Steelcase Inc.
Q4 2012 Earnings Call Transcript

Published: 23 Mar 2012

[Operator:]

Good day, everyone, and welcome to Steelcase's Fourth 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 over to Mr. Raj Mehan, Director of Investor Relations and Assistant Treasurer. Please go ahead.

[Raj Mehan:]

Thank you, Ally. Good morning, everyone. Thank you for joining us for the recap of our fourth quarter and fiscal year 2012 financial results. Here with me today are Jim Hackett, our President and Chief Executive Officer; Dave Sylvester, our Senior Vice President and Chief Financial Officer; Mark Mossing, Corporate Controller and Chief Accounting Officer; and Terry Lenhardt, Vice President Finance for the Americas and EMEA segments. Our fourth quarter earnings release, which crossed the wires yesterday, is accessible on our website. This conference call is being webcast, and presentation slides that accompany this webcast are available on ir.steelcase.com. The replay of this call will also be 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. Reconciliations to the most comparable GAAP measures are included in this earnings release and webcast slides. At this time, we're incorporating by reference into this conference call and the subsequent transcript 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 with those formalities out of the way, I'll turn the call over to our President and CEO, Jim Hackett.

[James P. Hackett:]

Thank you, Raj, and good morning, everyone. It's been exactly one week since our company officially turned 100 years old. And it has been an honor and privilege to celebrate with our employees around the world. Now more on my thoughts about the anniversary at the end of these comments. But first, I want to talk about the results for this quarter. And I can't help but point out the irony that we're stepping back from our 100-year history of being in business to focus on the last 90 days. The management team has worked extremely hard at rebuilding our business in recent years, and I want to confirm with this report that we are about building long-term value. This quarter brings us to the close of a fiscal year in which our net income more than doubled. And overall, we're pleased with the continued momentum in our top line this quarter, particularly the 13% organic revenue growth in the Americas. We are outperforming the industry right now in that same region. Now elsewhere, we saw a modest growth in EMEA with positive results in some countries and declines in others. This resulted in 4% organic growth. Asia Pacific, it continues to grow nicely. In fact, I just returned last week from employee meetings in various locations in Asia. This area of the world plans on setting and hitting some aggressive targets in the coming year. So today, I want to relate that we are very positive about the sales side. It is true that I would have liked to see more of that revenue fall to the bottom line this quarter. And I'd be having serious discussions with the leaders about this if I thought this was a systemic problem. But I think it's largely a matter of timing of orders, which came in later in the quarter that were entered but not shipped and some unusual factors such as inventory and warranty reserve adjustments. And because our execution has been solid lately, I'm sure you expected the same thing. Now we're very aware with this call that our operational performance did not meet expectations of this quarter. But let me call out 2 areas that contributed to the missed targets in the specific quarter and try and create an awareness that longer term there are areas of confidence and optimism. First, we believe we would begin to realize net savings in the fourth quarter from our most recent manufacturing consolidations. They're well on their way, and we are seeing benefits. It's just that they are being offset right now by other transition costs. And the decision to have parallel capacity during this period is at the core of these additional costs. Dave will add much more detail to this in the discussion in a few minutes. But my insight for you is one of the things we've learned that is if we go too fast in these moves, we will run the risk of greater customer disruption. So we worked hard with that parallel structure to avoid that pitfall. We do expect net savings to begin in the first quarter as we complete the transition of our seating production. The second timing issue is that we sped up the pace of our investment in new products and services compared to what we originally planned. We actually started talking to you about this last quarter. We're confident that we have great examples of turning this research and insight into innovation across all the brands. And we now have the data that shows recent market share improving with Steelcase growing its share. And it was my decision that we're going to build on that momentum and move into the execution phase on a number of our new projects. We have more to say about what those are and the additions to our portfolio later in the calendar year. And we'll begin to preview some of the new products at some of our sessions later in the fall. There are several other signs of continued momentum in our business. Customer visits at Grand Rapids and the mock-up activity are good indicators, and they were up by double digits compared to the same period last year. With the exception of the federal government, we saw growth across all our vertical markets. And we're strong in education where we've got a bunch of new products that are resonating with our customers. Many of the visits are about customers coming to discuss major projects, which is new in the last decade and to explore our thinking around the future of their work patterns. We believe our reputation for research-driven insights also helped us earn other notoriety. For example, we just learned we got national recognition in Fortune's Most Admired Company list and in addition to that, overall brand recognition during the fiscal year of 2012. Steelcase has been honored for technology innovation, employee development and special product design. And in this quarter's report, there are additional financial signs of momentum. You read in our earnings release that Steelcase's Board of Directors voted to increase the quarterly dividend by 50%, and I see this as a vote of confidence from them based on our future plans. As today, we're returning increased value to shareholders. Our employees as well will also be sharing in our success as we announce to them the current year bonus and funding of their retirement plans later today. Steelcase. Well, it's a member of a very small group, companies that have survived Great Depressions, global wars and numerous recessions to reach their centennial. I've been saying in a number of my visits around the world to stay ahead of the market, to be ever more relevant for 10 decades, you have to do more than just survive. You have to thrive as a business. I suggested to our employees this year that it's not just companies that last for 100 years though, it's ideas. And today, our customers turn to Steelcase not just because of what we make but often they tell us, it's because of what we know. We make furniture, but we are in the human insights business. As a CEO of this company, it's my job to harness what we can become, and it's also my job to keep us focused on the future. So as we close this fiscal year and begin the second Steelcase century, we know what we do in the future will always be influenced and informed by what we've been successful in doing in the past. So thank you for your continued interest in our company. And now, I ask Dave Sylvester to take you through the quarter's financial results. Dave?

[David C. 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 2013. And then, we'll move to your questions. Again, as Jim mentioned, there are many things to understand as it relates to the results in the fourth quarter. But when you sift through the complexity, there are 4 important takeaways

[Operator:]

[Operator Instructions] Our first question comes from Matt McCall of BB&T Capital Markets.

[Matthew S. McCall:]

I'm going to try to be as brief because this has, I guess, multiple parts but -- so part of the story here is that, for us at least, the bridge into FY '13 numbers and understanding you haven't given outlook there, and a lot of this depends on the top line. But it sounds like you're going to start to see some -- when you saw the price cost environment kind of offset one another in Q4, right? That was -- and can you give us an idea of what that picture looks like for FY '12? And then, on the net restructuring benefits, it sounds like you're going to start to see some benefit in Q1. I know the initial view was 30 -- or still $30 million to $35 million. How much net of disruption do you expect to see in FY '12?

[David C. Sylvester:]

Okay. I'll cover price cost first and then go to the restructuring benefits. On the price cost, there's a lot of moving variables on this, right? So it is very difficult to predict. However, if you assume inflation will be relatively modest or that the inflation can be offset -- incremental inflation relative to today will be offset by pricing actions that we announced, I think, and go effective in the middle of April, a modest price increase. If you assume that, that stuff is okay -- meaning, that inflation doesn't spike, I would imagine that year-over-year comparisons will reflect improvement. Because last year in the first half of the year, inflation exceeded our pricing benefits. And we would expect that trend to reverse. On the -- and then, it gets smaller at the back half of the year. Because remember in the third quarter, we said that pricing offset inflation for the first time in several quarters, and then we said again in the fourth quarter that pricing was higher than year-over-year inflation. So we have the first half of last year to overcome in a year-over-year comparison, and that should provide a bridge from FY '12 to FY '13 -- a benefit, a bridge benefit, using your words, from '12 to '13. On the...

[Matthew S. McCall:]

Dave, I'm sorry to interrupt you. But what's -- can you remind us of what that impact was price net of cost?

[David C. Sylvester:]

Yes, right. I have a recollection that last year's total inflation -- year-over-year inflation was in the neighborhood of $40 million, maybe a little bit south of that. And our pricing benefits were certainly south of inflation in the first half of the year and began to neutralize the effect in the second half of the year. So what we would hope for is that a year from now when we're doing a year-over-year comparison, that we would not only offset the inflation, but that we would have margin on the inflation. So if last year, we did something like $40 million of inflation, again very roughly, and we had something like $40 million very roughly of incremental price yield, probably less than that in both cases, you would expect -- if you're going to achieve margin on the inflation, you would expect pricing year-over-year to be closer to an incremental $20 million, right? Because then you'd have $60 million over $40 million, and you'll be getting margin on your inflation. That -- again, that assumes stable pricing environment. That assumes that inflation remains covered by the incremental price increase that we announced that goes into effect in April. So there's no guarantee in that math. But if you make some assumptions, you can get to a bridge of around $20 million.

[Matthew S. McCall:]

Okay. And then on the restructuring benefit?

[David C. Sylvester:]

On the restructuring benefits, this one -- so what I said in the scripted comments is that we had savings in the fourth quarter of 3 and cost of 4. So we were net negative one. We anticipate that flipping to net positive, albeit at a small amount in Q1. We're building from there. The way it's going to build is I believe from the manufacturing guys, we believe that the costs are going to be -- are going to stay at the $4 million range for at least another quarter, maybe 2, and then start to decline. And we believe savings will improve incrementally over the next 4 quarters. What that nets out to be remains to be seen. But in very rough strokes, Matt, I mean, I certainly would hope that it would be better than, say, 1, 2, 3, 4 in the next 4 quarters. But I'm not sure that I would model 2, 4, 6, 8 either.

[Matthew S. McCall:]

And that's the net number?

[David C. Sylvester:]

Yes, that's the net number. And that's really all I can give you on the benefits of the restructuring. Again, what we're dealing with is moving production lines and closing factories while demand level is very high. And so we're being very cautious, which unfortunately -- fortunate to our customers, it's not disrupting them; unfortunate to our P&L is we're incurring higher levels of disruption for a longer period of time.

[Matthew S. McCall:]

Yes, okay. And the follow-on, it sounds like the incremental spend -- I think, you said -- the chart said $19.9 million year-over-year. It sounds like it's going to be at or slightly above that. As we look at the growth projection -- and I found it interesting that you said the industry is going to be up. I think the projections are that the industry is going to be slightly down, so maybe address that first and then if you're up a little bit more than that. When we were talking about the growth that's going to essentially -- what kind of growth you need to assume to offset that? What kind of incremental margins you would bake in? In the past, you talked about, I think, initially 40 off the bottom then more like a 30. Is it still in the 30 that we should talk about, or is it something slightly less than that?

[David C. Sylvester:]

Okay. You have a bunch of questions in there. Let me see if I remember them all. The first one is around our view on the industry. I acknowledge that the business out there have a slight decline, and I said we think it's going to grow slightly. There's 2 things to keep in mind

[Operator:]

Our next question comes from Chad Bolen of Raymond James.

[Chad Bolen:]

Matt got to a lot of the moving pieces in terms of kind of modeling and looking at the guidance. I just had a couple of others. I noticed in the slide commentary and in your scripted remarks, you talked about the healthcare vertical being up though at the same time, Nurture was down. Could you just maybe help us give us a little color there and understand that dynamic?

[David C. Sylvester:]

Yes, the Nurture brand is really entirely focused on the off-carpet part of the vertical market. But when we talk about the vertical market in total, it includes everything including the administrative settings. So what's referenced in our webcast slide is related to the revenue in the quarter. And there, we had growth on the vertical market and a decline on the off-carpet business within Nurture.

[Chad Bolen:]

Okay. And one of your obviously key competitors talked about weakness in healthcare. To what do you attribute the growth in that vertical for you guys? Is it a customer mix issue, any additional thoughts there?

[David C. Sylvester:]

I'm not aware of any specific large project or anything like that, that's generating the growth. So I'm tempted to say, although I haven't looked at the specific detail, that it's relatively broad based. But I think what you're seeing in that vertical market is what you're seeing in all the vertical markets for us is there is a high level of appreciation for our new products, applications and experiences.

[Chad Bolen:]

Okay. And you told us that customer visits, mock-ups were up double digits year-over-year. Care to quantify that with any more specificity? Or we're talking up 10, mid-teens, 20 plus?

[David C. Sylvester:]

Well, no, I think that the volume of these trips are large for our company. So in an absolute basis, it's a large number of people, but it's double digit.

[Operator:]

[Operator Instructions] Our next question comes from Todd Schwartzman of Sidoti & Company.

[Todd A. Schwartzman:]

As you look at the CapEx budget, $75 million, $85 million, how does -- how much of that is product development, number one? And second part is how do you see that shaking out by product category just kind of back of the envelope?

[David C. Sylvester:]

I'll see if Mark has enough information on the top of his head to give you a sense. I don't we'll be able to give you specifics on the call, but we could maybe talk more detail if you call us back. But Mark, you want to...

[Mark T. Mossing:]

Yes, I think if you look at it, the product development is -- it's called a third for purposes of comparison, then you've got manufacturing IT in the middle. And then this year, as Dave mentioned, we've got the rest of the consolidation here. So I think you're going to see definitely from the investments, we're putting into product development, that's going to be a big piece of it and maybe even push the higher end of that range I gave you. And then some manufacturing investments, as Dave mentioned, will be in there too. So in essence, I think, that's the way I'd suggest you think about it. And as Dave suggested, we can touch base offline if you have more questions.

[Todd A. Schwartzman:]

Yes, sticking with just the product category theme and you talked about how you've gained share for a little while now. Where have you made the most strides and which categories in your opinion?

[Terry Lenhardt:]

It's Terry Lenhardt. It's been pretty broad based. If you think about by verticals, the investments we had to diversify ourselves in vertical markets have really helped. We've got a good strong growth in healthcare and higher education as well as our historic verticals have grown. So we really got a good growth across almost our verticals, now except for government. And it's really been the investment we've had in products during the downturn. So if you think about media

[Todd A. Schwartzman:]

And on the backlog, what was the -- just to refresh, what was the year-end backlog consolidated as well as for the Americas region?

[David C. Sylvester:]

We don't give out the absolute number because of -- our business doesn't -- we don't capture backlog for every single one of our businesses, and they're all a little bit different on how it works. But what I referenced was that the Americas backlog was up nearly 30% versus a year ago because of the strength of February orders.

[Todd A. Schwartzman:]

And what about sequentially?

[David C. Sylvester:]

Sequentially, I would imagine it was down. Terry is looking up-to-date as we speak.

[Terry Lenhardt:]

It always goes down sequentially. We build up strong backlog going into the fourth quarter, and some of that just bleeds off just from a -- that's our typical seasonal trend.

[Todd A. Schwartzman:]

Right. On the geography, you called out a few places, Latin America, New York, if I heard correctly, both the Central and Western regions of the U.S. Is that accurate?

[David C. Sylvester:]

Yes.

[Unknown Executive:]

Yes.

[Todd A. Schwartzman:]

Are -- did any of these regions -- were any of them not skewed by 1 or 2 customers or 1 or 2 large projects?

[David C. Sylvester:]

Yes, well, there is one project that we've mentioned on previous calls that is more in the Midwest. So I think that's in the Central region, but that's really it -- I mean, there is -- that's particularly large. There -- as we've also said, there has been an increase in project business from some of our largest corporate customers. But this one project in particular would have impacted the Central region.

[James P. Hackett:]

In fact, it's a good point for me just to remark again. I did this 2 quarters ago when we were facing the question of what looks like low GDP and low interest rate environment. And the question was, what do you guys think your market's going to be like. And I observed that for the last decade, decade of 2000s, most of the Western base corporations were expanding in Asia particularly China and India. We would have discussions with lots of these large accounts, and they would say we're busy, we're just not going to be busy in our core historical markets, we're expanding. Now those Asian markets are self funding in a way that I was remarking back at the last time I brought this up that budgets now were emerging. I could see in corporations who have a lot of cash to update their kind of home based operations. And you layer on that the fact that Asia and India caused them to suspend, to see the effect of what technology and the demographics of the workforce changing. And all of a sudden, they wake up and there spaces are out of date. And so I made this suggestion that it'd be hard to see it inside the GDP to understand why our industry was likely to enjoy, I think, some decent wins to help expand business. And I would report that when you out -- when you're trying to figure out how sustainable the demand is and you wonder if -- like in our case, we didn't have as much government business that affected the year-over-year, there's not a segment that's now said, "Okay, we're all done." And we don't see the rest of the year being -- having improvements. So I'm still very bullish on that. You'd say, what's the one caveat? Well, the one caveat is that businesses today have to be really agile based on unintended events. So if something happens in the Middle East with oil or something like that being -- we are all reacting. But if you could just step back and say what would cause corporations to want to update their facilities, that description I just gave you is what I have said in many meetings.

[Operator:]

I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Jim Hackett for any closing remarks.

[James P. Hackett:]

Well, the 3 points that I want to emphasize

[Operator:]

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.