Steelcase Inc. Q2 2010 Earnings Call Transcript

Steelcase Inc (SCS)

Q2 2010 Earnings Call

September 24, 2009 11:00 am ET

Executives

Raj Mehan - Investor Relations

James P. Hackett - President, Chief Executive Officer, Director

David C. Sylvester - Chief Financial Officer, Vice President

Mark Mossing - Corporate Controller and Chief Accounting Officer

Terry Lenhardt - VP North American Finance

Analysts

Chad Bolin - Raymond James and Associates

Matthew McCall - BB&T Capital Markets

Todd Schwartzman - Sidoti & Company, LLC

Margo Mertah - Schneider Capital Management

Presentation

Operator

Good morning ladies and gentlemen my name is Misty and I will be your conference operator today. At this time I would like to welcome everyone to the Steelcase Second Quarter Fiscal 2010 Earnings 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 Raj Mehan, Director of Investor Relations.

Raj Mehan

Thank Misty, good morning everyone. Thank you for joining us for the recap of our second quarter fiscal year 2010 financial results.

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

Our second quarter earnings release dated September 24, 2009 crossed the wires early this morning, and is accessible on our website. This conference call is being webcast; presentation slides that accompany this webcast are available on www.ir.steelcase.com and a replay of this call will also be posted to the site later today.

I did want to mention, in the spirit of increased transparency and simplicity we have enhanced the disclosure in our webcast slide, so I would encourage you to review these in addition to our normal disclosures.

In addition to our prepared remarks, we will respond to questions from investors and analysts. Our discussions 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 the earnings release and webcast slides.

At this time, we are incorporating by reference into this conference call and subsequent transcripts the text of our Safe Harbor statement included in this morning'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 this morning's release and Form 8-K, the Company's 10-K for the year ended February 27, 2009, and our other filings with the Securities and Exchange Commission. This webcast is a copyrighted production of Steelcase, Inc.

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

Jim Hackett

Thank you, Raj, and good morning. If you take the time to compare our impressions of the second quarter with the transcript of this call after the first quarter you are going to see a similar story.

The effects of the global recession have not abated, however we are pleased to be profitable this quarter before restructuring even though we didn’t hit our revenue target for the quarter. The work we have done as a company to enable us to make money, even when our top line declines as far as it has, is an indication of the outstanding efforts of the Steelcase people around the world. They truly exceeded our expectations in reducing and deferring costs. Now three months ago I told you we believed there was a good chance our industry had hit bottom in this recession. Even though there is still a great deal of volatility in our business, we continue to think it’s possible that we will be able to look back at Q1 of this fiscal year as a low water mark.

Now, certainly in the financial sector, specifically the banking industry, where more than 2/3 of the stress test losses have been realized, there are signs that bode well for eventual stability in the economy. When you look back at where the economy was a year ago, and the potential precipitous decline that we all did experience, I think you can see our company has fared pretty well in an extraordinary situation. The game now is to continue positioning Steelcase for the broader economic recovery.

Now here is just one indicator: The number of customer visits to our corporate campus in Grand Rapids this fiscal year is holding steady compared to last year despite the revenue decline. We have also taken advantage of the opportunity to strengthen our message with various groups, in this case the design community. Architects and designers have recently made up a significant portion of our total customer visits and we are using this time to immerse them in our new products and the insights that support them. We expect this to pay off as new project business ramps up and the recovery in the design firms are driving the specifications.

We had a special opportunity that I should tell you about. It was to connect the A&D audience this month as we celebrated the 100^th anniversary of the Meyer May House. This is a Frank Lloyd Wright design here in Grand Rapids that Steelcase purchased and restored about 22 years ago. I know some of you who have been following our company have heard the good fortune that we have had with this jewel of American architectural history.

We hosted a symposium focused on Frank Lloyd Wright and during impact on design with a truly all-star collection of panelists and nearly 500 people locally in attendance. We were able to pull some influential people into Grand Rapids and we saw the delight in their eyes as they toured our new work lab space. This is a space where we demonstrate and show our new products. The new products there are c:scape and media:scape and the space that they sit in, which is called the WorkLab has just earned a Leed platinum certification. This is the highest ranking possible under the LEED system and we have the first showroom in our industry to receive platinum status. Our focus on designing for the environment is another reason that we are making new connections with the A&D community.

So, we feel good about our preparation for recovery and of course everyone wants to know when that recovery will come. Our employees, who have taken a temporary pay cut want to know, shareholders who have seen reduction in the dividend are interested in the same question and we still don’t feel comfortable making any kind of long-term forecast given the uncertainty and volatility in the business today. But, I believe that we could see modest growth in fiscal year 2011 and the steps we have taken to remove costs, improve processes, and introduce new products are absolutely going to serve us well at that time.

As we move into a more detailed discussion of our performance, I do want to call your attention to two highlights: First, as I mentioned a moment ago, we were profitable before restructuring in the second quarter and that is with or without COLI which is the company owned life insurance asset that we dial up and dial down with equity performance. We are profitable due to the actions we initiated as early as March 2008. Second, while our quarterly revenue was a little shy of our estimates, we did see a 6% sequential revenue improvement compared to the first quarter and that was driven by North America which increased 10% from the first quarter, so net net it is nice to see a little normal seasonality in the midst of unusual times.

Now I will turn it over to David Sylvester, our Chief Financial Officer. Dave?

David Sylvester

Thank you, Jim. Today we reported break even net income for the second quarter of fiscal 2010 which was consistent with the estimate we communicated last quarter. Excluding restructuring costs operating income of $16.4 million significantly exceeded our estimate of approximately break-even results. These results were achieved despite second quarter revenue falling $22 million short of our $600 million estimate.

Income from company owned life insurance, or COLI, played a large role by delivering approximately $10 million more than we typically expect in a quarter. In addition, we recorded a $3 million gain in connection with settling a domestic property tax dispute.

For COLI, consistent with the overall performance in the capital markets, our cash surrender values increased again this quarter following significant declines in the third and fourth quarters of fiscal 2009. Like any other quarter, our earnings estimate for the second quarter contemplated a $2 million increase in COLI consistent with what we would normally expect over a longer-term investment horizon.

Setting aside COLI and the property tax gain, it is important to note that we remain profitable at the operating income line before restructuring costs even though revenues came in short of our estimates. Strong cost control efforts, deferred spending patterns, and better than expected manufacturing performance served to offset the volume shortfall.

What I mean by deferred spending patterns is that we believe the first half of the year has benefited somewhat from deferral of activity to the back half of the year. Some of this effect is simply a function of project timing and some is likely due to the distraction of restructuring activities which have been very high for the past several quarters and are now starting to ramp down. While we won’t quantify any specifics today, we do anticipate that operating expenses, primarily related to product development, may increase modestly over the second half of the year.

From a revenue perspective we experienced a 6% sequential improvement compared to the first quarter and expect this seasonal improvement pattern to continue into the third quarter. While the next several quarters will remain challenging for our industry, we continue to believe that the first quarter of this fiscal year may have been the low water mark for our revenues in this downturn.

Compared to last year the $39 million decrease in operating income before restructuring costs was largely driven by loss contribution margin relative to our fixed costs associated with the $324 million decline in revenues. Decreased variable compensation expense softened the contribution margin effect of lower volume as variable compensation is tied to levels of profitability and EVA and accordingly was reduced by approximately $29 million in the quarter as compared to the prior year.

Other factors which offset a portion of the negative volume effects included benefits from recent restructuring activities and strong cost control efforts, $12.4 million of COLI income compared to a loss of $2.1 million in the prior year; approximately $15 million of lower commodity costs compared to last year, and a benefit of nearly $10 million from temporary reductions in employee salaries and retirement benefits which took effect March 2.

As compared to the first quarter operating income excluding restructuring costs increased by $19 million driven largely by the seasonal improvement in North America revenue, lower commodity costs, and additional benefits from our cost reduction efforts. Lower COLI income offset a portion of these benefits. We have substantially completed all of the restructuring actions announced in March 2008 as well as the headcount reductions announced in early December. Each targeted to reduce our annualized operating costs by approximately $40 million, or $80 million in total. In addition, the temporary reductions to employee salaries and changes to retirement benefits announced in February and June of 2009 were implemented with an effective date at the start of the fiscal year; therefore our results are benefiting from these temporary actions by nearly $10 million per quarter while these actions remain in effect.

Regarding the additional reductions to our global white-collar workforce and the continuation of various smaller facility consolidations that we announced in June, we have substantially completed the white-collar workforce reductions during the last three months. Including the completion of negotiations related to the international workforce reductions, which occurred earlier than expected, pulling the associated restructuring costs forward into the second quarter. And, we continue to make progress against the smaller facility consolidations.

You will recall that these additional actions in total were expected to decrease our annualized operating costs by $20 million, or $5 million per quarter. A small portion of these savings began to be reflected in our second quarter results while the balance is expected to be realized over the third and fourth quarters. For your reference we have included a supplemental webcast slide which summarizes all of the major actions we have taken since the start of this downturn: the cost of which is now expected to approximate $30 million for the full fiscal year 2010, slightly above the $25 million estimate communicated last quarter.

The income tax benefit recorded in the quarter approximated the loss before income taxes. The resulting effective tax rate of 100% was driven in large part by significant non-taxable income from COLI. As we said last quarter, while we continue to estimate our longer-term effective tax rate will approximate the mid-thirties, the impact of tax credits, potential changes in valuation allowances and non-taxable items like COLI can have significant impacts relative to lower levels of pre-tax income or loss amounts.

Next I will talk about the balance sheet, cash flow, and liquidity.

Our cash and short-term investment balances approximated $142 million at the end of the quarter, a $24 million increase from the end of the first quarter. As previously disclosed, we completed a $47 million financing of our existing corporate aircraft during the quarter to further enhance our liquidity position. Significant uses of cash during the quarter beyond capital expenditures and dividends included the funding of restructuring actions and payment of semi-annual bond interest.

We continue to target approximately $40 million of capital expenditures for fiscal 2010 including a $3 million progress payment to replace a corporate aircraft which was placed in service during fiscal 2006. There after capital expenditures will include additional aircraft payments through April 2011 when we expect to take delivery of the replacement aircraft and sell the existing aircraft, plus incremental investments in our Grand Rapids campus as we consolidate our white-collar workforce in western Michigan in order to reduce future costs. Accordingly, we currently estimate our capital expenditures for next fiscal year could increase by approximately $20 million.

As of the end of the second quarter our total liquidity position includes $142 million of cash and short-term investments, $202 million of COLI cash surrender value and $110 million of available capacity under our existing unsecured credit facility. We are currently in discussions with our bank group regarding the renewal of our existing credit agreement which matures in July of next year. Due to the recent dramatic increase in the costs associated with such a facility, we are planning to reduce the commitment size. Because our COLI investments provide a non-balance sheet source of liquidity and we intend to continue to carry excess cash of at least $100 million, we are comfortable targeting a reduced commitment of $125 million under a renewed facility.

We are pursuing a term of three-years along with a net debt leverage covenant which will take into consideration our on balance sheet liquidity and therefore allow a higher level of assured access during the bottom of economic cycles. We expect to finalize the renewal of the facility by mid-November provided the pricing terms and conditions meet our expectations.

In the mean time, we amended our existing credit facility, as our increased level of long-term debt, when coupled with our declining levels of trailing four quarter EBITDA in this recession, would otherwise have put us slightly out of compliance with the leverage ratio covenant. The amendment was supported by our bank group, reduced the amount of the existing facility from $200 to $125 million, and defers the calculation of our quarterly leverage ratio covenant until November 16.

Now I will discuss the quarterly operating results for each of our segments and the other category.

While North America revenue decreased by 35% compared to the second quarter of last year, sequentially we experienced a seasonal improvement of approximately 10% compared to the first quarter, and we expect similar or slightly higher revenue in the third quarter. Compared to the prior year orders in the second quarter were down approximately 36% and ending backlog was down approximately 33%. The decline in orders was felt across most regions and product categories and similar to the first quarter, we experienced deeper declines in day-to-day business compared to project related revenue.

Across vertical markets the US federal government order patterns continue to reflect strong double-digit growth in part driven by the large multi-year contract with the Department of Defense we secured one year ago. Health care and higher education continued to decline at t rate much less than the rest of the business. We continue to be very pleased with the short and long-term prospects of our Nurture healthcare brand and believe our efforts in higher education have the potential for similar results.

Order declines in the financial services sector, which entered the recession a full year prior to other vertical markets, also moderated during the quarter, as we secured a couple of large projects and have seen some modest improvement in the level of continuing business across the rest of this customer segment.

Several important new products were launched during the past few months including c:scape and media:scape furniture solutions and cobi and i2i seating. Dealer, designer, and customer response has been favorable and early indications are that first year sales numbers will meet or exceed our initial expectations set in connection with early product development tole gates.

Operating income excluding restructuring costs declined only $13 million compared to the prior year despite a $177 million decrease in revenue. The positive effects of cost reduction efforts, higher COLI gains, and lower commodity costs all contributed significantly to offset a large part of the negative contribution margin effects associated with the lower volume. We continue to strengthen our business model which will benefit greatly from sales growth when our industry recovers from the current downturn.

As compared to the first quarter North America operating income excluding restructuring costs increased by $18 million driven largely by the seasonal improvement in revenue, lower COLI commodity costs, and additional benefits from our cost reduction efforts. Lower COLI income offset a portion of these benefits.

In the international segment sales decreased slightly compared to the first quarter and by 42% compared to the prior year quarter. Currency translation effects and divestitures in the last 12 months had the effect of decreasing revenue by approximately $22 million as compared to the prior year. Adjusting for the negative effects of currency translation and divestitures we estimate the year-over-year organic decline in the international segment approximated 36% in the second quarter.

International orders in constant currency declined at a slightly lower pace or approximately 33% compared to the prior year. Germany and most of Eastern Europe declined more than that, while France and Latin America declined less. For France a few project awards helped, plus we are beginning to lap prior year declines as France entered the recession early. While Germany is in a different stage of the decline, we are in the fall off in day-to-day where continuing business is now driving larger declines as project activity runs off.

The Spanish and UK broader economies seem to be in similar states as France, beginning to lap the start of the recession, but orders in these markets, never the less were down significantly again this quarter.

The Middle East remains a bright spot and we are encouraged by the prospects of increased activity in the Latin America and Asia Pacific regions.

International reported an operating loss excluding restructuring items of $10 million compared to operating income of $13 million in the prior year. You will recall that international reported a 34% increase in revenue or approximately 22% in constant currency during the second quarter of fiscal 2009 setting a high benchmark for comparison purposes. The $23 million decrease in operating results compared to last year was largely driven by the reduction in volume which adjusted for currency translation effects and divestitures approximated $84 million.

Cost reduction efforts were only able to offset a portion of the loss contribution margin from reduced revenue as the pace across structure changes in our larger international markets is tempered by the process of negotiating with the related work councils.

The other category, which includes the Coalesse Group, PolyVision, and IDEO, reported a decline in revenue of 27% compared to the prior year. The Coalesse Group experienced a decline in revenue similar to the North American business while PolyVision and IDEO posted revenue declines closer to 15%. PolyVision performance benefited from an exciting new product called ēno which we believe is a break through advance in interactive white board technology. All businesses posted sequential or seasonal revenue growth compared to the first quarter.

Excluding restructuring costs the other category reported a small operating loss which compares to a $6 million operating loss in the first quarter and approximately $5 million of operating income in the prior year. Compared to the second quarter of last year loss contribution margin associated with the decline in revenue was partially offset by the benefits of restructuring actions and various cost control measures over the past four quarters.

Now I will review our outlook for the third quarter of fiscal 2010.

Overall we expect revenue to approximate $600 million, compared to $811 million in the third quarter of the prior year which marked the beginning of the decline in our revenues in this recession. The estimate takes into consideration the following factors: First based on exchange rates at the end of the second quarter our estimate contemplates approximately $9 million of favorable currency translation effects compared to the prior year. Second, we expect to see modest seasonal improvements across our domestic and international markets.

Taking into account our revenue estimates and the status of our cost reduction actions we expect to report modestly positive operating income excluding an estimated $5 million of pre-tax restructuring costs, as well as approximately break even net income for the third quarter of fiscal 2010.

With respect to commodity costs we are not expecting any sequential increase or decrease in the third quarter compared to the second quarter. Compared to the prior year however, we estimate third quarter commodity costs will decrease our global costs by approximately $15 million.

The third quarter net income estimate assumes we will record a tax benefit using effective tax rates similar to the first and second quarters, which again remains highly sensitive to changes in estimates related to non-taxable items like COLI in relation to relatively small pre-tax income or loss amounts.

As we indicated in the release, we are not providing full year revenue or earnings guidance; however we have continued modeling various scenarios of revenue declines for the full fiscal year 2010, along with the expected benefits of our cost reduction efforts and the reversing trend of commodity costs in recent months. We currently estimate that we could achieve break even or better operating income for the full fiscal year, excluding restructuring costs and year-to-date excess COLI income of approximately $26 million, provided that revenue declines do not exceed 27% compared to fiscal 2009.

These estimates are contingent on the successful completion of our current restructuring actions over the balance of the year; the full year effect of the temporary salary reductions and employee benefit changes we implemented, and net benefits from current deflationary trends. In addition COLI income remains subject to volatility in the capital markets and thus we have only modeled a normal level of COLI income for the remainder of the year for purposes of this modeling.

While the last decade has forced us to manage through two unprecedented recessions in our industry, our industrial model is dramatically less vertically integrated, and our top line is much more diversified than it was just five to seven years ago, and at the same time our balance sheet remains strong. No one can predict with a high level of certainty when our industry will recover, but we increasingly believe the chances are good for a recovery sometime next fiscal year.

Now we will turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Chad Bolin with Raymond James.

Chad Bolin - Raymond James and Associates

I have a couple of questions. Last quarter I think you said you saw a modest pricing benefit. Could you quantify what pricing was in this quarter and are you seeing any significant changes or anything new on the competitive front?

David Sylvester

From a pricing perspective we really didn’t see any kind of additional benefit this quarter; last quarters was quite small. With respect to the second part of your question, I would say that we haven’t seen any dramatic changes in pricing patterns. It remains highly competitive, as you would expect in a downturn, especially around the few projects that are out there.

Terry Lenhardt

That’s right. We talked about it last quarter, the markets being competitive and that environment is pretty similar to last quarter.

Chad Bolin - Raymond James and Associates

Okay and talking about operating expenses, it sounds like, at least on a sequential basis and certainly through the back half of this year, you will get a more significant benefit from that last piece of cost reductions with a white collar workforce and facilities consolidations, but that will be offset to a certain extent by some of the deferred spending, maybe product development that you talked about. Could you perhaps help us maybe quantify what incremental savings you would see in the second half and maybe give us a sense of that in comparison to that increased spend?

David Sylvester

Let me start with the restructuring actions that are yet to be completed. If you go to that webcast slide that we included where we laid out all of the actions we have taken since the beginning of the downturn, the March actions are 100% in our run rate as of this quarter and probably even as of the previous quarter. The December actions I would say are largely in, maybe a tad yet to be realized and I can’t tell you whether those are going to come in OpEx versus restructuring, but very little of them may be an additional $1 million kind of quarterly benefit comes in from the December actions.

The temporary reductions in employee salaries as well as benefits, those are in 100% and have been in since the beginning of the fiscal year. So it is just this last piece in June that we announced of the workforce reductions and the smaller facility consolidations were $20 million, or $5 million a quarter. I would say roughly $1 million is in our second quarter results and the balance of $4 million probably comes in evenly over Q3 and Q4.

The split between OpEx and COGS I would be guessing, but 50/50 would probably not be too far off.

Chad Bolin - Raymond James and Associates

Okay and can you give us a sense of the magnitude of any of the spending increase planned for the second half?

David Sylvester

Well I said we wouldn’t quantify specifics, but we do see operating expenses going up in the second half of the year. So, if you are doing a sequential analysis you are going to take OpEx down a little bit next quarter for the cost reduction benefits, but then you are going to take it back up something more in order to account for what we are saying is going to happen; which is we think they are going to increase modestly.

Chad Bolin - Raymond James and Associates

Great, well that is very helpful. Thank you very much.

Operator

Your next question comes from Matthew McCall of BB&T Capital Markets.

Matthew McCall - BB&T Capital Markets

Dave, you hit on the temporary costs. I think I ask this question every time I talk to you, but Jim, as you look at the way you see the world, you said you see the business up next year, talk about how we should anticipate some of these costs coming back into the models.

Jim Hackett

Dave is not going to give a lot of specifics, but let me broadly paint a pictur5e for you of what causes that. For a moment consider that the kinds of costs that the Company might expand are principally around product development and it is an important indicator that they are in areas where we are seeing good results even in a down turn with some of our new products. They are just starting, so they are kind of de minimus to effect of top line, but being in the business as long as a number of us have, you can just read this that these are products that are going to be of high acceptance. So, there are categories in products that are getting continued investment because of this early good start. They are on plan. They are hitting the projections that we imagined even in spite of the downturn. So, we have this touchy tipping point which is starting to expand investment in that so that we have these ideas and notions ready to go when the market really picks up again.

That is the broadest view of why expenses come back. It is mostly because of product development.

What won’t happen is that much of what we built in terms of support structures and systems to help the business, I am vaguely referring to the shared service structures that we have invented and created over the last 2 ½ years, those costs that have been able to be shifted to those setting don’t come back; that is a good thing and it is making us very competitive globally.

A third area which is a temporary kind of reduction is the employee salaries. In Michigan, where of course we are headquartered, we saw where one automotive company just announced that it was going to increase the salaries, or bring them back, and I feel that pressure to address that, but this isn’t a quarter call where I am. There are a number of indicators that we are going to be using to make that decision. The first people we have to tell is our employees and that line item is a big number back in our business when it comes back, but the good news is we have the choice of when to put it back so that we don’t destroy value or destroy profitability.

Those are kind of the three areas I would have you think about. Product development, their shared service centers are going to allow us to have persistent cost reduction and then we have a management decision of when to bring the salaries back.

Matthew McCall - BB&T Capital Markets

Okay, thank you Jim that was helpful. I think you said there is a similar message this quarter versus last and it is kind of a message of stability. If you look a little deeper and you talk about the order patterns that you are seeing, Dave, I think you mentioned that day-to-day business is a little stronger, but is the volatility in the business stabilizing at all or are we bouncing along a very volatile bottom?

David Sylvester

Let’s let Terry take that because he has been studying that very question.

Terry Lenhardt

Volatility does continue and we talked about that in our script. When you look at the volatility though, you are not getting as severe of the volatility if you say look at our weekly order patterns and our two-week rolling average. They are not as severe as they were prior to mid first quarter: we saw a little less volatility since mid first quarter. Then when that volatility hits it doesn’t last. It doesn’t seem to last as long as perhaps it did last fall, last winter. You get a couple of three weeks that are a little more volatile and then it gets back a little bit closer to the seasonal patterns. So, volatility continues, just a little less severe.

Jim Hackett

If you go across the ocean and get into the international markets you almost have to go country by country. I guess what I would call out is that I think that Germany and most of Eastern Europe are still quite volatile. As we have said before, France, Spain, and the UK, who is now laughing, at the beginning of the recession they are starting to see somewhat less volatility, but still volatile and I guess I would stop there.

Matthew McCall - BB&T Capital Markets

Okay. I am going to sneak one more in. The amended facility, any costs associated with that in the quarter, Dave?

David Sylvester

No. We have a good relationship with our bank group and they have been very supportive in the way we are running the business and our capital structure and so they were comfortable giving us an amendment through the middle of November for free. I think they are going to try to make up for it in the new facility.

Matthew McCall - BB&T Capital Markets

Okay, thanks guys.

Operator

Your next question comes from Todd Schwartzman with Sidoti & Company, LLC.

Todd Schwartzman - Sidoti & Company, LLC

Will you quantify the second quarter year-over-year benefit in commodity pricing relative to the $15 million, I think you said, year-over-year benefit you expect to see in 3Q?

David Sylvester

Yes, it is $15 in the second quarter and about $15 in the third quarter, again compared to prior year. No sequential increase or decreases significant going from Q2 to Q3. We did however see some sequential benefit coming into Q2 from Q1.

Todd Schwartzman - Sidoti & Company, LLC

Okay and my other question is can you update us on the restructuring actions going on in Europe?

Jim Hackett

Well, I would tell you that as I said we completed our negotiations with the work counsel in France a little bit earlier than we anticipated which ended up pulling forward the restructuring from Q3 to Q2 and they are in the process of implementing now.

Todd Schwartzman - Sidoti & Company, LLC

There is nothing else major to speak of?

Jim Hackett

We really can’t get into that on the call. If we had plans, we would need to first discuss them with the work counsel.

Todd Schwartzman - Sidoti & Company, LLC

Great, okay thank you.

Operator

Your last question comes from Margo Mertah with Schneider Capital Management.

Margo Mertah - Schneider Capital Management

I was curious about the renegotiation of the credit line. Can you talk any more about what kind of covenants might be put in place as opposed to where they are now, what interest rate you might expect? Do you expect to dip into that line? To address the liquidity situation more, what are the priorities? You have cash, you have COLI you can borrow against. When you look at your different scenarios can you tell me more about the sources of liquidity and the priorities?

David Sylvester

Right now what we are continuing to do is to try to operate the business at break even operating income; you and I have gone through the math before. The reason we target that is we believe we are not burning any significant cash, if we are operating at break even before charges, and that has been our objective and so far we are not too far from that, especially when you factor in our guidance for the third quarter. So, it should be through three quarters we will be pretty close to that objective. Restructuring charges uses cash, but so far it also has had a relatively fast pay back so we have kind of held that aside.

Our objective of cash is simply to continue to protect the strength of our balance sheet in this downturn, so we have been taking actions in order to operate at the break even level, in order to protect the already strong balance sheet which, as you know, includes a significant amount of cash and COLI, and consistent with our efforts to protect the strength of the balance sheet we have decided to pursue negotiations of a renewed credit facility. We have taken that number down, the amount of the facility down, for two reasons: One is it is dramatically more expensive than it once was, but more importantly we don’t see a need. It is really a cushion level of liquidity, so we feel comfortable bringing it down to $125 million.

The covenants on it I would tell you we are pursuing covenants that will give us a higher level of assured access in the bottom of cycles. We are not entirely through the negotiations yet.

Margo Mertah - Schneider Capital Management

Okay, so you are saying if operating incomes are break even you can maintain your cash level basically and not dip into anything else, is that what you are saying?

David Sylvester

Broadly speaking yes, because if you think about break-even operating income before charges, if you add back $80 million of depreciation and amortization that gives you enough cash generation to cover CapEx at $40, interest expense at $20, and dividends at $20 on an annualized run rate.

Margo Mertah - Schneider Capital Management

Okay so you can’t say anything more about what interest rate you might expect on the renegotiated credit line or covenants?

David Sylvester

Well what I expect is a really low one, but what the banks are willing to, I think we are near that.

Margo Mertah - Schneider Capital Management

Right, do you have any estimate of how much they might, I mean what is the going rate or how much they might raise?

David Sylvester

Spreads are continuing to tighten, so I just really don’t know, but I would hesitate to even speculate. Let us finish the negotiations.

The capital markets are just starting to stabilize versus a year ago. It is amazing to think it is just a short year ago when kind of the devil broke loose and I am seeing some data this week about the stabilization in the banking system, it is just getting better and better.

As a company we still have to perform and have those discussions with our lenders about why Steelcase is as solid as it is and as you know, we have a very conservative balance sheet so from that perspective it is not a hard discussion. The perspective is what kind of rate we are willing to take, so we are highly motivated to keep that as low as we can of course.

Margo Mertah - Schneider Capital Management

Okay, well thanks very much and good luck.

Operator

With no further questions, gentlemen I would like to turn it back to you for any additional comments or closing remarks.

Jim Hackett

Sure. I would just like to thank everyone for the call and remind you that as David was talking about the break even position that this is an extraordinary achievement in an industry like ours given that the top line did drop. I am really proud of the fact that the Company is focused on profitability. Our employees are very committed to that and the kind of decisions that we have made and the long-term strategy that we are taking, we are turning the Company towards a really nice recovery of profitability when the demand comes back with the recession abating. I just want to underscore that and thank you for your time today.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation. (Operator Instructions)

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!