Steelcase Inc (SCS) 2020 Q2 法說會逐字稿

Good day, everyone, and welcome to Steelcase's Second Quarter Fiscal 2020 Conference Call.

As a reminder, today's call is being recorded.

For opening remarks and introductions, I'd like to turn the conference over to Mr. Mike O'Meara, Director of Investor Relations, Financial Planning and Analysis.

Thank you, Kevin.

Good morning, everyone.

Thank you for joining us for the recap of our second quarter fiscal 2020 financial results.

Here with me today are Jim Keane, our President and Chief Executive Officer; and Dave Sylvester, our Senior Vice President and Chief Financial Officer.

Our second 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.

A replay of this webcast will be posted on ir.steelcase.com 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 details regarding the risks associated with the use of forward-looking statements are included in our earnings release, and we are incorporating my reference into this conference call the text of our safe harbor statement included in the release.

Following our prepared remarks, we will respond to questions from investors and analysts.

I'll now turn the call over to our President and Chief Executive Officer, Jim Keane.

Thanks, Mike, and good morning, everyone.

Our business continues to perform well.

In fact, this is one of our strongest quarters in the past 2 decades as we delivered 14% revenue growth and 26% operating income growth.

We grew orders 3%, which was against a strong prior year quarter, in which we grew 12%.

Our earnings of $0.50 per share beat our estimates as we executed really well operationally, and did a good job controlling commodity costs and overall spending.

We also faced typical challenges in the quarter.

We had a couple businesses miss their estimates, we took a few small charges and we faced economic headwinds in markets like China, the U.K. and to some extent, Germany.

But we were able to more than offset that softness with business we've won with new customers and strong underlying performance across the company.

So it really was a good quarter.

I'll share a bit more about our businesses and then turn it over to Dave to go through the financials.

In the Americas, our industry is doing well, with BIFMA showing 9% shipment growth for the most recent 3-month period, an improvement over the previous 3-month period.

And we outgrew BIFMA in both of those periods, so we are gaining share.

Why is the industry growing, and why are we growing even faster?

Customers are really seeing the connection between their business challenges and their workplace.

Yes, it's related to work for talent, and it's also related to innovation, the adoption of new work processes like Agile and other efforts to improve workplace productivity.

Last week, I met with customers here in Grand Rapids who are consumer product manufacturers, financial service providers, health care providers and major universities.

These customers are from the U.S., Canada, Australia and all over the world.

Customer visits to Grand Rapids are up versus a year ago, and our pipeline of opportunities is higher than it was last year.

And because we continued to update our product offering, and we have more partner products to sell, our win rates have remained strong as well.

Revenue from our marketing partnerships is ahead of our expectations and the feedback from dealers and designers is we're succeeding in making it simpler to specify an order from our expanded portfolio.

We developed and launched our digital selection and specification tool last year and we continue to see steady increases in adoption and use by dealers and designers.

We acquired AMQ, Smith System and Orangebox over the past 2 years and established value-creation plans for each business.

Through the second quarter, the acquisitions are collectively meeting the value-creation plans we established.

The revenues have grown 12% so far in fiscal 2020 against the prior year and that includes some softening in Orangebox, which is based in the U.K., and is, of course, [seeing] negative effects from Brexit in that market.

Capturing maximum value from these acquisitions remains key to growing faster than our industry.

The Other category grew 20% organically on a top line in Q2.

Designtex had a particularly good quarter and Asia Pacific grew across the regions, but exceptionally well in India, based on winning many large projects with multinational corporations.

It was our highest revenue quarter ever in Asia Pacific.

As I mentioned earlier, our business in China and Hong Kong is starting to see some downward pressure, but we expect to continue to see solid growth across Asia Pacific.

EMEA always faces profit challenges in the second quarter because of August holidays and shutdowns in some markets.

We narrowed our loss versus the prior year because our continuing profit improvement initiatives more than offset softness in the U.K. Moving forward, our growth plan in EMEA is similar to the Americas.

We're focused on driving growth through our new product pipeline, which remains healthy, our partnerships that expand our offering and the value creation plans from our acquisitions, like expanding Orangebox across Continental Europe.

We believe we will achieve our fiscal 2020 target of being profitable in EMEA.

I also want to give you an update on products we've talked about on previous calls.

The Flex Collection of products supporting Agile teams is now in regular production in the Americas, and we'll start taking orders in the other regions before the end of the calendar year.

Early customer interest in natural orders are quite encouraging.

Roam, a product collection we developed to support the Microsoft Surface Hub 2 is now available in all our regions and selling ahead of expectations.

You might remember that these products allow users to move digital content throughout the workplace without interrupting flow.

It's another example of the potential for success when furniture, technology and space are designed together.

In summary, we feel good about overall demand in the commercial furniture industry.

We believe our strategy is helping us win with customers looking to invest in their spaces to drive innovation and to compete for talent, and we keep seeing tangible evidence of this.

Our first half results were a little better than we had planned at the beginning of the year.

Taking into account our outlook for the third quarter, we are now targeting to finish the year at the higher end of our EPS target range of $1.20 to $1.35.

Now, I'll turn it over to Dave for more about our performance and our outlook for Q3.

Thank you, Jim, and good morning, everyone.

My comments today will include highlights related to our second quarter results and cash flow, plus a few remarks about our outlook for the third quarter and targeted earnings for the full year.

As Jim just mentioned, we had a very strong second quarter, growing revenue by 14% in total, or 9% on an organic basis.

And we delivered earnings growth in excess of 20%, providing evidence that our growth strategies are resonating with customers and our longer-term target to grow earnings at twice the rate of organic revenue growth is achievable.

Relative to the estimates we provided in June, second quarter revenue of $998 million was slightly higher than the top end of our guidance, and the $0.50 of earnings per share exceeded our estimate range -- estimated range by $0.05.

For revenue, our 14% growth included the impact of acquisitions and other inorganic items, plus 9% organic growth, which benefited from a strong beginning backlog of customer orders.

Our estimated range of revenue for the second quarter took into consideration the ongoing uncertainties related to tariffs, slowing global economic growth and Brexit, but their impact on our quarterly revenue was not as significant as it might have been, and the results of our growth strategies more than offset any direct consequence.

As a result, we were able to report revenue higher than the top end of our guidance for the quarter.

The Americas' organic revenue growth of 9% was broad-based across geographic regions, vertical markets and product categories, and included an improving mix of revenue from customers with whom we have continuing agreements.

The quarter included seasonal strength at Smith System, which we believe could represent approximately 2/3 of their annual revenue again this year.

Similar to the first quarter, orders in the Americas included customer requests for extended shipment dates, which remained higher than historical averages, but were largely consistent with what was assumed in our revenue estimates.

EMEA posted organic revenue growth of 5% despite a challenging environment in the U.K. The revenue growth was better than expected, and our opportunity pipelines continued to reflect growth for the second half of the year.

The Other category had a very strong quarter, with the organic revenue growth of 20% being driven by a record level of quarterly revenue from Asia Pacific and strong growth from Designtex.

Across the Asia Pacific region, India revenue growth was very strong, but all other markets also posted year-over-year growth.

With the inclusion of a full quarter of revenue from Smith System, our second quarter seasonality has increased.

Historically, this sequential increase between the first and second quarters approximated a mid-single-digit percentage, and this year, the increase approximated 21%.

First quarter order patterns and the resulting high level of backlog at the start of the second quarter also contributed to the sequential revenue increase, but Smith System and other seasonality in our business were the primary drivers of the sequential increase this year.

Compared to the prior year, the 9% organic growth stacks on top of 8% organic growth in the second quarter of fiscal 2019.

Over the balance of the year, our prior year comparisons become even more difficult as we posted organic revenue growth of 13% and 15% in the third and fourth quarters of fiscal 2019, respectively.

For earnings, we exceeded the top end of our range by $0.05 due to favorable gross margins and operating expenses, both of which reflected year-over-year improvements as a percentage of revenue and helped improve our operating margin by 70 basis points to 8.5% in the quarter.

Better than expected price yield, commodity costs and business mix drove the favorability to our estimates.

Lower than expected operating expenses also played a role in our favorable performance in the quarter as our employees continued to drive fitness improvements across the business, plus some project spending didn't materialize as quickly as we estimated.

Across the segments, the Americas and Other category were the largest contributors to our better-than-expected performance, but EMEA results and our corporate costs were also better than expected.

As you can see, we had a lot of things working in our favor this quarter, which contributed to our earnings exceeding the top end of our estimates by $0.05.

Diving a little deeper into the year-over-year comparisons.

We grew revenue by $122 million or 14% in the quarter, with $83 million coming from broad-based organic growth of 9%, and $39 million representing net inorganic benefits, which included $47 million of revenue at Smith System and Orangebox before we acquired them in the prior year, net of a small divestiture and $8 million of unfavorable currency translation effects.

For earnings, this $0.50 in the quarter compares to the $0.41 in the prior year, which included some unusual items, including a property gain that had the effect of increasing earnings per share by approximately $0.03 after consideration of related variable compensation expense.

The prior year also included lower warranty product liability and workers' compensation costs and the initial purchase accounting effects related to Smith System, but these items largely offset.

Our operating income improved by $17 million over the prior year, or approximately $22 million adjusted for the effects of the unusual items in the prior year.

A few million dollars of the improvement can be attributed to the acquired revenue after consideration of purchase accounting impacts, and the balance represents the operating leverage or contribution margin related to the organic revenue growth, which exceeded 20% in the quarter.

Beyond the absorption benefits related to our fixed costs, the strong operating leverage also included improved pricing, lower commodity costs and benefits from cost reduction and fitness initiatives, partially offset by unfavorable business mix and investments to support growth initiatives.

After facing significant inflation for much of last year, which pushed us to take multiple pricing actions, commodity cost pressures are beginning to abate, while at the same time, the benefits of our pricing actions are kicking in more fully.

We expect net pricing benefits for the balance of the year, but at lower levels as we are beginning to lap initial benefits in the prior year.

And on cost reduction and fitness, we supported increased investments in sales, marketing, product development and a few other areas of our business, while delivering an improvement in our operating expense leverage in the quarter, demonstrating the significance of our fitness efforts.

As it relates to orders in the quarter, the 3% order growth compares to a strong prior year, which posted 12% order growth compared to fiscal 2018.

Across the segments, the Americas grew 3% on top of 9% growth in the prior year, EMEA declined 1% after 22% growth in the prior year and the Other category posted 9% growth on top of 15% growth in the prior year.

As a reminder, at the beginning of the year, we indicated that our organic revenue target for fiscal 2020 anticipated higher growth rates in the first half of the year compared to the second half based on how our order patterns and organic revenue growth accelerated during fiscal 2019.

And thus far in the current year, our order and revenue patterns as well as our revenue estimate for the third quarter are consistent with those expectations.

Moving to cash flow and the balance sheet.

Free cash flow generation was strong in the second quarter, nearly reaching $100 million and exceeding the prior year by more than $40 million.

The year-over-year improvement was driven by the strong earnings growth in the quarter, but we also benefited from lower consumption of working capital and timing related to the capital expenditures and estimated income tax payments.

Capital expenditures were $18 million in the quarter, bringing year-to-date spending to $33 million.

We expect higher levels of spending in the second half of the year primarily related to manufacturing investments, but we now expect the full year to total approximately $80 million to $90 million.

We returned approximately $19 million to shareholders in the second quarter through the payment of a cash dividend of $0.145 per share, plus a modest level of share repurchases.

And yesterday, we announced the same level of dividend for the third quarter, which will be paid in October.

For the third quarter, we are projecting revenue in the range of $920 million to $945 million, or growth between 2% and 5%.

Because of the estimated unfavorable currency translation effects of approximately $9 million are offsetting the remaining $7 million acquisition impact related to Orangebox, the projected organic growth range is also 2% to 5%.

And again, this growth estimate compares to a strong prior year, which grew by 13% on an organic basis compared to fiscal 2018.

From an earnings perspective, we expect to report $0.33 to $0.37 per share, which compares to $0.31 of earnings in the prior year, or $0.36 of adjusted earnings after excluding the impact of a pension charge.

As you update your models for the third quarter, recall that prior year also included favorable adjustments to accrued promotions, a favorable tax adjustment and lower interest costs in advance of our debt issuance in the fourth quarter, as these items in total impact the year-over-year comparison by approximately $0.04 per share.

Taking into consideration our year-to-date performance and outlook for the third quarter, we are now targeting to finish the full year at the higher end of our EPS target range, which takes the following factors into consideration.

Furniture industry growth through July of calendar 2019 in the Americas, as reported by BIFMA, appears to be stronger than the slowing growth of capital spending over the same period, whether derived from macroeconomic data or from looking at capital expenditures across the S&P 500 our Fortune 800.

This suggests that our industry share of capital spending may be gaining resiliency as organizations continue to invest in their workspaces to help drive productivity and compete in the war for talent.

Our backlog of customer orders at the beginning of the third quarter is up approximately 3% compared to the prior year.

Our opportunity pipelines for the next 6 months continued to reflect growth for the Americas, EMEA and Asia Pacific.

Overall sentiment from our sales leaders and dealers remains positive, which we believe should support normal end of year -- end of calendar year seasonality across our customer base.

We're pleased with our win rates in most regions around the world and believe our research and innovation is resonating with business leaders contemplating investments in their work environments.

I shared those points because many of our individual investor conversations center around the economic uncertainties, and it's important to note that recent industry growth and our performance has been quite good at the same time.

From there, we'll turn back to the operator for questions.

(Operator Instructions) Our first question comes from Bobby Griffin with Raymond James.

Congrats on a good quarter.

Dave, I guess, first off, would you just start on EMEA?

Just curious maybe a little bit more color on the confidence around the back half and flipping the profitability for the year.

It implies a pretty nice improvement on the third and fourth quarter versus last year.

Can you maybe just give us some details of what you're seeing in the business that excites you?

Where do you think some of the upside and improvement will come from?

Anything else to help us get a better level of confidence in our models of that business flipping the profitability for the year?

Well, as I said, our pipeline of opportunities that we're competing for is reflecting growth.

Jim mentioned, we won some nice business that has offset some of the pressures we're feeling in the U.K. Our win rates are pretty good in most markets, or improving.

Customer visits at the LINC, Learning and Innovation Center, in Munich, continue to be solid.

We're introducing a lot of the new products in EMEA that we've launched in the U.S. So we're not feeling -- we're not super excited about the broader economic environment, but our business is steady and the performance of our teams is quite solid, so that's giving us confidence to continue to show year-over-year improvement.

I'll add.

Operational performance has been very strong in terms of really across all the metrics we track, but the on-time shipments and quality and all those things that eventually translate into better gross margins.

So -- and on top of all the things Dave mentioned, I think that's also been an important factor.

All right.

I appreciate that color.

And then maybe can we also talk a little bit how the -- how some of your partnerships are coming along and particularly the West Elm partnership?

What type of growth you're seeing?

Is it starting to move the needle a little bit?

Any early learnings you can share with us?

It was a great setup there at NeoCon that I saw a few months ago, but anything else would be great.

Sure.

So we're happy with our partnerships overall.

As I said, they're ahead of our expectations, and we can see that in terms of shipments, we can see it in terms of orders and we can see it too in terms of the feedback we're getting from our dealers.

And dealers include both dealer principals here but also dealer designers and others who are using the digital tools we created a year ago.

Their adoption of those tools is -- continues to increase and has increased since we first launched them.

We have -- as you may remember, we're on our second rev already of that tool.

So we continued to make investments in that and the products are also getting a great reaction.

As it relates to West Elm specifically, we continue to launch new West Elm products.

We launched -- exposed a lot to the market back in NeoCon.

Those products are all passing their first order entry dates and first shift dates as this year continues, so we've had several of those products already begin shifting, some are going to begin shifting here in the next few weeks.

So when you look at West Elm specifically, we're really optimistic and hearing lots of positive feedback from everyone.

I think moving the needle, it's probably not material yet to our results, but we're happy with the trajectory we're on.

Okay.

And then lastly, I guess I'll try to sneak one more in here.

But Dave, on the free cash flow, I mean year-to-date it's up pretty nice versus last year-to-date.

Is that more just functions of timing or -- and it should kind of reverse a little bit in the second half?

Or should we expect that strong trend to continue through 3Q and 4Q?

Well, I think it's being driven by the strength of our earnings improvement first, but we're also very focused on working capital across all 3 components, inventory, receivables and payables.

So the fact that we are seeing a little bit of improvement there is hopefully sustainable.

I know the teams around the world are working very diligently on various initiatives in that regard.

And then we did have some timing that I do think is going to -- will result in more outflows in the back half of the year.

For example, our CapEx, we still think we're in a $80 million to $90 million range for the full year and we spent $33 million the first half.

That implies timing or more investments in the back half.

And our estimated income tax payments are -- were a little less than expected this quarter, so I think that's also timing as well.

A little bit of all 3, I would say.

Our next question comes from Matt McCall with Seaport Global.

So let's see, maybe start with just the first margin SG&A.

Maybe start, Dave, and I think you gave some of this detail, but I just wanted to ask it maybe just to put everything together.

Can you talk about price, price cost, any tariff issues or mix issues in the quarter, specifically obviously curious about steel prices?

And then I think you mentioned some OpEx project spending delays.

Can you quantify what the benefit was, if any, in the quarter?

Well, I'll start with the last question, the OpEx delays.

Not a big deal.

It was just a contributor.

We just had some projects that we thought would pace at a little differently than they did, but not -- it's not a meaningful number.

It's a little bit -- on the gross margin and all the puts and takes, I'll start with tariffs because they're impacting us, but they're not impacting us dramatically.

And really, we've -- our teams have worked very hard to offset much of that impact, whether it's through negotiating with our supply chains, adjusting our supply chains, taking pricing actions to offset it.

So it's in our numbers, but it's really not a headline for us.

On pricing and commodity costs, I'll add with pricing as the #1 driver of our gross margin improvement as well as our performance versus our estimates.

It is a little bit better than expected.

It's largest contributor after many quarters of significant inflation outpacing.

Our pricing efforts were finally -- have moved to more of a meaningful tailwind on that.

At the same time, steel prices, as you know, have come down from recent highs, and that's benefiting the whole industry right now.

Business mix...

I'd also give our [procurement] people a lot of credit for doing their job and helping us recapture some of those commodity cost increases.

So it's both the macro forces but also a lot of our internal efforts.

Good point.

Business mix is still a negative year-over-year.

It's still hurting us, but it's hurting us less than it has been in recent quarters, in part because we are beginning to lap the origination of some of this unfavorable business mix, but also because we're starting to see an improving benefit of business off of continuing agreements with our customers.

So we've -- it's starting to abate a little.

Thanks for the details.

So was -- so just on the price cost front, was price cost maybe excluding the tariff?

I don't know if we can do that, but were your price costs positive in the quarter?

Yes.

But -- and can you quantify it for us?

And then what's in -- what's the expectation in the guidance and as we progress through the year?

We're not able to quantify it precisely enough to share basis points.

It -- our modeling requires a lot of assumptions as to what's actually driving it, trying to tease mix apart from it and pricing.

So we're going to stay away from quantifying it, but it was the most significant driver.

Okay.

So maybe a quick one on the Other category.

You called out India specifically.

Is there something going on there where this type of growth is going to be consistent?

I think you had some positive things to say about the pipeline.

But what's driving that growth specifically?

Interesting that you would call out India specifically.

Yes.

I think, first of all, we have a terrific team of people and they've built great relationships with the customers in that market and we continued to serve new customers in that market.

So I have to start just by saying we have a great team and they are doing a great job, just straight up performing in the market.

We've also made some investments over the last couple of years in broadening our product line to address specific gaps that we saw developing there.

Now I want to be careful as I say this because we've talked about product gaps before and when I've done that, it's usual that a gap that's existed maybe for a couple of years that we will come back to and develop products to fill that gap.

That's not the case here.

A lot of times these gaps are emerging very quickly, and we're on it as quickly as they're emerging, so we might see very short period of time where we had opportunities to win some jobs and we lost because we just didn't have the right product.

So we've been very intentional by trying to fill some of those gaps.

And also in that case, gap filling isn't just about kind of basic commodity products.

It's also about innovation.

So Series 1, for example, that we launched a couple of years ago started as a response to the opportunities we saw emerging in India.

And as we developed the product for that market and for the Asia market, we saw opportunities to sell that product all around the world.

So our India -- I'll just summarize and say we have a great team and we've made investments in product development that's helped make us more relevant to our customers in that market.

We've also invested in our supply chain, so expanding our factory capabilities there, adding more products to the list that, that factory can manufacture has improved our lead times, has aligned our costs more completely with that market.

So a lot of good work across a lot of different functions, but we're -- and we're really pleased with that performance.

And although we called out India, I'd have to also say that, really across Asia, I could talk about Southeast Asia.

Australia didn't do better this quarter and we've had good performance really across the region in a broad way.

China, we're seeing some headwinds there, of course, because of the things going on in China, but in other parts of Asia, it's been really, really strong.

But even parts of China are doing better than others.

We've had some performance in certain markets across the Chinese market.

It wasn't all pressured.

Okay.

I'll switch gears, again.

The comments you made, I think, Jim, about making it simpler to specify an order of product, I think I've -- it seems to be a theme that I'm hearing maybe across the industry.

I guess the question is, where do these efforts stand for you?

What's expected to be the benefit going forward?

Is this a differentiator or it's just becoming kind of a requirement for participation or entry in the industry?

I feel like this -- I've heard this elsewhere and I actually want to hear what you guys are doing differently?

Well, if were to go back a couple of years, I'd say, first of all, you have the rise of ancillary, which is another way of describing this.

And that rise of ancillary created a lot of additional work without really a lot of additional margins for our dealers and for designers in architectural design firms, and for customers who are trying to now fragment their buy across a much broader range of manufacturers and vendors.

So they might be buying a couple products from one company and a couple products from another company.

So you just imagine the workload of trying to learn about all those products, select those products, be able to see samples of those products, ultimately price and order those products, receive those products and on and on.

So that was a starting point with a shift from a fairly consolidated buy to a more fragmented buy and it drove cost and complexity from really the rest of the value chain.

So the -- our move was to begin to carefully select partners as well as developing our own products, and to connect all those together into a supply chain that makes it easier for dealers and designers to do all the things I just said.

And that's not easy to do.

There is a scale advantage here.

Investing in those sorts of tools.

I think there's probably only a handful of companies that make those sorts of investments.

We are clearly one of those.

I think one differentiator is that we're not just providing the tools, but we're also in many cases, manufacturing the products.

So we talked about West Elm earlier, but the idea that -- that partnership is founded on the idea that West Elm designs the products and we manufacture and manage logistics, takes it to one more level of reliability, so that it's not just a matter of specifying and ordering it, but does it actually show up on time?

And with a warranty that we stand behind related to the -- to our role in that process.

So I think there's lots of opportunities for differentiation.

It plays to our strengths around scale, both in terms of the digital tool itself but also our entire logistics system and manufacturing system.

Our next question comes from Steven Ramsey with Thompson Research Group.

I wanted to kind of dig in on -- more on the project and continuing business.

Maybe can you quantify the breakout between projects in continuing for Q2 this year versus last year.

And does -- do acquisitions like Smith in particular, do they permanently shift this mix in any away?

And then I guess do you expect the continuing business to grow as a percentage of sales in North America through the back half?

Well, I'll make a quick few comments about it, Steve, and I'll probably stop short of giving you actual quantification.

But directionally, we've been talking for the last couple of years about how project business has represented a higher mix than historical averages, and therefore, was pressuring our gross margins a little bit from a mix perspective.

We've also talked about how winning project business is really important because at the same time you put in place a continuing agreement with that same customer for smaller projects and smaller initiatives that they have in their business.

And what we've seen more recently is that starting to move back toward a more balanced split, I don't know that it'll ever go back to where it was in the past.

We just don't have a view on that, but it is seeing -- we are seeing increased business off of continuing agreements.

Now some of that can include projects off of continuing agreements, but the fact that we're seeing off our continuing agreements is a good thing and it's helping our overall mix impact.

That's great.

And does Smith has a continuing component as well?

Or is it more project-based?

I think they're more project-based, driven off of -- and it's been driven by bonds that are floated for school districts to redo different school buildings or campuses.

But I would imagine they have continuing agreements in place as well.

And their business is like our business.

I think there was a time in our industry when there was a clear divide between what is project and what is continuing.

And as you could hear, as Dave described, that it's getting where you now have projects coming from continuing and some of that are in the bill.

Sometimes you have contracts that have negotiated project price and it goes out a few years.

So we still talk about it because it's still a fundamental way that we win business and win customers, and it has an effect on the margins, but it's getting harder and harder to distinguish which is which.

Great.

That makes sense.

Thinking too on North American investment.

In the past few years, you've spent more to innovate and it's paying off clearly on the top line.

Are you expecting that level of investment will be needed to continue to drive growth?

Maybe kind of thoughts on an absolute dollars basis and a percentage of sales basis.

And I'm thinking a little more longer term, back half of the 2020 into fiscal year 2021.

Well, I'll just reiterate what we've said at the start of the year in connection with our targets that we are targeting to improve our overall operating expense leverage on sales.

But we are continuously evaluating opportunities to grow our business, which could impact the amount of dollars that we're investing in the business.

We don't have a view for next year our out several quarters on the dollars.

We've said inside the last 12 months that we are more comfortable with the level of spending that we have in our business, but with the growth that we've been posting and our desire to continue to grow the business, we know that it's going to require us to continue to fuel product development and put feet on the street, et cetera.

That said, we're diving fitness in the business, pursuing productivity and therefore want to see our OpEx, as a percentage of revenue, continue to improve.

So we're trying to balance that.

Yes.

I'll add one comment on that.

When we were expanding the capacity of our product development capabilities here in the Americas, and again, I'll just remind everybody that when we talk about where the product development is, it's not necessarily just for products sold in that region because these products are sold around the world.

And when we did that, we actually believed that we were going to have to invest in even more capacity than we did.

And the reason we were able to pull back on the original goals because we were seeing the throughput of our product development group improve at the same time as we embrace Agile and other technique here, we're able to improve productivity of product development itself, and that's great news.

So we don't see it going down, but we do see this leverage continuing to improve, as Dave said.

Great.

And then lastly, from me, thinking in Asia Pacific.

How much of this business is continuing?

How much of it is project-based?

And are you able to set up kind of similar agreements over there as you are in the Americas?

The agreements themselves might be slightly different, but principle is still the same.

In Asia, and I can pick any of those markets, but if you require China or India or any of these markets, when our growth comes from new customers, so customers that we often have never served before and that's unique because if you think about it in the U.S., we've been here forever, and we've served kind of everybody at some point in time.

So -- and for most of the Fortune 500, we have some level of business with them.

So you go to Asia where there's clients we've never served ever, and you get that first project opportunity, it's a chance to build relationships.

That might help you win another project over time.

You get into a regular rhythm.

Again, that may look something like what the continuing business flow is in the Americas, that's certainly the hope.

So we're pleased by not just broader orders with existing clients like traditionally in Asia, we might have started our business over there serving a lot of companies that were headquartered in the U.S. and Europe and other places where we were established.

Now because we're serving more China-headquartered, India-headquartered companies, we expect to see those business relationships pay dividends for a while.

Our next question comes from Greg Burns with Sidoti & Company.

Could you just remind me, in the Other category, is the revenue still roughly split about 1/3, 1/3, 1/3 between the 3 businesses?

Well, it's never really split 1/3, 1/3, 1/3.

What we always talked about was Asia was biggest and PolyVision was smallest, and that's still the case.

So relative size, Asia then Designtex then PolyVision.

Okay.

And in terms of the profitability of the Asia business, is it roughly in line with the consolidated segments operating margin?

Or is it lower?

And maybe how does it stack up against where the Americas and EMEA is and what are the opportunities more broadly for margin improvements in that segment?

Well, we have said in the past that we believed Asia has the potential to be a similar operating income margin as other parts of the world.

But we are intentionally investing to grow our presence and grow our market share in Asia.

So what I've said over -- several times over the last couple of years is, you guys ought to think about the Other category as somewhere in a mid-single-digit operating margin range because of how much we're investing back into Asia and the fact that it's our biggest business in the Other category.

And you ought to ask a question if the operating margin is less than that or more than that?

And this quarter it was more than that and it was driven by the fact that we had a record quarter in Asia Pacific, and we also had very strong performance from Designtex, at the same time that it's PolyVision's seasonally best quarter given their support of school systems as well.

They do much of their work in the summer.

Okay.

And then just lastly on the guide.

I appreciate you're up against tough comps.

So the absolute growth is going to -- is slow in the second half.

But the revenue guide at the midpoint was still a little bit below consensus, so I was just wondering, is that just how The Street is modeling versus your internal expectations?

Or have you seen anything that maybe tempers your outlook a little bit for growth in the second half?

Well, I never know what currency rate The Street uses, but what I did comment on is that year-over-year, we're seeing about $9 million of unfavorable currency effects, and it's not significantly different from the start of the year.

Remember, our revenue range that we said we were targeting for the full year contemplated FX or currency exchange rates that were in place at the beginning of the year, the dollar has since strengthened our euro and other currencies have weakened, which has pressured our revenue a bit.

My sense is that the models built by The Street don't take into account or adjust for that currency movement as regularly as we do.

So it could simply be that consensus doesn't have the most recent currency assumption in it.

And if it did, maybe it would be spot on the midpoint of our range.

(Operator Instructions) And I'm not showing any further questions at this time.

I would like to turn the call back to Jim Keane for closing remarks.

Thank you.

So again, we're very pleased with the quarter and with the direction our business is headed.

We look forward to continuing to deliver value to our shareholders.

Thank you for your interest in Steelcase and for joining the call today.

Ladies and gentlemen, this does conclude today's presentation.

You may now disconnect and have a wonderful day.