Steelcase Inc (SCS) 2016 Q2 法說會逐字稿

Good day, everyone, and welcome to Steelcase's second-quarter FY16 conference call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would like to turn the conference call over to Mr. Raj Mehan, Director of Investor Relations, Financial Planning and Analysis, and Assistant Treasurer.

Thank you, Sharon. 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.

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 the 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'll respond to questions from investors and analysts. I'll now turn the call over to our President and Chief Executive Officer, Jim Keane.

Thanks, Raj, and good morning, everyone. This was another strong quarter for Steelcase, and we are pleased to see organic revenue growth in every segment, and to record an adjusted operating income margin of 15% in the Americas. I want to make a few comments about our results in the Americas, and then I will talk in more detail about EMEA. Then Dave will take you deeper into the results.

This was a remarkable quarter for the Americas, in terms of profitability. These results represent all of the work our people have done over the past few years to improve our business model, modernize our industrial footprint, and stay ahead. These benefits of the long-term investments coincide with the reversal of a pattern we had seen previously. We've mentioned on the past two calls that we were seeing an increase in the number of customers asking for extended delivery dates. We fell somewhat short of our revenue expectations for the Americas in those quarters, but built a strong backlog of orders.

In Q2, fewer customers asked for extended delivery dates, and we were able to work through a big part of the longer-dated backlog. Revenue in the Americas was up 6%, while orders increased by 4%, with project growth relatively flat. We believe our order patterns in the Americas are keeping pace with the industry, and we believe we continue to win at a higher rate with leading organizations, that place a higher value on their spaces. This is true in all of our regions, where these kind of customers helped us achieve strong top-line growth in the Asia-Pacific market this quarter.

We are closely watching business sentiment indicators around the world, in light of the recent market volatility in China and elsewhere. So far, we have seen no signs of weakness in our Chinese order patterns or pipeline. The US market is on track to meet our initial growth expectations for the year, because of both traditional drivers of demand, and the continuing need for companies to update their spaces.

Now, let's turn to the EMEA results for Q2. We reported organic revenue growth of 17% in this segment, but that was offset by continued disruption costs and inefficiencies associated with our footprint changes, plus some additional manufacturing and distribution issues that arose this quarter.

We set a very aggressive timetable a year ago for this wave of operational restructuring in EMEA. You all realize how important it is that we get our EMEA business back to profitability, and we certainly share that same view. Every quarter matters, so we want to move quickly. However, we also know there are risks with going fast in terms of disruption costs, and we don't want to interrupt our ability to meet customer commitments. I will go into more specifics than normal to give you a sense of how we're managing this, to balance speed and risk.

As you know, we opened a new factory in Stribro in the Czech Republic last fall, and we've been ramping up production quickly. We had some early problems with equipment reliability and other normal issues, and we shifted resources to address those problems. Just as things were starting to improve, we suffered a failure of one sprinkler head in our new system that damaged some inventory, and a series of small power outages that caused production delays. Those are unfortunate, but they can happen anywhere, and we would normally recover with a small disruption. But for a new plant, already a bit fragile because of the pressure of a fast ramp-up, it's very hard to recover.

So we had disruptions, but I think those are understandable, and I think our teams did well in responding. But there's more to this story. Stribro recovered so quickly that we generated a surge of finished goods that overwhelmed our downstream distribution center in Rosenheim. Our focus had been in areas directly affected by the restructuring work, so we didn't anticipate the downstream impact, and really, these kinds of situations only happen when you're doing these kinds of changes.

So now we had a new problem, and we fell more than ten days behind. In these situations we swarm the problem, and frankly, we spend whatever it takes to get the product to our customers. We make it our number-one priority. We had people on site from around EMEA, and around the world. I've been on video conferences every morning with our operations team based in Germany to review their progress and agree on our priorities. I follow those meetings with phone conferences with our sales and customer service people, so they have the best information we have.

As of this week, the distribution center is back to normal levels of efficiency, and we're cleaning up some open items left over from the last few weeks. Our Stribro plant continues to operate efficiently, and with quality levels typical of our other EMEA plants. We are taking other steps to help our dealers where the disruptions have created other issues for them. There's no question we could have executed better, but we captured the learnings from every situation like this, and we make improvements that make us stronger and more resilient.

The lessons we learn during the US restructuring work have helped us move faster in EMEA, but we are always balancing speed against risk. When we have a problem, we put the customer's needs ahead of our own short-term profitability, and as you can see, there are many of us personally involved in this on a daily basis, and at a fairly detailed level, because that's what it takes to realize these improvements. The good news is we're getting close to the end of our operational footprint restructuring, and the targeted benefits from the overall modernization effort are still valid. We have more than 80% of the product transferred to Stribro, as we prepare to close our Durlangen plant. We may be done a little later than we hoped, but we have always considered these moves to be long-term investments in our future competitiveness in EMEA.

We had a number of other changes we also implemented these last few weeks in EMEA, including the final transfer of production from Wisches to Madrid, and the startup of a new distribution center near Paris. Those changes were equally aggressive, and those were executed very well. And soon, we can turn our full attention towards continuous improvement across the entire system, as we have done successfully in the Americas.

I'm proud of our teams around the world, and the commitment to our customers and shareholders. I want to extend my thanks and congratulations again to everyone in the Americas for record performance, as we continue to improve our results in other regions. And with that, I'll turn it over to Dave.

Thank you, Jim. I will start with a few high-level comments about our second-quarter results and balance sheet, provide some additional color around our order patterns and outlook for the third quarter, and then we will move to your questions. Overall, as Jim said, we feel good about our second-quarter results, which reflected 7% organic revenue growth and $0.35 of adjusted earnings per share, both of which exceeded the estimated ranges we provided last quarter.

Organic revenue growth of 6% in the Americas was stronger than expected, and outpaced organic order growth of 4%, as order growth was strongest early in the quarter, and customer requested delivery dates began to normalize during the quarter, trending closer to historical averages. Recall, we have had several quarters where a significant amount of project business had requested delivery dates more than 90 days from the order date. Our revenue estimate contemplated this trend to continue; however, when it normalized, we shipped a higher percentage of current-quarter orders than estimated, which drove the stronger than expected revenue growth in the quarter.

Organic revenue growth of approximately 17% across EMEA was also better than expected, and was driven by strength in Germany and the UK. Within the other category, Asia-Pacific exceeded our internal growth estimates, but softness in the K to 12 education market and delayed project deliveries at PolyVision and a shortfall at Designtex largely offset these gains. Adjusted earnings of $0.35 per share exceeded our estimated range, due to the stronger than expected revenue growth, higher than expected price realizations and lower material costs in the Americas, and favorable spending globally. These items were partially offset by the impact of the manufacturing and distribution issues in EMEA that Jim just covered.

Our second-quarter adjusted operating income of $71 million improved by approximately $12 million over last year, driving approximately $0.06 of the $0.08 improvement in year-over-year adjusted earnings per share, with the balance of the earnings improvement being driven by a lower effective tax rate. The $12 million improvement in adjusted operating income was driven by the Americas segment, which benefited from revenue growth and a record adjusted operating margin of 15.0%, or 110 basis point improvement over the prior year.

The improvement in adjusted operating margin reflected a 190 basis point improvement in cost of sales, offset in part by an 80 basis point increase in operating expenses. Lower cost of sales as a percentage of revenue in the Americas was driven by our sales and operations teams, and included improvements in negotiated pricing, lower material freight and distribution costs, and benefits of other cost reduction efforts. Beyond these items, favorable adjustments to customer rebate and dealer incentive accruals were offset by an increase to our reserves for warranty costs.

The increase in America's operating expenses as a percentage of revenue was largely driven by variable compensation expense, resulting from the improvement in operating results, and a lower effective tax rate. For EMEA, our 17% organic revenue growth compared to an organic decline in the prior year, and resulted in a slightly lower adjusted operating loss, as benefits associated with the growth were largely offset by the impact of the manufacturing and distribution issues that arose during the quarter. These costs are incremental to the disruption and inefficiencies related to our manufacturing footprint changes that we have been calling out over the last several quarters. Lower absorption of fixed costs due to a large project that was manufactured in the first half of the prior year and shipped thereafter also contributed to the year-over-year increase in cost of sales.

Operating expenses were relatively flat compared to the prior year in constant currency. As a result, operating expenses as a percentage of revenue decreased by 390 basis points, which more than offset the 290 basis point increase in cost of sales. As we said in the earnings release, we believe we are nearing completion of our manufacturing footprint changes, but we expect disruption costs to extend somewhat longer than previously projected, and the savings to be delayed by a quarter or two.

In addition, we expect to report an organic revenue decline in EMEA for the third quarter, compared to a strong prior year. As a result, we may incur adjusted operating losses in the second half of FY16, compared to our previous target of achieving breakeven or better results for the same period. We reported flat operating results in the other category, as Asia-Pacific nearly broke even in the quarter on a strong top line, improved gross margins, and lower spending. This was a significant improvement compared to the prior year, and served to offset lower profitability at PolyVision and Designtex. Finally, corporate costs were slightly higher due to reductions in COLI income, partially offset by lower deferred compensation expense.

Beyond the operating results, our effective tax rate of 36.4% in the current quarter was approximately 500 basis points lower than the prior year, reflecting the impact of implementing a new transfer pricing model in EMEA during the fourth quarter of last year. Sequentially, second-quarter adjusted operating income doubled, compared to the first quarter. The impacts of seasonally higher volume across our segments, and a favorable shift in business mix and lower material costs in the Americas were reduced in part by some of the factors impacting EMEA that we mentioned earlier.

Switching to restructuring costs, they were higher than expected, due to the acceleration of charges related to the Munich learning and innovation center. During the quarter, we were able to complete negotiations with the French Works Councils related to the move to Munich, and affected employees declared their intentions to move or separate from the Company. As a result, we recorded the related employee severance cost in the second quarter, and expect to record the remaining restructuring costs of up to $10 million over the next several quarters, prior to our move-in date.

The timing and amounts of all other restructuring provisions recorded in the second quarter were largely consistent with our expectations. With the recent commencement of the lease related to the Munich learning and innovation center, we expect to incur operating expenses associated with overlapping facilities and staffing during the implementation of the project. The amount and duration of these costs are dependent on the pace of recruiting, employee departure dates, completion of the new space in Munich, and disposal of the facilities we plan to exit. We estimate that we incurred less than $1 million of these overlapping costs in the second quarter.

Moving to the balance sheet and cash flow, cash provided by operating activities of $90 million in the current quarter represented a significant improvement, compared to $56 million in the prior year, and was driven by the improved operating results and timing of payments associated with employee payroll around the world. Capital expenditures totaled $23 million in the second quarter, including $8 million of additional payments related to a replacement corporate aircraft. We continue to estimate capital expenditures for the full year will approximate $100 million, which is higher than our normal targeted level of approximately 2.5% of sales, primarily due to payments related to the replacement aircraft. We returned approximately $14 million to shareholders in the second quarter through the payment of the cash dividend of $0.1125 per share.

Turning to order patterns, I will start with the Americas, where our orders in the second quarter grew approximately 4% organically, compared to the prior year. Order growth rates during the quarter reflected 7% growth in June, 3% growth in July, and 1% growth in August. As I said earlier, customer-requested delivery dates began to normalize during the quarter. As a result, backlog at the end of the quarter declined 11% compared to the end of the first quarter, but still remain 7% higher than the prior year, largely because of business we booked in the first quarter for delivery in the third quarter.

Project orders grew modestly during the second quarter compared to a strong prior year, which benefited from a number of large projects. Project orders have grown over the prior year in 15 of the past 16 quarters, with at least 8% year-over-year growth in 13 of those quarters. Now that projects are comprising a more substantial mix of our business, quarterly growth rates have become more dependent on the timing of project orders. Project orders comprised approximately 46% of our incoming orders during the quarter, sequentially a little lower than recent quarters, but still much higher than our long-term historical average of approximately 40%.

Regarding project business in general, our mock up activity remains strong, customer visits remained high, and the outlook for the US economy suggests that GDP should continue to expand and support business capital spending. It is also worth mentioning that project business less than $1 million in size has been growing more recently, which tends to be representative of a cyclical recovery. Orders from continuing agreements grew by a low to mid-single-digit percentage, and were also led by small to medium-sized orders, while orders related to our marketing programs, aimed at smaller day-to-day business, declined by a similar percentage.

Across vertical markets in the Americas, order growth rates were highest in the manufacturing, financial services and healthcare sectors, while order declines were most significant in the state and local government and energy sectors. Information technology, federal government, and insurance also declined, but by modest percentages.

Switching to EMEA, orders declined by approximately 7% organically, compared to a strong prior year, which grew by approximately 10%. We experienced solid order growth in Germany, and Iberia grew modestly, while all other markets declined. Customer order backlog for EMEA ended the quarter down more than 20% compared to the prior year, which included a large government project in France that was shipped over the last several quarters. Prior-year backlog also included a significant amount of deliveries which were delayed from the second quarter to the third quarter, due to the disruption we experienced following our announcement to exit our facility in Wisches, France.

Within the other category, orders grew in Asia-Pacific and PolyVision, while orders at Designtex declined, resulting in modest overall order growth for the group. The order growth in Asia-Pacific was led by strength in China. To summarize, our order patterns in the Americas continued to reflect an elevated mix of project business, and small to midsized orders grew at a higher rate than larger business again this quarter. EMEA order patterns remained mixed, but Germany continues to grow, despite the recent manufacturing and distribution issues that are now beginning to dissipate.

Asia-Pacific orders grew again this quarter, so we have now seen growth in year-over-year orders in this business for four of the last five quarters. Designtex orders have hit another soft patch, after rebounding nicely in the spring, bringing our year-to-date order growth rate to a low to mid-single-digit percentage. Finally, PolyVision orders remain solid, but I should mention that our business model could be impacted beginning in calendar 2016, by a recent anti-dumping action filed by five major US steel producers, targeting imports by foreign producers of certain cold rolled steel flat products.

The preliminary scope of this action unfortunately includes premium enameling grade sheets that PolyVision uses in its business. Although this imported material represents a very small and specialized segment of the broader market for cold rolled flat steel, if trade relief is ultimately granted in the form of higher import duties across the entire segment, it would increase our material costs accordingly. Of course, we are evaluating our options, including alternative supply and pricing, but I wanted to give you a heads-up of the potential risk this situation creates.

Turning to the third quarter of FY16, factoring out an estimated $25 million of unfavorable currency translation effects, and the impact of a small dealer acquisition, we expect to report organic revenue growth between 3% and 5%, compared to the prior year. Our third-quarter revenue estimate contemplates organic revenue growth in the Americas and across the other category, and an organic revenue decline in EMEA, which compares to 14% organic growth in the prior year.

We expect approximately $5 million of disruption and inefficiencies in the third quarter associated with the changes in our manufacturing footprint in EMEA. This compares to approximately $9 million in the third quarter of FY15, and $6 million in the second quarter of the current year. In addition, we expect operating expenses to increase sequentially in the third quarter compared to the second quarter, and we anticipate stabilization of our manufacturing and distribution performance in EMEA.

As a result of these factors, we expect to report third-quarter earnings within a range of $0.29 to $0.33 per share, including restructuring costs of approximately $0.02 per share, which translates to an adjusted earnings range of $0.31 to $0.35 per share. From there, we will turn it over for questions.

(Operator Instructions)

Budd Bugatch, Raymond James.

My question, I guess on EMEA, and I know you were surprised and disappointed I guess, just make sure we have quantified the impact of EMEA in the second quarter on revenues and earnings on that disruption or on the -- what you would call the unexpected items?

Unfortunately, I'm not able to quantify the impact that it may have had on revenue or on orders. We suspected our order patterns were dampened, in part because of the disruption, and possibly some orders were moved to other solutions. But I think the bigger issue in the quarter were the costs related to the manufacturing and distribution issues that Jim summarize. And our rough estimate of that, Budd, is that it's in the neighborhood of $3 million or $4 million. So it had a pretty significant impact on the quarter. I'd also tell you too, that the absorption benefit that we had in the prior year, related to that large French government project that we built ahead of shipping it in the back half of the year, that had a few million dollar effect as well.

So the sum total of that is $5 million, $6 million, $7 million?

In that neighborhood. You're probably right. $5 million to $7 million.

Okay. And Wisches is done, and that's all completed?

Yes. We completed the transfer from Wisches to Madrid, and the other things related to that. We also started up a distribution center in Paris, and so those actions are proceeding very well, and we are continuing to make progress across other fronts. But Wisches went very well.

Okay. And we don't expect the same kind of issue that you might have had in your Czech plant and the Madrid plant now that you've shipped more product through there?

We have -- overall there were nine lines of product that moved from the factory in Durlangen to Stribro. We have seven of those nine lines fully transferred. The two that are left are less complex. Some of the issues we had at the beginning related to equipment that really is going to support all of our production there, so we have, by far, most of the challenging part of the transition behind us. I'm always careful not promise that everything is going to go perfectly, but I do feel that we have the most difficult parts behind us, and we have a good team in place managing it in these last couple line transfers.

And in Madrid, Budd, we're actually, the stuff we moved from Wisches to Madrid was quite similar in manufacturing process, so it's not like they're building new product with new employees. They're following similar processes with new employees, because we expanded our workforce in Madrid, but it's not as complex as the move to a new plant in the Czech Republic.

Okay. I guess the other question I'm going to ask is on capital expenditures. You talked about $8 million for a new plane. I think you had two of them. Is there one more to be done, and what's the timing on that, and if you look out a year or two in CapEx, how do we frame that?

What we're shooting for is delivery of the replacement aircraft, either late in the fourth quarter of this year, or early in the first quarter of next year. And we'll sell one of our existing aircraft, hopefully around the same time. And I would expect to sell that replacement aircraft for somewhere in the high double digit, maybe as high as $20 million.

And the one you're buying costs how much?

In the $30 millions, by the time you add up all the deposits we've been communicating.

Okay. You think 2.5% of sales is the right number for the out years? Is that the way to --

I think next year we'll feel a little bit of pressure as we are -- on that 2.5% as we are completing the Munich Learning and Innovation Center and spending our capital there. But that's really the most significant project that we'll have going on in the Company, and we'll have the benefit of selling the replacement aircraft, the aircraft that's being replaced. I know that will show up on a different line in the cash flow statement, but we really look at those as net. So 2.5% is a pretty good long-term assumption, I think.

Finally from me, EMEA has been an issue for -- that we've talked about for a long time. Is there any less enthusiasm, expectation, that you get it back to profitability, that we have a viable return on capital business, and any change in the ultimate numbers? And does currency affect much of that at all, as well? Is there any change in that impact?

First of all, without currency I'd say that there's no change in the ultimate impact. We set our goals a while back. We have total savings goals from all of these initiatives, combined. We have margin goals we set for all the initiatives combined, and we still believe we're on track to achieve all of that.

It's a long-term trajectory, as you know. And what does happen as you go through a project like this is, you do save more on some things and less on other things, but the totals are still in line with what we expected when we began. As it relates to currency, maybe I'll ask Dave to offer any thoughts on that. Currency affects both our top line and our bottom line because our costs are often in local currency.

It's largely a translation issue, so not a big deal for our European business.

Okay. Thank you very much.

Matt McCall, BB&T Capital Markets.

Maybe talk about, a little bit about the Americas margins, 15%, pretty good. The incremental on a year-over-year basis was like 32%, and I think that's a little bit about the norm. Maybe tell me what drove the above-normal incremental. If I missed it, I'm sorry. And then how do we think about the ongoing profitability of the Americas, taking into account that 15%, what I think is a near-record number?

Well, we think it is a record for the Americas segment as it's currently reflects our business in Canada and Latin America along with the US. We were very happy with the level of performance. What we tried to make as clear as possible in the earnings release, and in our remarks earlier on the call, is that the stars were a bit aligned, and we had a lot of things moving in our favor with not only getting improved improvements in negotiated pricing, but also lower material freight and distribution costs, on top of normal cost reductions that we're pushing.

And you know, the summer is also -- tends to benefit from a nice seasonal mix. Our business is more heavily weighted toward education business in the summer, and in the fall, it's more heavily weighted toward the government business, and government business tends to be a lower gross margins in the industry, and in our business as well. So I'd be hesitant to suggest you should model 15% in every quarter, go forward. But certainly some of those factors should sustain themselves. It was a strong quarter.

I understand the seasonal impacts. I'm just saying is there anything that -- sounds like there are some of the items that are going to be sustainable, but as you thinking around profitability there, I recall in the past, it was kind of a low teens number. Don't assume much more as we move forward? Given the strong incrementals, do we now change that? Maybe, it becomes maybe we get to 14%, 13%, 14% for a year now? Or is the low teens still the right number?

I think the low teens is the right number. We don't know definitively, but we're peaking in the Americas. If you go back a few quarters, Matt, when we give color about the investments that we anticipated making in our business this year, they were largely weighted in the Americas, in order to continue to support our aspirations to gain market share, and deliver new products with the new way of working. We know that we need significant ongoing investments. So I don't see us moving the operating income long-term objective to 15%, or anything like that. I think at 12%, 13%, 14%, that's peaking.

Okay. So it's the margin peaking, not demand peaking. I just wanted to clarify that.

Yes.

Okay. Maybe the outlook a little bit, the comment about Designtex, I know it's a small part of the business but I wanted to explore it a little bit more. What does it tell you about anything else that's going on from a demand perspective? And then, your other pipeline indicators, what are they telling you about the remainder of this year, as we look out into calendar 2016?

Well, I'll start. Maybe Jim will want to pile on, but we're real careful not to let any one individual month or even a quarter sway our thinking too significantly. We don't ignore what's in front of us. But we have found ourselves continuously going back to the start of the year, and the guidance for the full year that we gave at that point. What we believe the US economy might do, what we thought the furniture industry might look like, what we might do as a result. And really, as we step back from a soft patch at Designtex, or even a modest growth rate in the Americas in August, which orders only grew 1%, we step back from that, we still believe that we are on the same track that we talked about at the beginning of the year, that the US economy is going to continue to expand, our industry is going to continue to grow at this mid-single digit rate, and we should continue to grow at or above that, as well.

Okay. All right. I want to sneak one more in, Dave. I think you said SG&A was expected to be up sequentially Q3 versus Q2. Roughly a flat top line. Can you explain why that's going to be the case?

That has to do with a little bit of seasonality. I'd tell you, we spent a little bit less in the summer, simply because we have a lot of summer holidays, and therefore project teams are maybe not working at the same pace that they otherwise work at for the other three quarters of the year. But we also have some projects and initiatives that are nearing completion, and therefore the spend related to them will ramp up for the back half of the year.

Got it. Okay. Thank you.

Kathryn Thompson, Thompson Research Group.

Just point of one clarification, in the Americas, in your prepared comments, you talked about orders being more reflective of revenue growth. I just wanted to get confirmation of that. And then also, pulling the screen moving down the margin side, as we look at the margin growth in Q2 and as we think forward, particularly on the gross margin side, I know we talked about lower costs and better negotiated pricing, but how much did this improve utilization rates, in other words falling and flowing through impact margins in the quarter? Thank you.

Let's go back to your first question, Kathryn. Can you state that one more time, because you broke up a little as you were coming through, so I didn't catch the back end of it.

Sure. As you have smaller orders, as a percentage of total, so you've gotten behind you the nine day-plus orders, or it's significantly improved, is that 4% order rate now a bit more reflective of the next quarter revenue growth than perhaps it had been in the past? Because you have more balanced small, medium-sized orders in your total mix?

Okay. I understand. I'm going to stop short of giving a specific projection for the third quarter, but I also tell that what will influence the third quarter is year-end activity, which really starts to come in now, early in September --

Calendar year-end activity.

Calendar year-end activity, so companies trying to spend their budgets before their calendar year ends. And what level of that we see in each year varies relative to previous years. So that could impact our overall growth rate in the quarter. We also, as mentioned on previous calls, we have a fairly significant inventory of project orders that have been won, that haven't been entered yet. And so as they come through, that could also influence the overall growth rate in the quarter.

And then the second part of the question was on margins. How much did volume [capacity] utilization contribute to the Americas margin growth?

I would say very little. The biggest drivers were improvements in negotiated pricing, followed by lower material freight distribution costs, followed by other cost reduction efforts. There was some absorption benefit, but it would have been the smallest item.

I'll also add that if you compare our results this year to a year ago, so the same part of the annual cycle, that we had better performance across the board in our Americas system, from operating efficiency through the distribution of physical product. We had some issues last year, not serious issues, but issues that depressed our margins a bit. And we had better performance across the board this year, so it may not related to volume, but it is related to some things that continue to improve every year.

Okay. Do you give capacity utilization, can you give that for the Americas on a blended basis?

The way we've talked about the utilization in the past, is we've referenced the average shifts that we are operating within our facilities. And it varies by region, but in the Americas, we're at somewhere in the neighborhood of an average of two shifts across our facilities, so we still have a significant opportunity to ramp up volume.

And so the max would be -- what's the -- essentially the full number of shifts you could have where you're really pressing up against getting close to that full capacity? Is it a three shift or four shift?

The way we think about the business is we like to have a little bit of room for demand levels that follow seasonal patterns, as well as occasionally, we have large projects that if they all show up in the same quarter, can cause some spike in demand. So we don't like to be operating at three full shifts for very long. What typically happens in our manufacturing facilities is certain parts of production move to a third shift, before the whole facility moves to a third shift, and as that happens, we look at ways to expand the capacity, could be by adding a tool at a supplier, or adding some additional cells on the line to increase capacity. So don't think of it as the whole plant moves in unison up in shift, but rather it comes in pockets across the facility.

Yes. Absolutely understand. Each industry is very different in how they even define utilization. Moving over to Europe, you now are expecting an operating loss in the second half, but just to clarify, will you be able to at least generate positive gross margins in the second half and a little bit more color on the drivers for why you will have losses into the second half of the year? Thank you.

So you said we'll have positive gross margins. I think you meant, will we have expanded gross margins compared to last year?

Correct.

I think we'll see that. And really, there's not much more color to give than what we've already given. If you go back last year, when we had a relatively high level of volume in the back half of the year, in part because we had significant orders in the first half of the year, that had extended delivery date requests from customers. So when we shipped that volume, and we looked at our operating performance that included the disruption that we've been calling out, and we anticipated how that disruption would come down, and how savings would start to come in, what we were commenting on is, at similar levels of volume, without lower levels of disruption in the beginning of savings coming in, it was possible that we could see breakeven or positive results.

With the level of demand not getting back to that same level of demand in Europe, or the timing of business being different this year than it was last year, and therefore not having the same revenue level of revenue in the back half of the year, and having some modest delay in completion of our initiatives, it's possible that we could post adjusted operating losses. I didn't say definitively. I very carefully chose the word, may, see adjusted operating loss, because the team is doing a lot of work to move as quickly as possible on the modernization of the industrial model, but we're also making a lot of progress in our sales and marketing strategies in the region too. So I don't know that it's entirely out of the realm of possibilities that we could break even in the back half of the year.

I'll also add just to build on that theme, that we have launched several new products in the last year, and we are seeing demand developing in EMEA for those products that exceeds our initial estimates. A completely unrelated issue we're dealing with is longer lead times on some of these new products than we expected, simply because demand has been stronger than we expected. So there's a lot of good stories going on, as it relates to the reinvention of our sales organization, reinvention of our product portfolio. We see a lot of positive signs as we work diligently to finish this operational rationalization.

Okay, great. Thank you for taking the questions today.

(Operator Instructions)

Barry Haimes, Sage Asset Management.

You mentioned the 1% order rate in August, and the ABI, which was just out recently, was weaker in August too. I'm just wondering if there's anything in the Labor Day shift this year that might have affected your order rate this year compared to last year? Thanks.

That's a good question. And it did impact it a little bit but not significant enough to warrant a call out. We did take note of the ABI, like you did as well, but we also noted that inquiries remained pretty strong in the ABI report.

Great. Thank you.

Budd Bugatch, Raymond James.

While we're talking about some other current metrics, we also noticed that [Bitmo] did publish a somewhat interesting forecast going forward. And which relied heavily on imports, and wondered if you had any comments, and could see any elevated level of imports that might make that more accurate prediction of late 2015 and 2016?

So I'll offer my thoughts, and then Raj, who is here, and is more of an expert on these things, can correct anything I say that's incorrect. But I believe that if you go back in that report from many years, Budd, and you've been following that report a long time, as we have as well, there was a time when you looked at that import data, and you would conclude that must be from companies that are based somewhere else, that are importing product and competing with domestic manufacturers. And since you have the domestic production and domestic consumption, that would line up as long as there were no companies coming from someplace else that were gaining share. These days, I think it's a more complicated situation, because you have a lot of companies including most of the major companies in the industry, who have supply chains of their own, that are already global in scope.

And so some of the import data, I believe, is going to be related to some of the activity that's going on, just within domestically headquartered manufacturers. So it's hard to tease apart how much of it is that versus something else that's going on, but I think a fair amount of that shift is related to that. And then there may be also some other activities going on, but that's where I would start. Probably doesn't mean today what it would have meant 10 or 15 years ago, if you saw that kind of shift. Raj, want to add anything to that?

No. I think that's definitely part of it, Jim. And we have been teasing out, trying to look at a lot of import-export information too, and the magnitude of what the industry association has put in their estimates for growth from imports just doesn't intuitively seem right, and so I think they are definitely taking a look at it. They're working with their econometric modeling people to look at it, as well. And expect to hear something back from them soon.

Okay. Yes. Structurally, it seemed to be too big a jump for even just the currency-related issues, and given the structure of the industry. So --

Exactly right.

Secondly, talking about other macro, China, and you mentioned your orders in China, you haven't seen an impact there. We are hearing and starting to see more stories about people requesting Chinese suppliers for pricing relief. And so there are two issues that I think affect China. One is what's going on internally there, and how much you can rely on what you see and hear from the Chinese authorities. Secondly, now that you've had the yuan devalued, what are you seeing in any costs that may affect you or help you, at least in other parts of the world?

In terms of completing, I'll start by competing in Asia. So a lot of the production we make today in China and India and Malaysia and other parts of Asia are to serve those markets, and so it helps us to have our costs in local currencies and our revenues in local currencies. And so from that perspective, you could say, well there's no effect, but it would have had a more significant effect if we were trying to do more of an import model in China. So I'm happy that our supply chain's actually configured to make us a little bit more resilient to those changes.

There are other currencies in the region. The Japanese currency, the Australian currency that create other problems for us, because in that case we don't have our costs in local currency, and we are seeing significant shift in those currencies, and we take steps to try to remain competitive but it's not an easy challenge when you're facing that fundamental structural gap between your revenues and your costs. In terms of other markets, we have not yet seen, that I know of, any shift in the arrival of new competition, or anything driven by currency in this country. I don't know if that -- I'm not saying that wouldn't happen or couldn't happen, but I haven't heard any reports of that yet, specifically related to currency.

Okay. Lastly again for me, you called out two things, Dave. You called out the whiteboard effect, I guess, on rolled steel. And also Designtex, which had been at least an improving story. And since the end of the quarter or since you've seen it, have you seen any change in A, Designtex order pattern, which I guess is much more sort short cycle, and two, when do you think you'll know something on the effect of steel on anti-dumping duties that might cost you some headaches?

I think we'll have much better information on that for the December call, related to the anti-dumping issue. We're certainly trying to, if nothing else, to be an exclusion from the action, if the action were actually successfully put through. But we're not taking that assumption that will happen either. So we're of course looking at alternative supply and evaluating what kind of price increase we might have to take to cover that exposure. But because it poses a risk, I wanted to call it out, but there's still a lot of questions to be answered at this time.

On Designtex, I probably should have commented that part of the reason that they declined year over year in their orders was that they had very strong order growth in June and July of last year, but I would tell you, too, that we believed that we were going to outpace that level of growth that we had last year, and see order growth this year and we just didn't see it. We hit a bit of another soft patch. There's no real, there's common thread there. It's the business has been firing pretty well. I mean, it's growing nicely, but because of the level of investment that we've made over the last couple of years in all the growth strategies, we have higher growth expectations than just the low single-digit growth we've been seeing year-to-date so far this year.

Okay. Thank you, and again, good luck on the balance of this quarter, and for the balance of the year.

I'm showing no further questions at this time. I'd like to turn the call back over to Jim Keane for closing remarks.

Thanks to everybody for joining our call, and for your interest in Steelcase. Again, we are pleased with what we would consider to be another strong quarter, and with the pace of our progress in EMEA. Thanks again, and we'll talk to you next time.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.