Its A Whole New Ballgame

June 24, 2005
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The office furniture industry was wearing its happy face last week.

In its second year of recovery, the NeoCon World Trade Fair in Chicago surpassed the industry’s wildest hopes. Attendance was up 12 percent and hotel bookings were up 20 percent.

Steelcase Inc.’s North America segment had its third “best week of the year,” and its best performance in that week since 2001. On Monday, the world’s largest maker of institutional furniture revealed a nearly $12 million swing on its bottom line for the first quarter of fiscal 2006.

First quarter 2006 sales rose 13 percent to $676 million, from $597.7 million in 2005.

On Wednesday, Herman Miller Inc. reported its most profitable quarter in four years.

Driven by nearly across-the-board improvements, Herman Miller’s net earnings were up 11.9 percent from 2004 to $21.6 million. Fiscal year 2005 was a 60.8 percent improvement over 2004, as net earnings soared from $42.3 million a year ago to $68 million.

Both furniture makers are looking ahead with renewed optimism.

“This was an important year in our recovery,” Steelcase President and CEO Jim Hackett said in a conference call with investors. “In past calls, I’ve emphasized improving performance and meeting commitments. The margins are up, spending down. North America is beginning to deliver results.”

Steelcase is in the midst of an intensive restructuring, most notable locally in the consolidation of its immense Grand Rapids facility.

“The evolution of our business model is on plan,” Hackett said. “In building a new industrial system, I’m proud to say that is on track as well. It’s safe to say a tremendous amount of the work is behind us. It’s been quite a challenge. This company built its heritage on manufacturing, but this is vital to our competitiveness.”

Despite incurring an unexpected $2.3 million in restructuring charges, Steelcase reported first quarter profits of $6.7 million, a significant leap from the $5.7 million loss of the year-ago quarter.

Jim Keane, chief financial officer, said although the costs of the North America consolidation were higher than expected, the company’s original estimate of $25 million to $30 million in savings has not changed.

In the past quarter, the restructuring spread to its international segment with consolidation of facilities in Italy and France.

The company continues to estimate full-year, after-tax restructuring charges of $18 million to $23 million.

Despite the restructuring costs, gross margins of 29.5 percent in the first quarter improved from 28 percent in the same quarter last year. Operating expenses as a percentage of sales dropped to 27 percent from 28.6 percent in the prior year.

“We still haven’t captured all of the benefits from last year’s restructuring efforts,” Keane said.

Plus, a drop in steel prices won’t show until the next quarter.

“Each of our reportable segments had double-digit sales growth,” Keane said. “Some areas have lagged behind others, but now we’re seeing a broader recovery across the country. There is strength in the Midwest and projects are coming from a variety of sectors; areas (where) we’ve historically been strong, as well as those we have put a lot of effort into lately.”

Keane said the company is seeing signs of recovery in key international markets and gaining market share there.

Steelcase listed asset management and consulting as revenue for the first time. The services have evolved into modestly profitable ventures, generating $11.2 million this quarter.

Hackett cited the company’s ability to convert science into products as a key to sustained growth, demonstrated in its environments for healing and new products built on wood platforms.

With that, Steelcase appears to be undertaking the same turnaround model adopted by Herman Miller years ago.

“We significantly restructured our business model, and last year we established the four avenues we will take to grow our business,” said CEO Brian Walker. “This year our focus will be on implementing our growth strategy.”

Walker said the Innovation award for the Cella chair and the Gold award for Sonare Technologies’ Babble sound management device at NeoCon reconfirmed the company’s ability to innovate and create new opportunities.

Babble captured one third of its annual order goal one week after launch.

Later this year, Herman Miller will unveil another product from its Creative Office, an adaptable interior architecture system featuring ceiling-suspended lights, partitions and digital displays like television and video screens. Walker describes the new product, code-named Motus, as a “radically flexible” infrastructure designed to let big box retailers, museums and other users of large spaces rearrange their interiors faster and cheaper, without resorting to costly renovations.

Representing both year-over-year and sequential growth, fourth quarter sales were up 15.2 percent to $407.5 million and orders 16.4 percent to $421.1 million. The order backlog ended the quarter at $228.6 million — the highest in five years — a 9.1 percent increase over the prior year and a 6.3 percent increase from the prior quarter.

For the year, sales totaled $1.52 billion, up 13.2 percent from fiscal 2004. Orders increased 13.4 percent to $1.53 billion.

“Our core North American office business is enjoying strong growth,” Walker said. “In prior quarters, we talked a lot about international growth. This year, domestic hit a home run.”

Not included in this quarter’s figures were a large Department of Transportation project, a $5 million West Coast account held by a competitor for 18 years, and a $6 million, three-year health-care contract.

The international segment did grow, but slowed to 10 percent.

“I think we’re still in the recovery phase. Everything I see from our sales people and BIFMA (Business and Institutional Furniture Manufacturers Association) makes me think we’re still above it,” Walker said.

The industry is plowing along so strong right now that it is bucking seasonal trends. Walker said he has never seen an increase in sales from the second to third quarter, yet the company expects first quarter revenue of $420 million to $440 million.

Steelcase forecast 10 percent to 15 percent sales growth in the second quarter over the prior year, driven by a strong backlog.

“In the long run, growth rate of the industry will get closer to 3 percent,” Walker said. “We think we’ve got another year with above average growth. We think we can grow faster than BIFMA (estimates).”

BIFMA projects the industry to grow roughly 11 percent in 2005, and from 7 percent to 8 percent in 2006.

“I think that the work we’re doing in vertical markets will allow us to grow faster, along with our success in emerging markets and what comes out of the Creative Office,” he said.

Herman Miller invested $33 million into the Creative Office in fiscal 2005.

Providing additional leverage is the company’s increased liquidity — a cash balance of $154.4 million and available credit of $137.2 million.

“That gives us the ability to look at other things that might help us along the way,” Walker said. “Not as much brick and mortar but tooling, R&D, maybe some acquisitions.”

The year’s gross margins improved by over a full percentage point to 32.3 percent of sales, from 31.1 percent in fiscal 2004, driven by the prior years’ restructuring efforts and increased volumes. This was also offset by higher material costs, including an $18 million spike in the price of steel alone.

“We’re still seeing an increase over many materials,” Walker said. “The good news is it’s starting to level off and even decrease.”

Steelcase noticed a similar trend, prompting one analyst to inquire about its 4 percent steel surcharge. Keane explained that despite the dip, the company is still not capturing any of the surcharge.    

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