeline today is considerably higher than our pipeline one year ago.

In addition, the average potential revenue value per mockup has increased compared to the prior year. The timing, however, is a little bit different. In fiscal 2013 we shipped our two largest projects in the first half of the year and, this year, the timing of large projects looks to be more heavily weighted toward the back half of the year.

For EMEA, we continue to believe volatility will play a role across the region, but in total we are forecasting EMEA to be relatively flat again in fiscal 2014. Asia, on the other hand, is expected to rebound back to solid growth rates.

One other point about revenue for fiscal 2014 is that we will have an extra week in the fourth quarter, given our policy to close the fiscal year on the last Friday in February. So we expect revenue growth next year with the majority of it expected to come from The Americas and Asia as well as the extra week. Plus, we expect to expand our adjusted operating income margin again in fiscal 2014. We expect approximately $20 million-$25 million of year-over-year benefits associated with the completion of our manufacturing consolidation in North America, integration of the PolyVision technology business into the Steelcase education solutions group, and the restructuring activities launched during the fourth quarter in EMEA.

How much we are able to expand our operating margins in fiscal 2014 will be a function of many things, including volume and pricing, the level of EMEA volatility, the mix of project business, the pace of inflation, the successful completion of our restructuring activities and the level of investments in future growth ideas. It's this last item I want to spend a few minutes talking more about.

As we have stated many times, we believe staying interested in a variety of growth initiatives at the worst of the recession is a key reason why we have been able to gain market share over the last two fiscal years. In our webcast slides, we included a fiscal 2013 roll forward of operating expenses compared to the prior year which highlights changes due to foreign currency translation effects, acquisitions and divestitures, variable compensation expenses and other items.

In this roll forward you will note another net column totaling $7 million which compares to an increase of $20 million in fiscal 2012. You can think of these amounts as the levels of costs which were invested back into the business since the recession to sustain our momentum in the market and support future revenue growth. We had planned to invest approximately $20 million or more in fiscal 2013, but with the poor results in EMEA and Asia-Pacific facing a lull in demand during the current year, we pulled back on spending around the world in order to cushion the effect of lower than expected results in these businesses.

For fiscal 2014, we expect to reinstate many of the investments that were delayed in 2013 and add a few additional strategies, all targeted to sustain our momentum in the market. As a result, however, you should anticipate that one year from now this other net category within the operating expense rollforward will aggregate a number between $25 million and $30 million.

The payback for these investments will come from our ability to sustain momentum with our growing global customer base and to continue growing faster than industry averages. A way for you to evaluate the future prospects from this next level of investment is to witness what we are bringing to market now through our global launch of Gesture and will bring to market at NeoCon in June. These launches are from the investments we've made during the downturn as well as over the last couple of years.

Beyond Gesture, which is a big enough deal on its own, we plan to unveil a few other surprising new products, (technical difficulty) applications, and experiences come June 10th through the 12th.

So despite some of the noise in the current quarter results, we had a solid quarter. And despite a first quarter outlook that is somewhat less than consensus estimates we expect another solid year in fiscal 2014. Net net, the business is in great shape and we are positioned the best we have been in a long time to take advantage of opportunities around the world.

From there we will turn it over for questions.

(Operator Instructions). Matt McCall, BB&T Capital Markets.

So, Dave, you gave some color on the pipeline, on a year-over-year basis. I think you talked about revenue per -- available revenue per mockup is higher on a year-over-year basis. Maybe -- and this might be for you, Jim, if you step back three months and given all that we just talked about can you talk about the outlook? I mean the outlook for construction that I see on the office side is very strong and it seems like it has gotten a little bit better. So can you talk about how you view specifically North America and maybe just talk about contract today and the outlook for, say, the next 12 months versus say three, six months ago. What have you seen transpire?

The seduction here for me to just rip for a moment on the macroeconomy is just too strong so I won't do a lot of it because I know you guys all can read. But I was just doing this for our top leadership yesterday. And there is a narrative out there that is talking about with the energy policy issues, allowing natural gas to change our dependency, the manufacturing sector growing, housing is not nearly back where it is, but it is improving, the banking stability in terms of the tangible net worth of the banks. Insurance companies, by the way, a lot of these are our customers.

I see a narrative that I am going to continue with you which is I said to you before that the companies can't escape the fact that their spaces are out of date. And this happened over the last few years, mobile computing and global connectedness is forcing this. And I have been sharing this on the call.

We keep referring to our gains because we have been telling this story earlier coming out of the recession and there is no need for us to think that that has dampened at all. There's blips here and there that we think we understand what has happened. And in our industry I think the government spending was in so many of our competitors' numbers and as that slowed down you start to see the industry correct, but I do believe in the forecast of the industry now responding to what I am saying where the corporate potential is as good as it has been and certainly since the banking crisis.

Now there is some evidence that capital spending and things like that, because of tax questions, are being discussed. But I -- in all of the groups I hang out with and customers I see, I don't see it dampening in the longer term.

I am going to ask Dave to translate that because this first-quarter thing is important to get right and I will let him address that, pardon me.

Jim gave a lot of color on how he sees and I am sure you feel the same way about the macroenvironment. It is not anything to be all that excited about, but there are certainly positive signs that it should continue. I think that has been feeding the construction reference that you just made, that it is strengthening. And I think the evidence of that showing up in our business is the fact that our pipeline today versus one year ago has more projects in it of larger and the average value of the projects are higher and what backs that up even further is as we look at mockups that we're doing today, the average dollar value associated with those mockups is up versus a year ago. So it is not just talk of large projects, there's actual mockup activity that is going on that supporting that theory as well.

And then I think the other data point that is out there, and I don't mean to endorse it because we don't have a public view about calendar 2014, but the data point that is out [this] has the industry growing close to, I think, 10% in 2014. So that is very likely to be linked to what you are saying from a construction standpoint and new space coming online in the near term.

Thank you both. The next question is on margins. And I know I only get one more so I am going to try to have a couple of parts here. Talk about the incremental spending, can you maybe in general terms should we look at this I think you said $25 million-$30 million, is that investment that is going to be recurring investment? Is it people or is it more investment in new products? How should we look at the out year relative to that number?

And then maybe speak to expectations for EMEA profitability given what you have done there. Are your expectations that you are profitable and maybe if I could throw in one more, the incremental margin assumption that you think is reasonable for the base growth in 2013 -- 2014.

While Dave is spooling up for the specifics, what I want you -- your instincts on this are in the right direction which is with the kind of product launches that we have undertaken and now are completing, we are at the point where what we call the implementation phase, has higher spending with it. And there is always this great question that says do you expect that to deflate then after they are done.

And we have been really careful to not add a lot of fixed cost to the enterprise because of this going through the -- the pig going through the python, so to speak. So I am confident that the implementation costs explain some of the inflation.

I am also certain though that some of the new things we are working on, I am as excited about as I have been in the last 19 years. And so, there's development costs starting on, now, next round ideas.

But I will let Dave explain how you look at the exit of the implementation cost and then the entrance into the development cost and see where that might take us.

Yes, on what is driving the investments, to really think of them as maybe three broad buckets of product development, some marketing and, frankly, new ideas. And it is the last piece that I actually hope does drive longer term increases in fixed cost because that will be -- it will only do that if those ideas actually are playing out.

As we have talked in the past, we have our hands in a number of different areas where we are trying to evaluate where work is going as well as we are continuing to invest to feed the existing core business and we are also taking advantage of the fact that our brand is strengthening and we are trying to get that a little bit well, more well known around the world that there is a new Steelcase in town. And so we are investing across all of those fronts. So today I would tell you that the $25 million to $30 million the majority of it is nonpeople, but our hope is that it does translate into people as some of the new ideas play out into future business models.

On the EMEA profitability question, I don't want to give a full year outlook for EMEA profitability. But I do think that they are going to be challenged certainly for the next year or two to present any kind of meaningful profit improvement. We have certainly improved the business. The fact that we grew the topline this year while we were reducing operating expenses, I think, is a testament to the team. Yes, the overall level of profitability was lost was higher this year versus last year, but a lot of that is driven by the mix of business and some of the pricing competitiveness that we face in that market.

So we feel like the performance of the business is getting a little bit better. We have got some actions we launched in the quarter that will continue to improve the results, but we are not planning for a miraculous turnaround in their results in the near term. It is going to continue to require long-term investments and improvements in our fitness as well as growth on the topline.

And lastly on the incremental margin piece that you asked, I still think that the 25% plus or minus is a reasonable number to assume before any consideration of incremental investment in our business. Again, why is that a little bit lower than the 30% we have talked about in the past? And that is simply because the weight of project business is higher now than continuing when in a normal environment they tend to contribute about the same amount to our business.

Thank you all.

Budd Bugatch, Raymond James.

Good morning. Thank you, I think, Dave, for all that color. It's a lot to digest as you said. I guess I want to take a larger step back at something that I'd had a hot button on for a while.

Jim, as you know, and I would hope maybe you could define for us what success will be ultimately in EMEA? And when does the patience of you or the Board really essentially come to an end on that? And maybe how long do we wait for success to develop?

I would say that the focus on growth fitness and global integration is going to lead us to a successful implementation. EMEA 2.0, this is the first phase that we just announced. It is not a restructuring of our business, it is a reinvention to transform the way we work and allow us to focus more on our customers. It is about improving our success by doing things differently in an environment where we don't expect organic growth and we are planning that the stretch will stay there.

Furthermore it is a significant part of our strategy to focus on the leading organizations. We have some skills in handling global accounts. So it is about redeploying our resources and not about overall workforce reduction. In every region, we need the organization we can afford and we need to support the growth opportunities we see in these different market situations.

I would just add that if it was simply about cost reduction and trying to make more money with the current business model in EMEA, our patience would have worn thin long ago. But we are not focused simply on the short term. What we continue to focus on is how do we integrate Europe with the broader organization globally and drive consistent strategies that are winning in a very nice way in The Americas across the globe. And that requires more surgical reconfiguration of our business model and it starts with the reorganization that Jim was referencing earlier.

So while we believe in the long-term strategy, that affords us more patience than simply trying to make more money now at the current business model.

So you have to believe in the long-term strategy.

And I think I do and I just wanted to make sure that I understand and I am going to come back to ask that question again. What defines success because I congratulate you on the thoughtfulness which you've approached the issues that you have in Europe in that area, but ultimately we have to get to some sort of financial success. You have done that very well in the States by approaching your business model and having to really redefine that over the last 12 years or so.

Now you have got to do it in Europe. And so the question is do you get to the same operating margin. Do you get to the same return on capital? Is that the ultimate goal here? Or is it something less down the road? And even if it takes the same length of time it has taken here to redo the business model. That is kind of my question. What is (multiple speakers) success?

Well, I think we have said on previous calls that we will be challenged to produce the same level of operating income that we are doing in The Americas. We haven't given up on that. But I think we will be challenged.

I think for EMEA, given the state that they are in at the moment, it is more realistic to talk about incremental steps. And incremental steps are -- we believe any business that we have in our Company has to return its cost of capital. So we have to figure out how to get this business in an accessible time frame to a mid- to high single digit operating income in order to drive or give return on invested capital. And that is going to, again there are different ways to try to approach that. We have taken the longer, more strategic view because we believe in the globally integrated enterprise to support our growing global customer base.

And in the impairment exercise, I was the voice in the room, as you are suggesting, about the future. I made this comment that when you think of the terminal value of the second largest GDP in the world, you cannot imagine it never growing again. It is even with its sovereign debt challenges, its governing problems, it is still a massive part of the world's GDP. And so I am a voice in every meeting I am in, saying that that terminal value is there and the journey for the Company to take care of what it can take care of is certain. And you have got to believe the market is -- and particularly think of market for creative class, knowledge workers, cross industries, this is almost an easy, easy assessment now. The hard work is as you have laid out.

Let me add a second thing is that the Company's conscience on all of this kind of stuff, the way it deals with its people, the role they play in having us build this better model is a really important thing. And we mastered that here in the US and it is going be really important in Europe. And we have got a lot of experience in Europe. We are not a new company there. We have been there over 30 years. We have people in my governing structure that are ex-pats to the US from Europe.

These are really solid business people. So, this is probably what, when you and I are retired one day that subsequent generations are the companies are mixed up with people from all over the world in the governance and they do know how to deal with the markets around the world. And because Europe seemingly hasn't gotten the declaration it deserves like you're asking for, I want to assure you that in our Board room and in our management teams, it is getting all of that attention.

I appreciate the thoughts on this which you have approached all the issues that Steelcase has found and I just -- I hope at some point in time down the road you can share with us a little bit more with what the ultimate game plan in EMEA looks like with maybe some more specificity. And I know that is hard to do with the current political and worker environment that you have there now and the issues you have today. But somewhere down the road I hope that becomes something -- that becomes something the investment community can be a party to.

We'll take that as a challenge.

All right. Thank you.

David MacGregor, Longbow Research.

This is [Josh Warstein] in for David. On The Americas you saw some nice operating margin improvement in the year and given everything you guys have done over the past year, do you anticipate the 10% operating margin range to be achievable in fiscal year 2014 as well?

That certainly is our objective.

And looking at some of the different types of business. In 3Q you noted that continuing business grew at the same rate or better compared to project business and that was the first time in several quarters you had noted. Was it again the case here in 4Q?

Well, as I mentioned in The Americas, the year-over-year growth rates and project business were affected by these orders in the energy sector last year. So adjusted for that we had 4% growth, I think, in project before those two large projects last year. And I think continuing was about the same, maybe a tad less. But yes, the point -- I guess the overall point is pretty much the same, that continuing is starting to grow now more consistently by projects. But it is only two quarters in a row, too.

And then last on GSA, could you say how much it was down in the quarter and whether you saw any impact from sequestration?

I did not say specifically and we are kind of looking at each other in the room to see if we have the data point. We can follow up with you on that.

So far we haven't seen a -- we certainly did see a slowdown in the day-to-day GSA business. We expect that more going into FY '14. But we also expect that to be offset by an increase actually in project business of federal government. It was a smaller year than usual in project business this year that we just finished in federal government and we expect that to grow by quite a bit next year.

Great. And any idea right now how much the percentage of business is related to GSA?

Of our better government -- of our total sales or federal government?

Of the total.

It is very small of our total Steelcase sales.

Low single-digit.

Yes, low single-digit.

Great. I appreciate it.

(Operator Instructions). Todd Schwartzman, Sidoti & Company.

Good afternoon. I was also interested in the GSA, but also if you could speak a little bit about healthcare that was called out as one of the relative laggers. Is there any from a year ago there? What were the drivers of that particular vertical?

No, not any significant noise last year that would have driven the healthcare decline this quarter. I think it's just a vertical that has continued to struggle a bit. I don't know, Terry, if you want to add anything.

No, we had had six consecutive quarters I believe of growth in healthcare so there's bumping up against some high comparables. The last few quarters it has slowed down and is down a bit. We are seeing fewer projects recently in the healthcare sector.

So it is not legislation-based that you could point to, put your figure on?

No there could be a small piece from the [VAPs] but it is not a material impact of our healthcare sales right now.

Regarding OPEX for the first quarter up sequentially from Q4, is that on a percent of sales basis or in dollars?

Dollars.

And I wonder if you could just repeat a couple of numbers for me. CAPEX for the year and also the anticipated savings from the headcount reduction in EMEA.

CAPEX for fiscal 2014 we would put in a $75 million-$80 million range plus or minus. So my comments in the scripted remarks were that we spent $74 million this year and we would expect to spend that or something higher. So you are not going to be far off if you are $75 million-$80 million. And the savings from the actions that we launched in EMEA during the quarter we estimate to be about $3 million annualized and should start pretty quick in the first quarter. And that has nothing to do with the consultations that we started yesterday in France. Those would be separate if implemented.

Got it. Thank you very much.

I am showing no further questions in the queue at this time. I will hand the call back to management for closing remarks.

I just want to summarize by saying that our people have done a great job. We have finished a really good year. We declared good bonus for them and we had a great meeting yesterday where we opened our Innovation Center here in Grand Rapids that is part of a global network of development nodes and this was a really big day for us because it is kind of a statement of the future. So if any of you ever get here we would love to have you see what we have been doing to change our Grand Rapids spaces, and confirm why we are so optimistic about the future. Thank you for your attention today.

Thank you, ladies and gentlemen. This concludes the conference for today. You may all disconnect and have a wonderful day.