Steelcase Inc (SCS) 2014 Q4 法說會逐字稿

Good day, everyone, and welcome to Steelcase's fourth-quarter and fiscal 2014 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. Please go ahead.

Thank you, Danielle. Good morning, everyone, thank you for joining us for the recap of our fourth-quarter and fiscal year-end financial results. Here with me today are Jim Keane, our President and Chief Executive Officer; Dave Sylvester, Senior Vice President and Chief Financial Officer; Mark Mossing, Corporate Controller and Chief Accounting Officer; and Terry Lenhardt, Vice President of Finance for the Americas, EMEA and Asia-Pacific.

Our fourth-quarter earnings released 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. Presentation slides that accompany this webcast are available on IR.Steelcase.com and a replay of this call will also be posted to the site later today.

Our discussions today may include references to non-GAAP financial measures and forward-looking statements. Reconciliations to the most comparable GAAP measures and the risks associated with the use of forward-looking statements are included in our earnings release and webcast slides.

We are incorporating by reference into this conference call the text of our Safe Harbor statement included in yesterday's release. Following our prepared remarks we will respond to questions from investors and analysts. It is my pleasure now to turn the call over to our President and Chief Executive Officer, Jim Keane.

Thanks, Raj, and good morning, everyone. This is my first call as CEO and over this next year I'm looking forward to meeting as many of you as possible face-to-face. I appreciate your investment in support of this great Company. We want to help you understand our business and why we are so excited about our purpose of unlocking human promise.

I have been at Steelcase working for Jim Hackett directly for the last 17 years. In that time I worked on strategy, I worked in our research area and I was CFO for about six years during one of the most challenging periods of reinvention in our history.

Over the last eight years I was initially responsible for the sales, marketing and product development efforts in North America. More recently as COO I have been working to help Steelcase become more globally integrated so we can leverage our best products and our best practices to better serve our customers and improve our economic performance around the world.

I feel very fortunate to be taking on this role at this time for two reasons. One, I believe Steelcase is headed in the right direction. That reflects Jim Hackett's challenge, to reinvent portions of our business and position ourselves in a new competitive environment. It also reflects the hard work of thousands of Steelcase employees all around the world to respond to that challenge beginning nearly 15 years ago.

Economically we can clearly see the impact in our America's business where we have been consistently achieving double-digit adjusted operating income margins. And we had another strong quarter to close the year. We face a new challenge of replicating this success around the world, but we are headed in the right direction.

Second, I have great confidence in the management team at Steelcase. This team has worked shoulder to shoulder in developing and executing our strategy. We have stayed together through some extraordinary challenges.

In terms of talent and global experience I believe it is the best team in the industry and it is showing in our results. It remains my privilege to be a member of this team.

So when the Steelcase Board of Directors chose me to become CEO they really chose the entire team. They chose the team who have helped us reinvent the Company, who have helped us redefine our brand and putting new products to market and who Fortune recognized in their list of most admired companies again this year -- the only company from our industry on that list.

As a result you should not expect my appointment as CEO to trigger any sudden changes in strategy. That strategy is my strategy, it's our strategy. Yet our strategy is dynamic; we are always working to be ahead, always reinventing to be better.

So this should sound familiar to you -- Steelcase's primary focus is on serving leading organizations wherever work happens in developed markets and selected emerging markets. We are relevant to our customers when we translate our insights into a portfolio of products, applications and experiences. And we earn a profit by leveraging scale, locally, regionally and globally.

Work is not going away; in fact work is only becoming more competitive. The leading organizations we serve are always looking for the next idea for how they can be more innovative, more agile, more globally connected. They want to hire the best people and engage them completely in their work. They want to be ahead and so do we. That is why we invest so much in research. Our research leads to insights about what will happen next so we are ready when our customers are looking for the next idea.

So that is our strategy in a nutshell. You won't hear us return to these points again and again and, in fact, you will see in just a minute how they connect to some of our current priorities. And I can tell you that one of the biggest priorities has been and continues to be improving the competitiveness and economic performance of our EMEA business.

Over the last 15 years we have implemented some actions in EMEA from time to time to adjust our capacity in response to declines in industry wide demand. Our current series of initiatives, begun over a year ago, is broader than capacity reduction and in some ways more significant. We have an opportunity to focus our sales efforts more completely on the leading organizations who value our insights and deepen our relationships with these customers.

We have an opportunity to more completely leverage our global product portfolio in our EMEA markets, and two of the largest (inaudible) chair orders to date have come from EMEA. We have opportunities to leverage scale both across EMEA and globally to improve reliability and reduce cost.

The team who runs EMEA is completely engaged in these initiatives and have announced specific plans that are already being implemented. But the EMEA team is not on their own. We have a global structure in areas like product marketing, product design, legal, finance, HR and the global leaders of each of these areas were either born in Europe or lived and worked in Europe during their careers.

Some of the people who led our reinvention of Americas operations are now fully engaged on doing the same in EMEA. Nearly every day I am part of meetings or receiving updates on our progress in EMEA.

Many of our competitors in EMEA are struggling to find a strategy for a new era in the region. But we have the advantage that we have seen our strategy work in the Americas and with some adaptations we believe it will work in EMEA since we are serving many of the same customers globally. And we have people with experience leading the reinvention, so we aren't trying to figure out how to do it for the first time.

It's important we work in close partnership with the various work councils and each country to find the best path forward to a more competitive future. While those discussions continue we have broken ground on our new factory in the Czech Republic and I saw photos this week of the first beams being set.

We have consolidated our dealers in Paris and have enjoyed several recent wins in France. We have implemented our sales force redeployment and are seeing signs of its effectiveness in Germany, for example. We are fully engaged in these initiatives even as we continue discussing the future with the work councils.

Despite that progress it is unlikely that we will see a material improvement in our EMEA financial results in fiscal year 2015, the year we are starting this month, without some improvement in the economy. The actions we are taking should start to impact our results in fiscal year 2016 with ongoing improvements in fiscal years 2017 and 2018.

So EMEA is clearly a prime area of focus for us and everyone in our organization is aware of this. Every recent Board meeting has included an update on EMEA.

We also remain committed to continuously improving our fitness across our business, we never stop looking for ways to embrace technology and leverage our global footprint to improve operating expense efficiency. At the same time we reinvest those savings in innovation and customer facing activities.

Our new V.I.A. architecture platform is a tangible example of innovation that will continue to require investment as we add more capabilities this year. We have also invested in expanding our sales force in our strong America's business, supporting growth in vertical markets and new product categories. As you know, the Americas business has the most efficient operating expense performance and we expect that to continue despite these investments.

Before Dave talks about our financial performance I want to share one piece of good news related to our sustainability performance. Steelcase has been recognized by the EPA for having made renewable energy investments equivalent to 100% of our global electricity consumption. In fact, we are the 15th largest green power user in the US making a fairly exclusive list of companies that have met or exceeded the standard.

Now we didn't make the investments to make the list but rather to be ahead in every aspect of our business, including the aim that many leading organizations share, to do business in a sustainable way.

Going forward I look forward to more chances to share information about our business and I hope to see many of you at NeoCon in June. I have never been more proud of our people around the world and I have never been more excited about what comes next. With that I will turn it over to Dave 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, as well as some general commentary on fiscal 2015 as a whole, and then we will move to your questions.

On the fourth-quarter results I will first talk about the results versus our expectations and then move into the year-over-year and sequential quarter comparisons. Overall revenue and adjusted earnings per share were at the high-end of our range despite $8.9 million of non-operating charges and approximately $3 million of tax-related adjustments.

From a revenue perspective we experienced higher-than-expected sales in EMEA which were driven by improved orders in Germany, as well as broad-based strength in Asia-Pacific and PolyVision. This more than offset a small shortfall in the Americas which largely resulted from customer requested shipment dates being pushed out further than historical patterns. Incoming orders for the Americas were otherwise slightly better than our expectations.

From an adjusted operating income perspective results were significantly better than our expectations primarily due to lower than anticipated variable compensation expense linked to the non-operating charges and tax adjustments, as well as the fact that a pending facility sale on the related gain were delayed to the first quarter of fiscal 2015.

The earnings estimate we provided last quarter anticipated the sale would close in the fourth quarter and resulted in a gain recorded as a restructuring benefit with related variable compensation expense recorded in our operating results. Gross margins and operating expenses in the quarter were otherwise slightly better than expected across most of the business.

As it relates to the non-operating charges and tax adjustments, we recorded a $6 million charge related to a minority equity investment in a start-up business venture. In addition, we recorded $2.9 million of foreign exchange losses primarily driven by exposure to the Canadian dollar.

Finally, we recorded approximately $3 million of additional tax valuation allowance adjustments and other discrete tax charges. The valuation allowance adjustments primarily related to additional jurisdictions primarily within EMEA that have been recording operating losses.

A little more color on the segments. In the Americas Project Business drove much of the 6% organic revenue growth which resulted in an 11.5% adjusted operating income margin, a significant accomplishment during a seasonally challenged quarter.

The impact of the Americas revenue shortfall was more than offset by lower than expected variable compensation expense and other operating expenses as well as better-than-expected gross margins. As a result adjusted operating income was slightly better than our expectations. And as I said before, order growth in the Americas was better than expected which drove customer order backlog significantly higher as compared to the prior year setting up a strong start to fiscal 2015.

For EMEA the adjusted operating loss of $5.7 million was significantly better than expected as revenue, gross margin, variable compensation expense and other operating expenses were all better than we anticipated. While we are pleased that EMEA's loss this quarter was smaller than expected, EMEA posted its third consecutive annual adjusted operating loss for the full fiscal year 2014. As Jim said, we remain focused on our multi-year strategy necessary to safeguard our global competitiveness and restore profitability.

Regarding the other category, we expect Asia-Pacific Designtex and PolyVision in total to lose a little money in the quarter and instead they posted adjusted operating income of $2 million or 2.8% of revenue. The difference was largely related to strong order patterns in Asia-Pacific and PolyVision which I will talk a little more about in a few minutes.

Now a few comments on the year-over-year comparisons. Revenue in the fourth quarter grew 2% organically and adjusted operating income increased by $16.8 million or nearly 50%. Improved results in the Americas and the other category as well as lower corporate costs were offset in part by lower operating results in EMEA.

Organic revenue growth in the Americas of approximately 6% represented the 16th consecutive quarter of year-over-year growth and reflected a favorable shift in business mix despite the mix of business associated with large projects being higher than the prior year again this quarter.

The Americas operating results also benefited from lower variable compensation expense resulting from the non-operating charges and tax adjustments previously mentioned as well as continuous cost reduction efforts across the industrial system. These benefits were reduced in part by higher operating expenses.

For EMEA the effects of the 13% organic revenue decline in the quarter, including higher levels of competitive discounting and approximately $4 million of operating costs and inefficiencies associated with the changes in the EMEA manufacturing footprint more than offset lower operating expenses linked to our restructuring activities and other cost reduction efforts.

The current quarter results also included a favorable adjustment to accrued expenses compared to an unfavorable adjustment to warranty reserves in the prior year. In the other category a $1.9 million improvement in adjusted operating income was driven by 11% organic revenue growth.

PolyVision posted a double-digit organic growth rate and a double-digit operating income margin this quarter despite the fact that the fourth quarter is typically a seasonally slower quarter. Asia-Pacific posted a 19% organic growth rate in the top-line and return to modest profitability on the bottom-line. The revenue growth was broad-based and fueled by 28% year-over-year growth in orders on an organic basis.

For Designtex we experienced a lull in overall demand during January and February which dampened their quarterly results. In addition, we continue to invest in a number of growth initiatives aimed at strengthening their position in the market over the longer term.

Lastly as it relates to corporate costs, the $6.8 million decrease was primarily a function of higher costs in the prior year. Including $3.6 million of environmental charges. In addition, earnings associated with deferred compensation were lower and COLI income was higher in the current quarter compared to the prior year.

Sequentially we recorded similar revenue in the fourth quarter which included 14 weeks compared to the third quarter which included 13 weeks. And our adjusted operating results were also similar. The operating cost associated with the extra week as well as the operating cost associated with the changes in the EMEA manufacturing footprint were largely offset by lower variable compensation expense and a favorable shift in business mix in the Americas.

In addition, the third-quarter results included unfavorable adjustments to reserves for slow moving component part inventory and customer sales allowances totaling $2.8 [million] and the fourth quarter included a favorable adjustment to accrued expenses EMEA.

Switching to restructuring benefits, they were lower in the quarter than our expectations as one of the facilities we have been in the process of completing was delayed to the first quarter of fiscal 2015.

Regarding the actions related to EMEA that we announced and Q3 2014, our discussions with the works council regarding the closure of a manufacturing facility in Germany remain in process and thus we do not have anything new to report. And as Jim said, construction of the new manufacturing facility in the Czech Republic is underway and largely on schedule.

We continue to anticipate approximately $10 million in annualized savings from these actions once fully implemented by the end of fiscal 2016. However, we continue to anticipate significant operating costs and inefficiencies over the next year or so as a result of these actions, likely exiting our initial estimate of $5 million to $10 million by another $5 million or so.

These actions in addition to previously announced actions are part of our multi-year EMEA strategy to improve revenue and the fitness of our business model. We anticipate the EMEA segment will continue to report adjusted operating losses until the benefits of this multi-year strategy are more fully realized and the overall economic environment in Western Europe improves.

Moving to the balance sheet and cash flow, we generated $79 million of cash from operations during the fourth quarter, working capital decreased by $41 million in the quarter primarily due to seasonal revenue declines in January and February compared to October and November.

Capital expenditures totaled $35 million in the fourth quarter and included initial investments in the new plant in the Czech Republic, upgrades to manufacturing technologies and facilities and investments in product development. For fiscal 2015 capital expenditures are expected to be within a range of $90 million to $100 million.

As we complete the construction of a new facility in EMEA, continue to upgrade various manufacturing technologies and invest in various customer facing initiatives including show rooms and e-business platforms.

We returned approximately $30 million to shareholders in the fourth quarter through the repurchase of approximately 1.2 million shares at a total cost of $16.9 million and the payment of a cash dividend of $0.10 per share totaling $12.6 million. And yesterday the Board increased the cash dividend declaring $0.105 per share to be paid in the first quarter.

Turning to order patterns, I will start with the Americas where our orders in the fourth quarter excluding the extra week grew approximately 5% compared to the prior year. Orders grew slightly in December and then fell slightly in January before strengthening in February. In fact, orders grew 13% in February excluding the extra week and the backlog for the Americas ended the quarter up approximately 18% compared to the prior year.

Across quote types in the Americas Project Business remains strong growing at a higher than average rate while orders from continuing agreements grew slightly less than average and our marketing programs aimed at smaller day-to-day business declined slightly compared to the prior year. Vertical market order growth was broad-based with only the financial services sector showing a meaningful decline compared to the prior year. Federal government orders were down slightly.

Switching to EMEA, order patterns and constant currency remain mixed growing by approximately 3% in total compared to the prior year. Significant order growth in Northern Europe and solid order growth in France was dampened by a significant decline in the Middle East and Africa and modest declines in Germany and the export markets of eastern, central and southern parts of Europe as a group.

At the start of the fourth quarter customer order backlog in EMEA was down 9% compared to the prior year and orders were down by a high-single-digit year-over-year percentage during December and much of January which drove the 13% organic revenue decline in the quarter.

During February, however, orders strengthen considerably growing more than 20% compared to the prior year and as a result customer order backlog for EMEA ended the quarter up approximately 26% compared to the prior year. While we are pleased with the order patterns during the month of February, we expect the month-to-month volatility to continue until the macroeconomic climate improves more significantly.

Within the other category orders grew significantly at PolyVision as we secured an $18 million project order that is expected to ship over the next five quarters and; as I said a moment ago, orders in Asia-Pacific grew by 28% adjusted for the extra week. Orders at Designtex declined due to the lull in demand during January and February we're beginning to see the seasonal rebound in March.

So to summarize, our order patterns and quarter-end backlog in the Americas remain solid. PolyVision continues to perform very well. Asia-Pacific may be emerging out of the demand lull and over the past two year, and we had a nice month of orders during February in EMEA, though we continue to face a challenging environment in this region.

Turning to the first quarter, we expect to report revenue of between $715 million and $740 million which compares to $667 million in the first quarter of fiscal 2014. After giving effect to currency assumptions we estimate organic revenue growth will approximate 7% to 11% compared to the prior year.

Sequentially the revenue estimate represents a range of down 2% to up 2% on an organic basis which is somewhat better than typical seasonality. As we enter fiscal 2015 we expect another strong quarter in the Americas But we estimate our adjusted operating loss in EMEA could exceed $10 million in the first quarter driven in part by an estimated $5 million of operating costs associated with changes in the EMEA Manufacturing footprint.

As it relates to restructuring costs our earnings estimate contemplates initial charges related to our proposed actions in Germany, the timing and magnitude of which is dependent on the completion of negotiations with the works council.

Plus, we expect to record the gain associated with the sale of a previously closed facility in the US which was differed from the fourth quarter and is expected to generate approximately $17 million of cash once the transaction is closed.

The estimate for earnings also includes three -- approximately $3 million of incremental variable compensation expense associated with the pending facility sale gain and an effective income tax rate of approximately 44%.

Many variables impact our effective tax rate estimate each quarter, so we cannot predict our effective tax rate with certainty but we do expect that we will continue to have a higher effective rate while EMEA is generating net operating losses in various markets in which we are not recording any related deferred tax benefits.

As a result of these factors we expect to report first-quarter earnings within a range of $0.12 since to $0.15 per share including net restructuring costs of approximately 2 million -- or $0.02 per share, which translates to an adjusted earnings range of $0.14 to $0.17 per share.

For the full fiscal year 2015 we expect revenue growth again this year and we expect to continue the expansion of our adjusted operating income margins. How much we are able to expand our margins will be a function of many things including volume and pricing the mix of business, the pace of inflation, the level of disruption we may experience in EMEA related to our restructuring activities and the level of investment in future growth ideas.

From a revenue perspective we expect modest growth in the US contract office furniture industry and we are continuing to target growth rates in excess of industry averages. We believe much of our growth in the Americas will continue to be driven by project business as the number and estimated size of projects in our pipeline remains high.

For EMEA will begin shipping a large project in France that we won over a year ago and others that have been in backlog for a while now. But demand volatility and potential customer disruption associated with our restructuring activities may stress their top-line. Asia on the other hand is expected to sustain some of its recent momentum and return to solid growth rates.

Lastly we expect growth from PolyVision driven by the large project won in the fourth quarter and we believe our investments in new products at Designtex will help drive growth in fiscal 2015.

As it relates to our expected contribution margin or operating leverage associated with the revenue growth, we expect the mix of business to remain favorable in the Americas resulting in a consolidated variable contribution margin associated with revenue growth of between 25% and 30%.

However, we also expect to invest in a number of sales distribution and e-business initiatives to drive our growth in fiscal 2015. This is different than the last four years where in our revenue growth was largely driven by improved sales efficiency. As a result our net contribution margin in the coming year could potentially be at or above 25% depending on the pace of these investments and the level of revenue growth we are able to achieve.

Across manufacturing we do not expect any significant benefits in 2015 related to the changes in the EMEA Manufacturing footprint as we do not believe they will be completed until late in the fiscal year. However, we do expect incremental operating costs and inefficiencies associated with these initiatives including the $5 million we estimate for the first quarter.

Sizing the full-year amount is dependent on a number of factors outside of our control, so I will stop short of estimating a specific number. Instead I will share that we are targeting a number of continuous cost reduction efforts around the world in our supply chain manufacturing and logistics areas.

In fact, our fiscal 2015 plan currently contemplates that the benefits of these cost reduction efforts will outweigh the EMEA disruption cost. So you can think of these two factors as netting out or potentially netting to something modestly positive.

Finally, as we have stated many times, we believe staying invested in a variety of growth initiatives has been a key driver of our market share gains over the last three years. In our webcast slides we included a fiscal 2014 roll forward of operating expenses compared to the prior year which highlights changes due to foreign currency translation effects, acquisitions and divestitures, variable compensation expenses and other items.

In this roll forward you will note an "other" net column totaling $12 million which compares to an increase of $7 million in fiscal 2013 and $20 million in fiscal 2012. You can think of these amounts as the levels of costs which were invested back into the business since the recession to sustain our momentum in the market and support future revenue growth.

We had planned to invest between $20 million and $30 million in fiscal 2014, but with the poor results in EMEA and Asia-Pacific continuing to face a lull in demand during the year, we pulled back on spending around the world in order to cushion the impact of lower-than-expected results in these businesses.

For fiscal 2015 we expect to reinstate many of the investments that were delayed in fiscal 2014 and add a few additional strategies all targeted to sustain our momentum. As a result, however, you should anticipate that one year from now this other net category within the operating expense roll forward may aggregate approximately $20 million, plus any investments we make in the sales distribution and e-business initiatives I previously mentioned.

The payback for these investments will come from our ability to sustain momentum with our growing global customer base, and to continue growing faster than industry averages which we have done for the past three years in the US.

So we expect another solid year in 2015, and we are committed to improving our competitiveness in EMEA. From there, we will turn it over for questions.

(Operator Instructions). Matt McCall, BB&T Capital Markets.

Dave, I will actually hit on that incremental margin question. I just want to make sure I understood it. So you said 25% to 30%, but with investment could be greater than 25%. And then I think you said the investment is going to be 20%. I just want to make sure I understood all those numbers.

Is the greater than 20% inclusive of the expected other category in the $20 million that you expect to be at issue?

What I was basically doing, Matt, was dividing our incremental spending investments for next year into two buckets, one that are directly linked to our sales growth and sales initiatives and distribution activities. And what I was describing was that our contribution margin should still net to around 25% or maybe even a little better, even after we cover those incremental investments.

Because of the mix of the business we expect to stay relatively good, which would otherwise push the contribution up maybe closer to 30%. Then separate from that, we expect to invest around $20 million plus or minus in other longer-term growth initiatives and other initiatives across the business. Does that make sense?

All right. So greater than 25%, but then you have to assume -- that is the core incremental, and then you have to assume $20 million as being in excess of that?

Yes.

(inaudible).

So you can do it a couple of ways. You can think of a net contribution margin after the directly-related expense investments associated with revenue growth as in 25%.

Okay.

And then a plus 20%, plus or minus. Or you could say, all right, well maybe the contribution margin is higher than 25%, maybe even closer to 30%; then the incremental expense investments will be more than 20%.

Got it. Okay. And I have got two questions. So the next one I am going to ask, Jim, you talked about most of the expected improvement in EMEA coming in 2016 and 2017. If I assume some cyclical recovery in EMEA with like the signs all over the place that things are getting better, what is your targeted profitability? You use your success in the Americas as a guide, but I am assuming it is not a 12% target in EMEA. What would make you happy in 2016 and 2017?

Well, without the cyclical recovery I would say that over the planning horizon we would expect single-digit operating income percentages and we would hope that it would continue to improve beyond the planning horizon.

With a cyclical recovery you tell me how much it grows and I will tell you much better it gets. But I am encouraged by the news this week that the European Central Bank is maybe hinting at least at some stimulus actions.

If things like that were to come together and the European economy were to strengthen we know that has an effect on our business. And we have a higher fixed cost and therefore a different kind of variable contribution margin in Europe, so we are more sensitive to volume increases there than we are in the Americas business. So we would see that improvement quicker.

So without any cyclical recovery we are talking about low-single-digit margins, upper to low in there -- I assume it's low, but low-single-digit margins over the next couple of years with obviously you could see something better than that.

Yes, I think again -- we consider this to be a long-term plan, so we are not content with that answer, but that is the answer (technical difficulty) planning horizon and our intent would be to continue to improve it beyond that planning period.

Okay, okay. And I apologize; I just want to sneak one more in. Dave, I just want to understand it sounds like you are saying there is going to be a benefit to mix that is going to help your -- or a mix benefit is going to help your incremental margins. But I also thought there was more projects expected, so I am just trying to make those two make sense. I always thought large projects meant better margins generally. So how am I not connecting those (inaudible)?

Matt, I'm going to let Terry take that, he has studied this in depth and it is a little counterintuitive, but he will walk you through it.

Hey, Matt. You summarized it well; we did have an impact from a higher mix of project business. Project sales have led our growth rate over the last nine quarters the fourth quarter was the same. So our percentage -- our mix of project business was up higher than last year, so that hurt our margin.

So if you look at customer mix, we had a favorable customer mix that more than offset actually the impact of a higher percentage of projects. If you recall, about a year ago we were talking about some unfavorable customer mix for a couple quarters. We are getting benefit from the opposite side of a favorable customer mix this quarter and we think next quarter.

And can you give me an example of what that means, what is a favorable -- who is a favorable customer?

If we knew that none of our customers would listen we would talk more specifically about all of that.

It is driven a lot by verticals. There are some verticals that are inherently less profitable than others, federal government for one. So some of it is structural with a higher mix within specific verticals and some of it is a specific customer run project or a large continuing order.

It also has some customers that just buy a different product mix.

That's right.

So it can simply be the shift in product mix towards products that are more profitable than other products.

And some customers buy a lot more than other customers so they use that as leverage in their negotiations so the discounts tend to be higher with that level of buying.

Okay, thank you, guys.

Budd Bugatch, Raymond James.

Good morning, Jim, first, congratulations, best of luck going on your tenure as CEO. David, thank you as always for the great color. I guess my real question, Jim, for you is kind of a larger picture and would you be kind enough to size the addressable market in Europe and maybe also the Middle East and Africa over the long term?

What do you see as the size of that market? We get good data in the US; we don't get such good data worldwide. And maybe you could give us the size of that and then I'm going to obviously go to the next question as to what kind of penetration you think you can ultimately get there.

Thanks, Budd, first of all for the kind remarks and the way -- first of all, we don't get great data either. We don't have something equivalent to BIFMA that covers all of Europe or all of EMEA and as you leave Western Europe and you go to Eastern Europe or the Middle East (inaudible) the data becomes even more difficult. So we take steps to try to estimate it.

One way of thinking about it is we think that overall we have a much lower market share across EMEA than we do in the Americas. So regardless of how I might define that denominator, we know that we've got more potential if we were able to achieve similar sorts of market share levels, we have more upside growth opportunities without having to do something extraordinary.

I will ask Raj to maybe repeat numbers that we've shared before with investors about our estimates of the addressable market. But I would also put that caveat in there that there is a lot of uncertainty around these numbers.

I mean the best numbers that I think we have, Jim, relative to Europe overall, currently that market is running around just a little over $7 billion -- euros. But it has peaked at around EUR9 billion. And it has hung at that $7 billion level but for the last three or four years. I'm sorry, EUR7 billion number over the last three or four years.

So there is clearly the same -- some sort of pent-up demand there because the forces of change that we have talked to you about in the Americas are also impacting the businesses over there as well.

Back to the growth opportunity. So we see growth opportunities in virtually every market there. We have markets where we have been very strong historically like Spain that has gotten hit particularly hard by this recession in EMEA. So that is one answer. Just the recovery we might see in Spain could help us dramatically increase our sales to even levels we were used to historically.

But there are other markets where even though we have been well-established there over time, we are building new customer relationships with the kinds of customers we should be serving, deepening those relationships, as I said before. And so even with our core customer segments in Western Europe there's an opportunity to gain share.

Now if you think about kind of broader growth drivers just overall growth in the economy, potentially Europe Eastern Europe is obviously a place that everybody is going to be talking about. We are establishing a manufacturing footprint, as we said earlier, in the Czech Republic. We are seeing opportunities to continue to improve our growth in that market.

The size of it today is probably not even relevant to what the size of it could be five years or seven years from now. It will be pure skepticism for me to try to estimate that other than it is worth pursuing. It is big enough for it to be worth our attention.

And the Middle East has been a place where we have been doing business for a long time, again some very large projects there and we have an opportunity to improve our presence. So we see lots of opportunities to grow across EMEA.

I guess one last point is that our customers are increasingly global and as they expand their own footprints, expand their own operations throughout Eastern Europe, Central Europe, Middle East, South Africa, Asia. In many cases we are following our customers as they are asking us to help us meet their needs in these places. So just by serving our existing customers we can grow by being in a place where they are growing. Thanks for that question, Budd.

Okay. And secondly as we get there, and you have talked a little bit about the penetration opportunity and the markets look I guess relatively the same size and the two numbers you have given us as to the US when you equate them in the dollars category.

Then the question becomes, what is the ultimate operating margin potential there? If we have double digits in the states are we three to 400 basis points lower because of a lower market share in Europe or is there something structural -- is their no structural impediment to get to the same kind of operating margin that you have been able to demonstrate in the US -- in North America.

So, again, during the planning horizons we have an improvement curve that we are working towards that will help us get into that single-digit level. In the longer run we expect to see that continue to improve. Now can it close the gap completely with the kinds of margins we see in the Americas? I don't know that I see that in the next few years.

I don't want to rule anything out because markets continue to change, our product portfolio continues to change, the segments we serve change and frankly our margins in the Americas much higher now than they were a few years ago.

So we might not close the gap in the medium-term, but we can certainly reached a level with acceptable profitability gives us a good return on the investments we are making and that is the way we have looked at it plus strong in EMEA helps us retain our strength in the Americas because we can serve these customers who are really global customers and helps us kind of walk in these relationships globally.

Okay. And my last question, since Matt snuck one more I will sneak one more is, David, you talked about the contribution margin and you kind of gave us several ways to get to the 25% range. How about parsing that by the segments, giving us some feel as to maybe the differential between EMEA, US and other?

Sorry, Budd, but I'm not going to go to that level of granularity. There are too many moving pieces that happen. I will tell you that the contribution margin in EMEA is higher because as they grow the business they won't be booking as much variable compensation, we've talked about this in the past.

We have been -- we pay our bonuses around the world on global profitability. So we have been accruing bearable compensation in their results so as they grow there will be less dollar for dollar connection of variable comp to their contribution margin. So it will be higher than the overall average.

Will that be the highest?

Yes.

And US the second, can you at least rank them?

No, because when you get into like Designtex and PolyVision in Asia they are all a little bit different. So I would rather just stay away from it.

Okay, you knew I would try. And thank you for your answer.

Josh Borstein, Longbow Research.

Just on the top-line, do you anticipate any pull forward in demand in the first quarter from (inaudible) price increase that you guys have out there?

Hey, Josh, it is Terry Lenhardt. We will see a pull forward in orders, we always do, it is pretty predictable. But you don't get much benefit in shipments in the first quarter because that is our -- price adjustment takes effect in mid April. It is always a few million but compared to last year I would expect it to be comparable.

Okay, so the revenue guidance you have for the first quarter doesn't really include any pull forward amount, is that right?

It will include a small amount that is comparable to last year so it really doesn't affect growth rates if you are looking at a growth percentage.

I see, okay, thank you for that. And then in the Americas obviously you guys have done an outstanding job there taking share in what according to BIFMA was a relatively flat year here. Based on what you see now is that still what you think is going on or do you see any meaningful acceleration and underlying industry dynamics out there?

Well, this is David, as I said in my comments about next year; we do expect the US contract furniture industry to grow modestly, which is an acceleration relative to calendar 2013. But obviously in my remarks I wasn't suggesting a significant acceleration.

Okay, thanks. And then just lastly, just to make sure I understand. In EMEA Jimmy said here in the current fiscal year in FY '15 you don't expect any material improvement in that segment. Does that mean you expect a similar [EBIT] performance as we did in FY '14 or is it just you expect losses of some amount?

Well, we gave you a sense of what we expected in the first quarter. I probably don't want to go any further than that other than we are working on a lot of things that will show some benefit but also has cost associated with them.

And when you net those together we are not going to see a net improvement in fiscal year 2015, unless we see, as somebody else asked before, is cyclical improvement in the economy that drives overall demand stronger in which case we could see an improvement.

But for now we are not expecting a significant improvement. I would rather not try to put a number on that because that is how I would leave it.

Josh, I would refer you back to my comments too where I mentioned that we expect continued adjusted operating losses and the EMEA segment until our strategy is more fully implemented and the economy improves.

Okay, got it. Thanks for that. And then if I can just sneak one more in. In Asia-Pacific it had been soft; you saw some improvements there this quarter. What is going on in that part of the world to turn the business around?

Actually it is broad based growth, some of it is or most of it I would say is project activity. But we are seeing it virtually in almost every market. We do have some expansion strategy, some distribution strategies that we have been deploying in different parts of Asia that are starting to pay nice dividends in orders.

So some of the growth is coming from that, but some of the growth is starting to come back in the areas that we have targeted more strategically over the last five years. And to be honest, even in some of the other developed part of the Asia-Pacific market we started to see growth again.

Whether that is sustained for the full year remains to be seen. But it certainly was positive to see 28% growth in the quarter and when I was there in February doing our -- working with our general manager on quarterly business reviews, the level of optimism and activity just feels a lot different than it did a year earlier.

I would just add to that that for several months we had seen signs of our pipeline building, meaning the activity level that has not yet turned into orders and our own forecast would have expected that some of those would have turned into orders sooner.

So it was frustrating at times and it is gratifying to see this boost in conversion from interest to orders all happen over those last few weeks of the first quarter setting us up for that or the fourth quarter setting us up for a stronger first quarter.

Thank you for the color and good luck on the year.

(Operator Instructions) Todd Schwartzman, Sidoti & Company.

First off on the CapEx guidance, is that 90 to 100 consistent with what you were thinking maybe three months back?

Yes, I would say so. We knew that it was going to be at or slightly above current year level. Again because some of the things that we have in the pipeline with the manufacturing plant.

I think if it went back and looked at the detailed calculations three months ago we might have had a little bit more CapEx related to the new plant in fiscal 2015 I'm sorry in fiscal 2014. And so a little bit of it was delayed to 2015 but not anything meaningful.

Got it. In the financial services vertical you said it was I think a slight decline there. Was there anything -- was there one or more outlying shipments in the year ago quarter that skewed the numbers there?

There was one client that was -- purchases were pretty heavy in the year ago quarter.

So if you were to look at maybe a core -- the core vertical ex that one large client, how would things look differently?

It still would be a decline year over year. But that vertical had a pretty good run with some double-digit growth for a few quarters. So I think it is just leveling off a bit.

Sure, sure. Okay. Now what are you seeing maybe on a global basis -- if you want to break it down by region that would be great. What are you seeing with regard to both non-res construction and also vacancy and absorption rates?

On the non-res piece, Todd, basically I think we are -- definitely in some of the cities that you visit around the world there is definitely a lot of construction going on; London would be a perfect example of that. In various cities that I have been to in the United States you see cranes in the sky.

But the real sort of bump in office construction hasn't come yet. I think the better metric perhaps would be to think about it from a complete non-res fixed investment number because that captures not only the new office construction but also the renovation piece as well. And that is really what is -- I think we believe has been helping our growth more in the recent years than in the past.

And I don't see good vacancy rate data on all the markets around the world. What we do see though continues to suggest that vacancy rates are high and incentives by landlords are still high which we think is good to incent churn which we have benefited from for the last couple years.

When you do start to see a meaningful pickup in construction do you look to as maybe an early leading indicator any particular segment, any region, any customer size, any folks that play in a particular vertical? Like where would you expect to see those early signs if it is even predictable?

The only thing that I can think of is perhaps you might see more office construction in downtown areas as opposed to suburban areas. That is the only sort of distinction that we have seen.

Okay, great. Thanks.

Todd, just one follow up on your financial services question, without the top client from last year, the change in year-over-year the net vertical would be about flat in sales.

Oh, okay. Great, thanks.

I would just add to that last point that the construction data we follow and we track, it is important, it is a factor. If you are trying to build an economic metric -- econometric model for Steelcase it would definitely be a factor in it.

But because renovation is such a big part of our business that it seems like job growth and really which companies are adopting change, which candidly get statistics around. Those are the things that seem to more directly drive our cyclicality than the actual construction of buildings because the other part of this is that there is a significant lag.

Between the time you looking at the construction of the building and people are actually occupying it there is a big lag between the construction period and when the furniture gets ordered and shipped. So that may be another reason why it has been tougher for us to find as direct a correlation, although again it is a factor.

Thanks much.

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Jim Keane for any closing remarks.

Well, thank you again for attending the call and for your questions this morning and your interest in Steelcase. Again, I look forward to meeting as many of you as I can face to face over these coming weeks and months. I will just reiterate, we are very excited to start this new fiscal year.

Although we have faced some challenges in our business we have faced them before and we will face them again. We are really encouraged by some the strength we see particularly in order patterns as we have talked about in the Americas and the end of the fourth quarter, the strong order growth we've seen in Asia, growth in EMEA in February orders which leads to a strong backlog.

So you can measure those things, but the thing that might be tougher to measure or gauge on a call is how people are feeling. So I am equally interested in what I pick up from meetings I get to have with customers and with our sales people who are out in the field competing every day with our dealers. I've had a chance to be with American dealers as well as we've had gatherings of dealers in EMEA recently.

And even in geographies where you would be concerned about the economy and so on, we are feeling a sense of optimism beginning to rise among the dealers who are often the first to see it. So that gives me great hope as we start this next fiscal year and you also feel it in our employees.

I had a chance yesterday to be in front of 800 of our employees here in Grand Rapids who gathered for a quarterly town hall where we talked about our financial results from the year, we talked about our future and our plans and I stood in the back of the room as people were leaving and had a chance to talk to a lot of people and you could just feel the energy and optimism in the air.

So a combination of seeing the orders grow and then kind of looking in people's eyes and seeing the excitement that they have gives me hope. So I look forward to working with all of you in this new role, thank you again for your attention.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.