Steelcase, Executive Insights: Order Growth, Earnings Bridge

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On Thursday, Steelcase, Inc. (NYSE:SCS) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Order Growth

Chad Bolen – Raymond James: Congratulations on very solid quarter and outlook. Thanks for all the details in your review of the quarter in your commentary.

David C. Sylvester – SVP and CFO: Thank you, Chad.

Chad Bolen – Raymond James: I guess a couple of things, Dave, you talked about the order growth in the Americas 9%, obviously, very good, can you parse for us at all orders in the U.S. versus the other geographies?

David C. Sylvester – SVP and CFO: I don’t want to get into that much detail, I would just comment that I was actually 11% adjusted for last year’s pull forward effect from the May price increase, so it was actually double-digit when adjusted for that. I think Latin America was pretty strong and Canada includes one of the large projects that we’ve referenced on previous calls. So, orders up there were pretty good, but they did not – I wouldn’t suggest that the math of those two geographies were so much that they drove the overall rate to 11%, the Americas were still – or the U.S. was still pretty good.

James P. Hackett – President and CEO: We do know Chad that, as I said in my comments we’ve outperformed the industry.

Chad Bolen – Raymond James: Dave, you talked about expectations for I think organic year-over-year growth in EMEA. Just to clarify, do you expect EMEA to be up year-over-year after the currency headwind as well or are we just thinking positive on an organic basis?

David C. Sylvester – SVP and CFO: Yeah. You’re trying to pin me down on what the organic growth rate would be, and I am going to stay away from that one, Ted, sorry. So, we gave you the currency number. I don’t want to tell you anything other than that.

Chad Bolen – Raymond James: You did call out in your comments and in the slides that Spain and Germany were some of the larger declines in the quarter; Spain not all that surprising, Germany maybe a bit. I guess obviously there are some timing issues that affected the EMEA results. Could you give us a little color on what geographies that impacted specifically and does that change any of the dynamics in terms of which countries performed better or worse, et cetera?

David C. Sylvester – SVP and CFO: Well, I mean, I don’t really have much more to add than what we’ve said in the slides and what I said a few minutes ago. What is interesting is that the revenue in the quarter was down most significantly in Germany and Spain, but Germany and Spain at the same time posted order growth in the quarter. It really remains pretty mixed.

Chad Bolen – Raymond James: Just kind of a bigger picture question. I mean the macro obviously has a lot of uncertainty, maybe anybody’s guess right now I think, and BIFMA seems to have a fairly optimistic view for the industry for calendar ’13. I am not asking you to endorse or not endorsed that forecast, but maybe Jim, could you share with us a little bit about how you’re thinking about next year for the industry based on the activity that you’re seeing in your business, maybe what you’re hearing from customers and any color around your thoughts on that.

James P. Hackett – President and CEO: Sure, I would probably summarize it in two or three key features as you look out. One is an area that I have described in the past, which is that at the end of the last decade you had a number of our customers who had spent that decade building their presence in developing countries, and think of that in translating into facility investments that they were making. As those emerging markets didn’t generate profit for them that tended to crimp the investments in the developed markets because they had to fund it from somewhere. That effort paid off in those developing markets, those businesses generally are making profit, funding themselves, and so, they’ve returned back to their developed areas and said, it’s time to modernize those facilities. So, I think that explains some of the demand, which is not correlated frankly to some of the real estate numbers we normally see, but more correlated to cash positions and this dynamic that I’m talking about. There is a small nuance in that, in that as they invested in the developing countries, they adopted more recent technology and that further levered the perspective that the developed business areas weren’t as far along. So, you know it’s the old notion that they didn’t have to build landlines in the developing countries, they used mobile technologies. When they build mobile technologies, they had a much different kind of layout, because Steelcase, as the second point, for more than a decade had been advancing the perspective of what happens when teams come together and teams in mobility have proximity to them. I think, we continue to see the nature of spaces needing to respond to that kind of adjustment. They have to kind of deconstruct parts of it. They were too fixed because the – at any given time, the population in these buildings are changing because of the mobility. Sometimes they are not there, sometimes they are there. That would be the second part. The third part though is more of a question of what’s the tipping point at which the corporations are now concerned about? You know the economic prospects because of the debt situation. I still from the networks I am in believe that most – virtually all the business people see the way out of the debt problem is through GDP growth. Not more austerity in the sense of – I don’t want to get into a political argument, but in terms of the real return to GDP growth, we got to have investments. So, I think that bodes well for our business. So I have been saying to as many people that the last decade was a unique period in our life time. The industrial change, the way that the investments were shifting like I am talking about this decade is about pain for some of that and building innovation and growth engines. So that bodes well for people needing to change spaces in our industry.

Earnings Bridge

Jack Stimac – BB&T Capital Markets: It’s actually Jack filling in for Matt today. Last quarter, Dave, you kind of walked us through an earnings bridge that takes into account some of the different items you guys have outlined. I was just wondering, if maybe we can get an update on that. So, the numbers I have from the last call, as far as a reversal in inflation, you had said maybe 20 million on the year, most of that coming in the back half, it sounds like you have a little bit of inflation baked into your Q2 forecast. And then kind of 10 million to 15 million on the year from restructuring and it sounds like if things accelerate, that still might be okay, and then is the 20 million from growth investments still a good number on the year or are there any changes with any of those going on with changes directly to them, or maybe an impact from what’s going on in EMEA?

James P. Hackett – President and CEO: I think the bridge that we talked about last time is largely still valid. The couple of new pieces of information are related to how much the mix has shifted on us across the business toward more heavily discounted projects. It’s not just in the Americas that we’ve been talking about for a few quarters. We now are seeing it significantly in EMEA and significantly in Asia as well. So, that can dampen the contribution margin as you would expect on the revenue growth. But from a manufacturing savings perspective, I said last quarter, I felt very confident in annual modeling something in the tune of at least 1 million, 2 million, 3 million, 4 million across the four quarters of net savings, but I wasn’t quite convinced it could go as high as 2 million, 4 million, 6 million, 8 million. So, I cited it between 10 million and 20 million and that’s still where we think that’s going to come in. And pricing is a very, very difficult one to project because it changes so quickly, and it can also be impacted by the mix of business, the number of projects that are out there, et cetera, but we do expect year-over-year benefits from our pricing actions because we had 18 months of year-over-year cost, where we were not able to put pricing actions in place fast enough. So, I think you guys kind of came up with a $20 million number, but is it in that range? I think it has the possibility to be in that range for the full fiscal year. On the incremental spending, we are not seeing anything at this point that would suggest that $20 million or a little bit higher is a bad number, high or low. So, I would still keep modeling that. The last piece of the bridge is the lower interest expense and that’s certainly playing out because out debt levels are significantly lower.

Jack Stimac – BB&T Capital Markets: As far as EMEA goes just on the margin performance there, is that all you need is volume or are there actions you can take to improve margins there?

David C. Sylvester – SVP and CFO: Volume is the biggest driver, right now, its volume and mix. Right now, volume is down and the mix of projects is higher, so it’s a bit of a double effect on our gross margin percentage. What we are doing in the mean time is of course, continuing to pursue cost reductions that we pursue every year and we continue to look at our footprint, but we are not prepared to announce anything now or in the near term about anything more aggressive than just normal cost reduction. Again, the big driver that is our business remains in a mix stage. It is one quarter is up, the next quarter is down, the next quarter is up. We are not convinced that they are falling off a cliff.

Jack Stimac – BB&T Capital Markets: It sounds like you guys have had some solid order growth and then with the project mix that you’ve seen, maybe you could comment a little bit on the pipeline and just your comfort level that those projects will be released. It sounds like you added that you guys were delayed later this quarter?

James P. Hackett – President and CEO: Yeah. Those were delayed installations, not delayed orders. The orders that were placed the product was manufactured and the site was not entirely ready, so they’ll ship in the second quarter. I will see if Terry wants comment on the pipeline overall, and whether – and maybe mention whether or not we’ve experienced any project order delays or any cancellations of significance.

Terry Lenhardt – VP Finance, EMEA and Americas: I’ll answer your second question first. We have not seen project delays related to any economy related projects delays through on orders. As far as visibility, in Europe, a lot of project activity remains, our visibility is not as far out right now as we can get it in the Americas, but our day-to-day business is little weaker, project activity remained strong. In the America, our visibility is down a little further, our visibility for second and third quarter, project activity remains very good, and as you get further out, obviously again to the fourth quarter, there is still customers haven’t made decisions on certain projects, but the funnels remains strong.

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