Steelcase Inc (SCS) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to the Steelcase's second-quarter FY15 conference call. As a reminder, today's conference is being recorded.

For opening remarks and introductions, I would like to turn the conference over to Mr. Raj Mehan, Director of Investor Relations and Assistant Treasurer. Sir, please begin.

Thank you, Michelle. Good morning, everyone. Thank you for joining us for the recap of our second-quarter 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 Finance for the Americas, EMEA and Asia Pacific.

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. Presentation slides that accompany this webcast are also available on ir.Steelcase.com, and a replay of this call will also be posted to this site 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 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. And with that, I'd like to turn the call over to our President and Chief Executive Officer, Jim Keane.

Thank you, Raj, and good morning, everyone. We're pleased to report another strong quarter, especially in the Americas, with several performance trends returning to a positive direction. Dave will take you through the numbers, but I'll share some quick impressions about each of our reporting segments.

This was the 18th consecutive quarter of year-over-year revenue growth in the Americas. We believe this momentum will continue because our customers are making the shift from traditional offices to new workplace strategies that better support mobility, and an increased emphasis on collaboration. During the third quarter, we will be officially taking orders on two key products, the VIA wall portfolio and the new version of our Think chair. Think is an important part of our seating portfolio, and we've strengthened the simplicity and sustainability benefits through this updated design, and we've had some great early feedback.

We've been in the pre-sell phase for VIA this summer, and shipped over 25 orders. The sales pipeline is already filling with some significant orders, as we move into our regular production phase. I'll remind you that VIA stands for Vertical Intelligent Architecture, and brings acoustic properties and design elements to enclosed spaces, that we believe are unmatched. Allan Smith, who leads our global marketing teams, likes to say the technology has gone from being on the wall to in the wall, and eventually the wall itself will be a technology device.

VIA is a key part of our strategy to address the need for privacy in the workplace. The cover of the October issue of Harvard Business Review is about why we hate our offices, and how to build a work space we can love. The lead article in that section of the magazine is entitled Balancing We and Me, and was written by three of our experts here at Steelcase. We think it's a great example of the impact and relevance of our research to business leaders around the world, and it illustrates the importance of products like VIA to help create a workplace that provides better privacy and less distraction.

Our EMEA business reported a significant loss in the quarter. As you know, we've been initiating restructuring efforts in our operations in Germany and France to help us improve our competitiveness. And because of these initiatives, we saw a significant amount of disruption and inefficiency, including extended lead times, split shipments, and other impacts to our customers. Our performance has since improved, but we are not yet sustaining normal levels.

We announced during the quarter that we had received a proposal to transfer the operations of one of our factories in France to another company that intends to employ our current workforce. We are awaiting final approval of this transaction, and we're very pleased that we are able to negotiate a plan that will provide continued employment, and would allow for a smoother transition of production from this plant to other Steelcase facilities in Europe. Our new factory in the Czech Republic was completed ahead of schedule, and has completed its first test production runs.

We celebrated a number of competitive wins in EMEA this year. And in this most recent quarter, we were selected by a major global financial services firm to provide a significant portion of their future furniture needs. We've intentionally refocused our sales efforts on leading organizations like this because they appreciate our insights and are already interested in ideas to improve the effectiveness of their workplace.

We all know the economies of Western Europe are still falling short of a strong, sustained recovery from the last recession. The work we are doing to restructure our operations, launch new products, and refocus our selling efforts, gives me confidence that we will be ready to serve customers when they are ready to increase their investments in the workplace.

Finally, I want to recognize the double-digit revenue growth in the Other segment, which includes our Asia Pacific business, Designtex and PolyVision. We saw growth in the Asia Pacific market in Q2, despite some economic headwinds. We believe China and India will be particularly important growth markets for the future, and we are building a strong team throughout the region.

Designtex is on track for improved performance, with new leadership and new offerings. We're pleased with the order growth we've seen, and we continue to be pleased with PolyVision's strong performance as well.

So, in summary, I'm pleased with our overall performance, while recognizing the challenge our teams are facing to meet customer commitments, while we significantly restructure our EMEA operations. I stay very close to this situation. I see signs of progress every day, and a bright future ahead for our Business in the region. And with that, I'll turn it over to Dave.

Thank you, Jim. I will start with a few high-level comments about the second-quarter results and balance sheet, provide some additional color commentary around our order patterns and outlook for the third quarter, and then we'll move to your questions.

As Jim mentioned, we feel pretty good about our financial results in the second quarter. Revenue and earnings were above the high end of our guidance, despite disruption and inefficiencies in EMEA being higher than we anticipated.

A couple of highlights for the quarter include: The 7.5% adjusted operating income margin reported in the second quarter represents the highest level we have reported for our consolidated results in more than 10 years, and this was accomplished despite approximately $9 million of disruption and inefficiencies associated with our manufacturing footprint changes in EMEA, which we anticipate will result in approximately $20 million of annualized savings, once fully implemented.

Our 4% organic revenue growth in the Americas marked its 18th consecutive quarter of growth, and we believe we gained market share in the US again this quarter. Overall, the Americas had a solid quarter, achieving a 13.9% adjusted operating income margin, with cost of sales in the Americas improving to being flat with last year in the second quarter, compared to the 70-basis-point year-over-year increase we experienced in the first quarter. Freight and distribution costs remain higher than the prior year, but warranty claims experience and overhead spending were back in line with expected trends.

And lastly, as Jim said, we reached an agreement to transfer our operations in Wisches, France, to a third party, subject to consultation with workers' councils and applicable legal requirements. Upon completion of the transfer, the third party would function as a contract manufacturer to Steelcase for nine months, during our production moves. The contemplated transfer is expected to preserve employment for our local workforce, for a period of at least three years.

As it relates to revenue compared to our expectations, the organic growth of 4% in the Americas was better than we expected, as a result of stronger-than-expected order patterns. For EMEA, the 4% organic growth was more significant than what was contemplated in our revenue estimate. Second-quarter order patterns weakened in July and August, and overall, included a significant number of requests for shipment dates in the third quarter, which negatively impacted revenue in the second quarter, but helped to push quarter-end backlog more than 30% higher than the prior year.

In addition, we experienced extended lead times due to labor inefficiencies and other disruption following our June announcement to exit our manufacturing facility in France. While difficult to quantify, we do believe that the extended lead times and disruption experienced in the second quarter negatively impacted our order patterns in July and August, thereby negatively impacting revenue and the overall results.

Revenue in the Other category grew by 13% organically, relatively consistent with our expectations. PolyVision, Designtex and Asia Pacific all contributed to the growth. As it relates to earnings compared to our expectations, adjusted operating income and Other income net were better than expected.

For the Americas, adjusted operating income was better than expected, as operating leverage from the revenue growth, benefits of improved pricing, and operating expenses were all favorable compared to our expectations. For EMEA, the adjusted operating loss was larger than expected due to the impact of the revenue shortfall, and higher-than-expected disruption and inefficiencies, partially offset by lower-than-expected operating expenses. The Other category was largely consistent with our expectations. Regarding Other income net, results from our joint ventures continued to be stronger than expected.

Compared to the prior year, adjusted operating income of $59.2 million in the quarter was approximately $4 million higher. Operating leverage from the revenue growth, and benefits of improved pricing in the Americas, were partially offset by approximately $9 million of disruption and inefficiencies associated with the manufacturing footprint changes in EMEA.

Our ongoing manufacturing cost-reduction efforts around the world are yielding benefits as well, but they were largely offset by increased wages and fringe benefits, as well as freight and distribution costs in the Americas, which remain higher than the prior year, albeit improved compared to the first quarter. We have initiated some changes which target additional sequential improvement in our freight and distribution costs, but we expect these costs will remain higher than the prior year, through the end of the fiscal year.

Before I move on, I will provide a little more color regarding disruption and inefficiencies associated with the manufacturing footprint changes in EMEA, which are recorded as cost of sales, not restructuring costs. These costs include labor premiums paid to employees during transition periods, and labor inefficiencies caused by work stoppages or slowdowns resulting from restructuring activities. They also include incremental logistics costs caused by split shipments linked to labor inefficiencies and interim supply chains during production moves.

Lastly, these costs include duplicate labor and overhead at the new Czech Republic facility and other plants impacted by production moves. We believe these costs are temporary, and will be eliminated from our cost structure once the manufacturing changes in EMEA are complete, and the industrial model returns to normal levels of operating efficiency.

To date, we have incurred approximately $16 million of disruption and inefficiencies associated with these projects: $4 million in FY14, and $12 million in the first half of FY15, or $3 million in the first quarter and $9 million in the second quarter. And we currently estimate approximately $16 million of additional disruption and inefficiencies will be incurred in the back half of FY15, or $9 million in the third quarter and $7 million in the fourth quarter.

Beyond FY15, we estimate disruption and inefficiencies will further reduce through the completion of the projects, which is currently anticipated to occur 12 months from today. Restructuring costs in the quarter were slightly lower than our expectations, and did not include any significant costs associated with the proposed transfer of the French manufacturing facility to a third party, as completion of this project is subject to consultation with our workers' councils and applicable legal requirements.

Let me turn it over to Mark for a few additional comments regarding anticipated restructuring costs and savings associated with our current actions.

Let me provide an update of our current estimates of restructuring charges, and disruption and inefficiencies, associated with the manufacturing footprint changes in EMEA. This update is also summarized in our webcast slides.

In connection with the previously announced project to close our manufacturing facility in Durlangen, Germany, we continue to anticipate total restructuring charges for the project to approximate $26 million. We have recorded $6 million of restructuring charges through the second quarter of FY15, and expect to incur $6 million of such costs in each of the remaining two quarters of FY15, plus another $8 million in FY16.

In addition, we have incurred approximately $11 million of disruption and inefficiencies associated with this project to date, and now anticipate a total of approximately $20 million to $25 million of such costs through the completion of the project. We continue to expect that annualized savings from this project will be approximately $10 million when fully implemented by the end of the second quarter of FY16.

Our estimates associated with the project to transfer our manufacturing facility in Wisches, France, to a third party remained the same as those disclosed in our August 18 Form 8-K. If the transfer is completed as contemplated, the net restructuring costs are expected to be approximately $40 million to $45 million, with approximately $35 million of costs to facilitate the transfer of the facility, workforce, inventory, and certain equipment, including a facilitation fee; and approximately $5 million to $10 million relating to manufacturing consolidation and production moves.

As previously noted by Dave, the timing of the restructuring charges associated with the transfer of the Wisches operation will depend on the pace of the completion applicable legal requirements; however, the transfer is expected to occur before the end of FY15. In connection with the transfer, we expect to enter into a supply and manufacturing agreement with a third party for a minimum period of nine months following the completion of the transfer. In Q2 FY15, we incurred approximately $5 million of disruption and inefficiencies associated with this project, and anticipate a total of approximately $15 million of such costs through the completion of the project. We anticipate annualized savings from this project will be approximately $10 million when fully implemented, following the completion of the supply and manufacturing agreement.

Now, I'll turn it over to Dave.

Thanks, Mark. Moving to the balance sheet and cash flow, we generated $56 million of cash from operations during the second quarter, consistent with the prior year. The increase in inventory since the end of FY14 is being driven primarily by seasonality, and a large government project in EMEA, which was manufactured during the first half of this year, for which we expect to begin recognizing revenue in the third quarter.

Capital expenditures totaled $29 million, and were related to the new plant in the Czech Republic, manufacturing investments, and new product introductions. We continue to expect capital expenditures to approximate $90 million to $100 million for the full fiscal year, as we complete the construction of the new facility in EMEA, continue to upgrade various manufacturing technologies, and invest in a number of customer-facing initiatives, including showrooms and eBusiness platforms. We returned approximately $41 million to shareholders in the quarter, $13 million through the payment of a cash dividend of $0.105 per share, and $28 million through repurchasing 1.85 million shares.

Turning to order patterns, I will start with the Americas, where our order patterns in the second quarter grew 2% compared to the prior year. As I said in the release, orders in the Americas averaged approximately 8% growth, before consideration of one particular region, which declined significantly compared to a strong prior-year comparison, that included a few very large projects. Customer order backlog for the Americas ended the quarter up approximately 10% compared to the prior year.

Across quote types, we experienced solid growth in orders related to project business, and modest order growth from continuing agreements, while orders from our marketing programs aimed at smaller day-to-day business declined. Regarding project business, our growth in orders was broad based this quarter. We were less dependent on a few very large projects, as the book of project orders was largely comprised of many mid-sized or more typical projects.

With respect to vertical markets in the Americas, we experienced order growth in the information technology, state and local government, technical professional, financial services, and education sectors, while energy, manufacturing, insurance services, federal government, and healthcare declined against the prior year. Overall, incoming orders remained well diversified, with 10 different vertical markets receiving orders of at least $20 million in the quarter. Within the federal government, a rebound in day-to-day GSA orders was not enough to make up for a large project order in the prior-year comparison.

Switching to EMEA, orders in constant currency grew by approximately 10% in total, compared to the prior year. Order strength in June was followed by weakness in July and August. We experienced order growth in all markets except for the Benelux region. Customer order backlog for EMEA ended the quarter up significantly compared to the prior year, due to the extended shipment dates I mentioned earlier, as well as a large government project won in FY13, and ordered in the first quarter of FY15, for which we expect to begin recognizing revenue in the third quarter.

Within the Other category, order growth was strongest at Designtex, while PolyVision and Asia Pacific grew at mid-single-digit percentages. Asia Pacific orders were strong throughout the quarter, but growth rates were dampened by a large order in the prior year.

To summarize, our order patterns in the Americas remained solid, albeit somewhat lumpy, given the inherent nature of project business, especially during the secular shift from private offices and cubicles to more open and collaborative workplace strategies. And we continued to gain market share in the US.

EMEA order patterns weakened following growth in the first quarter and early in the second quarter. Asia Pacific may be emerging out of the demand lull we have been experiencing over the last two years. Our Designtex growth strategies have gained traction over the last two quarters, and PolyVision remains solid.

Turning to the third quarter, we expect to report organic revenue growth of 4% to 7%, compared to the prior year. Sequentially, the third-quarter revenue estimate represents organic growth of between 3% and 6%, consistent with typical seasonality. We expect sequential improvement in EMEA's operating results compared to the second quarter, despite similar levels of disruption and inefficiencies associated with the changes in our manufacturing footprint. However, the anticipated sequential revenue growth in the EMEA segment is expected to include a higher mix of lower-margin government business, as compared to the second quarter.

Similarly, the Americas revenue in the third quarter is expected to reflect an unfavorable shift in business mix from education, which is typically strongest in the second quarter, toward lower-margin government business, which is typically strongest in the third quarter. Lastly, we expect higher operating expenses on both a sequential and year-over-year basis, associated with various product development and growth initiatives, and a biennial sales and dealer conference in the Americas.

As it relates to restructuring costs, our earnings estimates contemplate additional charges related to our previously announced actions in Germany and the US; however, our estimate does not include any significant restructuring costs associated with the proposed transfer of the French facility, due to the uncertainty of timing of such costs. As a result of these factors, we expect to report third-quarter earnings within a range of $0.20 to $0.24 per share, including restructuring costs of approximately $0.04 per share, which translates to an adjusted earnings range of $0.24 to $0.28 per share.

From there, we will turn it over for questions.

(Operator Instructions)

Our first question comes from the line of Budd Bugatch with Raymond James. Your line is open. Please go ahead.

Good morning, and thank you for all of the detail and color as usual, Jim, Dave and Mark. I guess I just want to step back and really look at the EMEA project, more on a larger or wider picture, and tell us what's going right there and what's going not as well as you would like it? And I realize it's probably somewhat sensitive to talk about that, given the sensitivity of the negotiations, but where are we on that project, and what's going later? I thought we were going to be out of the Wisches operation by the end of the year, and it looks like now through the second quarter of 2016, or 2015, if I read right.

Well, first of all, I think that what's going right is the work that we did over the last couple of years really to refocus our sales organization and leading organizations, the customers we serve -- we did a lot of that work, and we're seeing impact from that work. We continue to win business with customers we haven't served significantly in the past, or maybe have not served at all, and some of the wins we had in this recent quarter are evidence of that.

So, that's a very good sign. It's quite important that we make sure that we're able to have those kinds of relationships with those kinds of customers, and the work we're doing is relevant to them. So, I think that's a very good sign.

Secondly, as we went through the operations restructuring, we knew that we were going to face disruption. We just didn't know exactly what form it was going to take. It's a very uncertain environment when you begin these kinds of projects, and as it turned out, we did have disruption in the form of slowdowns, for example.

Those slowdowns, from a manufacturing perspective, were probably at the worst, some time back in August, in terms of the aggregation of delayed orders in our backlog and so forth. But our team began taking steps quickly, as quickly as they could, to catch up on those orders. And at the front end of the manufacturing level, we were seeing improvement in our backlog, as we got toward the end of August and into early September. And our manufacturing performance, the actual making of the product, was back close to normal levels in early September.

And I want to be careful how I say that because there was still disruption just because of the fact that we had to move a lot of business around. We had to move orders from one factory to another factory. And whenever you do that, you're never going to be at peak efficiency, but we are back, I'll say, within a nominal range.

Now, that said, customers don't see the benefit and we don't see the benefit until that makes its way all the way through the supply chain, end to end, which includes distribution, shipments, and making sure all that product shows up where it belongs at the customer site for installation, and we're still dealing with some of that. You can't have a disruption at the level we did and not find yourself taking a few weeks to clear that system and to get back to fully -- full performance across the board. I'd say we're still even not at that level, but the last few days of data that I've seen -- we look at this every single day -- the last few days I've seen -- track that data all the way through what we shipped, not just what we make, would suggest that we really are returning to that nominal level. Now, the question is, can we sustain that?

So, that's an example of where we are. It doesn't mean that we're done, because we have a lot of other work to do. We have a new plant that really has been doing test production, but hasn't begun operating at production volumes yet.

We have production that will have to ship from existing plants to that plant. And then we'll be managing through the transfer of the Wisches plant to this third party that Dave talked about, and that, too, could trigger some disruptions and interruptions. Again, I don't know exactly what form those will take. We don't know exactly how much of an impact it will have, but we want to be transparent with you about the fact that we see those ahead of us still.

In terms of timing, I would certainly hope by the time we're into next fiscal year and by next summer, that this series of actions will have stabilized, and we will -- beginning to see the benefits.

Two questions on the Wisches plant: One, is the transfer going to be in place -- in situ -- at that plant? Is the third party going to take over the plant, or are you transferring it to a different manufacturing facility?

And two, was there any spillover to the other plant in France?

Some of that is detail I probably won't go into, but I'll give you the broad summary of it. The idea here is that the third party takes over the plant, will continue to manufacture our products for us, and will also begin manufacturing other products. In addition, we've got people from our plants who will ship to other plants that are operated by that company; some of that's already begun to happen on a voluntary basis. So, that gives you a picture of it. It's really a transfer of our folks into their operating system that will include the Wisches plant, plus possibly other plants.

We don't see it having an impact really on our other plant in France, although there could be some insignificant impacts.

Okay, and finally, you were going to transfer, I think, some of that product to either Spain or to the new Czech plant, but I take it it's going to just basically stay in situ in France?

There's a commitment that they will continue to manufacture the product for about nine months, and then it is likely that our product will transfer to other plants in our system; that could include Spain, but it could include other plants in our system, as well.

Okay, and finally, the Czech plant that's already -- you said that's starting; when will that go into full production?

We're going to ramp up gradually here, so we expect to get all our permits in place over the next 30 days or so. Once we have permits in place, we can then begin making production [units] for sale to customer, and we'll begin a gradual ramp up, line by line, quarter by quarter, expecting that by summer, again, that plant will be at full capacity.

Okay, thank you. I'm sorry to focus on this, but your performance in the other two segments is admirable, and this is the one that I've been worried about for a long time. Thank you.

You're welcome. It's an understandable question; obviously, we spend a lot of time on it as well. It's very important to our future. Thanks, Budd.

Thank you.

Our next question comes from the line of Matt McCall with BB&T Capital Markets. Your line is open. Please go ahead.

Mark, thanks for all of the detail. Just to clarify a couple things: The restructuring savings, I think in the presentation, you quantified it at $25 million. The math seems to point to about $10 million next year. Would that imply $10 million back half of next year, or $15 million in the following year would be the way to model it?

Yes, I think that's a fair way to think about it, Matt, given that we're expecting the German plant to be completed mid-year, and then the supply agreement will likely be somewhere complete mid-year, but that's dependent on when we actually close the transaction. So, it's probably plus or minus $10 million in next year, and then your math in the following year makes sense.

Okay. And then maybe for you, Dave, if we think about next year and the incremental profitability, is there anything that's going to change from the typical way you've talked about your incremental margins on core volume growth next year -- anything we can think about from a mix perspective or anything like that?

Well, it's pretty early to say with a lot of certainty about next year, but what I can give you some color on, maybe, is that we don't see anything in our Business that would suggest a big mix change for next year. That doesn't mean that it won't happen or couldn't happen, but as of today, we don't see any big mix shifts. We do see that the disruption that we have this year, which we're currently estimating at a total of $28 million, should go down to a neighborhood of $5 million to $10 million next year. So, you should see an incremental improvement in disruption beyond the savings that you just talked to Mark about, for next year.

The other comment I would make is, as it relates to operating expenses, we talked two quarters ago about our intention to invest in a number of areas in our Business to the tune of, I think, an incremental $25 million or $30 million. And to date, we've actually invested year over year very little, in part because of timing and in part because of some of the pressure that we felt in our Americas gross margins early in the fiscal year versus our expectations. I don't want to say that we're definitively going to spend all that money this year or next year, but I don't want you to assume that we're not going to spend any incremental operating expenses next year either. That make sense?

It does. I recall a conversation a couple quarters ago about the incremental margin, and the way to think about it. So, is the way to think about it: The core, I think the number was in the 25% range, so you get the 25% incremental, but then you have to layer on these other items beyond that? Or does the 25% incremental encompass the growth spending you're referencing?

No, it's 25%, and then layer on the disruption, the savings, and incremental operating expenses.

Got it. So, the Other category -- $3 million in profit this year. It seemed like -- I think you said that was in line with your expectations. Is that the new norm in that business? I know it's a smaller part of the Business, but 3 times 4 will give us $12 million of incremental profit if we look forward. Is that the way we should think about it? What would change, if anything, or what could get better?

Well, we've said over the last year or so that what we're targeting in that category are three different things. One is we have -- and it's because we have three different businesses in three different states. PolyVision continues to do very well, and we expect that business to continue to perform well; don't see any significant changes on the horizon.

Asia Pacific, we had been investing for the long term ahead of the growth. The growth stalled, so 18 months ago or 12 months ago, we flipped back to quarterly losses for the most part in that segment. So, we've since slowed down the investments, and waited for the growth to return, and the growth is starting to return.

So, what we would like to think that we could operate at that, in that business, is that we can be investing incrementally but breaking even or making a little bit of money go forward. And that's the objective we're shooting for there. They are not quite there yet in the second quarter, but we like what the growth prospects are looking like.

And then lastly, on Designtex, we've talked over the last several quarters that we're targeting a turnaround at Designtex, making relatively significant investments in growth strategies under the new leadership of Susan Lyons. That business is performing well. It's hitting its expectations on those growth strategies, so we're starting to see it move its way back toward nice levels of profitability in that business.

So, if all of that continues to move in the right direction, we should be able to see a 5% operating income, or so, in that category. Again, PolyVision is doing really well. Designtex is on its way, getting back to doing really well. And Asia Pacific, we're investing for the long term, hopefully breaking even or making a little bit of money.

Okay, and so, tying the last two together, when you talk about that growth spending, is it aimed at any one business more than the others, or would you care to tell us that?

Are you talking about the growth spending I referenced in discussion with the Other category or in the --? (multiple speakers)

No, with overall -- overall, the part that was delayed.

Yes, I would say that it's going to primarily lean toward the Americas. If you look at the operating income margin that we're doing in that business this quarter, again, almost 14%. I'm not saying we can't do better than 14%. Maybe we can, but that business starts to peak at a certain level of operating income, and requires further investment for us to continue to grow and gain market share. So, I think that's where you'll see the bulk of our growth spending, go forward.

Okay, and I'm sorry, I know I'm probably at two and a half questions, but I'm going to do three. The VIA business, can you give us an idea of the potential of that market, the category for you, what's your capacity right now, how do we forecast that out since it is such a new business, how big can it be, and how quickly?

Well, maybe, Raj, you start by sharing what we've sized the market at.

Yes.

And then Jim and I can jump in.

So, Matt, I think if you looked at the market size, it's going to vary obviously, if you asked competitor A versus us, because each of us are doing our own internal analysis. But I think the market potential of $1 billion plus or minus is probably in the right ballpark, and we see that growing over time.

There's a segment of that market that we're playing in, and there's segments we are really not playing in, and this is where this gets to be a more complicated problem. I'd say for this next year, our focus is on making sure that we have a product that's ahead in terms of acoustic performance, ahead in terms of the ability to integrate technology, a manufacturing system that is -- I think it's one of the most remarkable lines we have anywhere in the Company. We want to get that working at top performance, and that's really going to be our focus.

I don't think it's going to have a material impact on our top line or our bottom line this year, and we're going to learn as we go forward, about what that will mean to us. We are enthusiastic about it, however. We think that, as time goes by, it will certainly be a material part of our Business, not just because of the VIA wall itself, but the value of integrating solutions that rely on VIA. VIA becomes a platform that goes along with the technology, furniture, and all kinds of other products and services. So, we see that idea being an important idea, and VIA is a part of the overall idea.

So, just to build on Jim's comment about -- we're learning. So, because we're learning as we're going along, we're intentionally limiting the capacity of VIA in the first couple of quarters of shipments.

Okay, perfect. Thank you, guys.

Our next question comes from the line of Todd Schwartzman with Sidoti & Company.

Wanted to first ask about pricing in the Americas -- if you could give us an update where you are with the latest increase with implementation? And also, going forward, if there's anything scheduled on the calendar -- any additional hikes?

So, Todd, we took a price increase in April, which was I think on average in the low-single digit, maybe a couple of percent increase, based on the costs that we were seeing in our Business. And as you know, in our industry, the way that works its way into contracts, it works its way over time, comes into our marketing programs almost immediately. And then on project and continuing agreements, it works in as we anniversary -- as we reach anniversary dates in those contracts that allow us to have dialogues with customers about price increases.

And the global financial services company that you called out, as particularly large project in Q2, is that a new or existing client?

We served them to some degree in places around the world before, but this was probably the biggest project opportunity, and biggest one we've had in EMEA in quite some time. So, it was definitely a notable win. It was a win that people were talking about throughout the Company. And people were talking about it in EMEA, but I walked into our innovation center here in Grand Rapids, and that same day everybody was talking about it. So, it was a big deal for us to have won that particular order, not just because of the order, but because of the relationship it opens up to us, and as I said before, the demonstration through that win that we're on the right track with our strategies in EMEA.

Was the seating component of that in the 25%, 30% range?

Are you saying was seating -- I don't know what seating was as a percentage of the total, but it wasn't just one category; it included more than one category.

Okay. Regarding EMEA, you guys spoke at length about the Company-specific distractions, all that's going on with the restructuring, but I haven't heard any of you guys mention anything about the political conflict, military conflict, actual or potential prospective conflict. Is there anything going on there that is causing disruption or uncertainty in the EMEA operations?

Not specifically for us right now. If you said any direct effects, I'd say there's been virtually none. And we've asked those questions. However, let me speak a little bit more broadly about the topic.

We know that when the economies go through shocks like the military conflict, it's going to have an effect on business confidence in places like Germany, which does a lot of trade with Eastern Europe, in France and other countries that are very important to us. And we know that it takes some time for those shocks to translate into business confidence, and then for those to translate into changes in orders for our kinds of products. So, we're paying close attention to that, and expecting that if we see a fall in business confidence, we see a fall in capital spending in those regions, we could see an impact in our Business.

But to answer your direct question, we haven't seen anything so far. Haven't seen any orders cancelled because of that. Haven't seen any interruptions to our supply chain because of that. We don't expect to see any direct effects, but we could see some of those indirect effects later on.

Got it. Thank you so much.

(Operator Instructions)

Our next question comes from the line of Josh Borstein with Longbow Research.

Ex the one region in the Americas that you mentioned, order growth was up high-single digits; two of the last three BIFMA numbers have been up high-single digits. Is it your sense, Jim, that what has been a low to mid-single-digit growth environment perhaps is turning into a high single-digit growth environment?

That's a good question, and we're not sure ourselves. What we're finding is that the actual -- it seems to us that the actual results for the industry, as time has gone by here, have been lower than what had been projected by BIFMA six months earlier. So, there's been a gradual ramping down of some of the earlier projections.

In fact, where the current projections are coming down to are closer to what we ourselves had assumed when we did our plans last year, because we were assuming lower growth in the Americas than [BIFMA was loading]. So, it's coming closer to our numbers. Now, we're also seeing that our results are exceeding the overall BIFMA results when it comes to shipments for example, and so that would suggest that we're continuing to gain market share.

I don't want to keep on trying to quantify that, but we are seeing ours slightly better than the industry, and we think that relates to the fact that we serve a segment of customers who are drawn to us because they are trying to make changes in their office. They're not just trying to make expansions or just trying to renew old furniture, but they actually want to make whole scale changes, in line to what Harvard Business Review was talking about in the October issue.

There's kind of a pent-up feeling that the office is going out of date, and we think we're attracting customers who are feeling that themselves, and we think we have the right solutions for that. So, we think that's why we're seeing a little better growth in the industry, but I don't know if it means that things are accelerating. We're just going to keep on doing the best we can every quarter.

And more qualitatively, do you feel any more optimistic about the Business in the Americas, or is it your sense that customers perhaps are a little less reserved, more willing to go ahead with the projects?

Well, I think that business confidence rises and falls, and every time we think that it's getting stronger, something will happen to interrupt that. I think issues related to politics can sometimes do it, with elections on the way; sometimes it has to do with tax reform. There's lots of things that could cause our customers to pause and take stock before they move forward. So, we're hopeful that the government continue to make good progress and reassure businesses that it will be a climate that they can rely on; R&D tax credits and things like that are obviously important to us.

So, we are hopeful of that, but I think the bigger issue is just, it seems like we're finding more and more clients who are coming to us saying that we know there's something wrong with our office, we know it's not working anymore, we want to do something different, but we don't know exactly what that is, can you help us? And that's what's causing the rise in our Business; our ability to be relevant to those kinds of questions.

And maybe for Dave, I know we shouldn't read too much into this, but you provided some order information for the first few weeks of the new quarter. Could you update us on what's going on in the first few weeks in September?

Yes, it's -- again, it's only two weeks, so we're always hesitant to share it, but I would tell you that we're continuing to see growth in the Americas through the first two weeks.

Okay, great. And then, on the EBIT margins in the Americas, a great performance there again; close to what you posted the year-ago period. And my impression in the year-ago period is that it was somewhat anomalous, and that the margin result of a confluence of variables that wouldn't necessarily repeat, but it seems like it has. What accounts for the strong EBIT performance this quarter?

Well, again, we had a lot of things going in the right direction. As I commented, we had favorable spending versus our expectations. We saw better-than-expected improvement in cost of sales compared to the first quarter. We had nice revenue growth and, therefore, operating leverage; pricing was a little better than expected.

So, once in a while, everything goes in the same direction. Sometimes it all goes negative; we've had a quarter like that in our past now and then. And this quarter, we had one where it all went in a positive direction. So, I just don't know that we can count on that happening very often, where everything works in your favor, but it certainly did in the second quarter.

Okay, and then just last one for me: In Europe, could you just talk a little bit about the top line there -- what you're seeing -- maybe walk through some of your major geographies and talk about those countries?

Well, really, you have to break it down into a couple of different primary regions. So, we always think of Western Europe, and then the rest of Europe, which is the Eastern, Central and Southern parts of Europe, and then the Middle East and Africa. And when you look at Western Europe -- the UK, I would tell you, continues to perform very well. I think you're aware of that. You hear that from some of our other competitors that have a presence in the UK. That market is growing and is doing well.

Spain, which was historically a good-sized market for us that has suffered a dramatic decline in the overall industry over the last half dozen years or so, is finally starting to come off of a deep, deep recession. So, we're starting to feel some improvement in that market as well. And then France and Germany -- feel like they're -- one quarter, you feel a little positive, and the next quarter you have reason to be cautious or concerned. And that's how it continues to ebb and flow with those two primary markets, which you know are our largest in Western Europe.

Eastern, Central and Southern parts of Europe, Middle East and Africa -- they continue to reflect good project activity and growth more often than not. But as we said earlier, we are a little bit cautious about how some of the military conflict might impact some of those regions in the future quarters.

Great. And the tax rate for 3Q -- still use around 41%, 42%?

Yes, we're year to date at 41.5% or 42%, and that would be -- that's our implied guidance for Q3.

Okay, great. I appreciate the color, thank you.

I'm showing no further questions at this time. I would like to turn the conference back to Mr. Jim Keane with closing remarks.

Thanks, everybody, for joining us on the call, and best wishes for those of you who are about to celebrate the holiday.

This was a good quarter, and I think the good quarter has to be closed out by talking about the work of our people. It's really -- a Company like Steelcase is just made up of people: people who are trying to launch new products, people who are trying to serve customers, and people who are managing through some of the difficult challenges that we have right now, as we restructure our Business and prepare for the future. And this quarter's results is the result of each of those people and the work they did individually and as a team to pull together and make these things happen. So, I'm very appreciative to them, and look forward to talking to you again next time. Thank you.

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