Steelcase Inc (SCS) 2017 Q1 法說會逐字稿

Welcome to the Steelcase's first quarter FY17 conference call.

(Operator Instructions)

For opening remarks and introductions, I would like to turn the conference call over to Mr. Raj Mehan, Director of Investor Relations and Financial Planning and Analysis, and Assistant Treasurer.

Please go ahead.

Thank you, Katherine.

Good morning, everyone.

Thank you for joining us for the recap of our first quarter financial results.

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

Our first quarter earnings release, which crossed the wires yesterday, is accessible on our website.

This conference call is being webcast and this webcast is a copyrighted production of Steelcase Inc.

A replay of this call will be posted to ir.steelcase.com later today.

Our discussion today may include references to non-GAAP financial measures and forward-looking statements.

Reconciliations to the most comparable GAAP measures and details regarding the risks associated with the use of forward-looking statements are included in our earnings release.

And we are incorporating, by reference, into this conference call, the text of our Safe Harbor statement included in the release.

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

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

Thanks, Raj, and good morning, everyone.

We were pleased with the first quarter results we reported yesterday and particularly pleased with the gross margin improvement in EMEA and the overall performance of Asia-Pacific.

While first quarter orders were a bit weak, we see strong reasons for optimism in the longer term.

I'll start with EMEA.

For the last several quarters, we've been talking about the disruption cost and inefficiencies related to changes in our EMEA manufacturing footprint.

In last quarter's call, I told you we were seeing clear signs of operational improvements.

Our progress in the first quarter was, in fact, ahead of our expectations and we're pleased to see those improvements translating into improved gross margins and improved customer service levels, which we believe helped us win more day-to-day business in the quarter.

We expect to see continued improvement in EMEA gross margins over time through a combination of operational sales and marketing initiatives.

Unfortunately, we're also feeling some top line weakness in the EMEA markets as a whole, driven by Energy-related factors in the Middle East and Africa, and by a combination of factors in the UK, including possibly the uncertainty related to Brexit.

If overall orders continue to weaken, it may take a little longer for us to return to profitability than we planned.

But the decisions we made to resize our footprint are even more valid if growth remains soft.

Over time, as the impact of rising oil prices takes hold and as today's political uncertainties pass, we believe the EMEA economy and our industry will return to a more favorable growth rate.

And the rest is up to us: to gain market share by developing deeper customer relationships, solving customer needs more completely, and leveraging our investments in product platforms and infrastructure.

That takes leadership and we have taken some steps to invest in our EMEA leadership team, both in operations and in the UK, by redeploying some talent from Asia and the Americas.

These cross-border moves are also really valuable for developing senior talent, ready to lead this global Company in the future.

In fact, many of our senior leaders in the Americas and Asia started their careers with us in EMEA.

The new Munich Learning and Innovation Centre is expected to open as scheduled in the third quarter and we are looking forward to this next chapter in the way we work, learn and invent.

And of course, this facility will eventually be an important customer destination as well.

Our Asia-Pacific business also had a very strong first quarter because of operational improvements as well as good top line growth.

We continue to win the business of more locally headquartered companies, which as you know, are rapidly growing to become among the largest companies in the world.

As we win these new accounts, it helps us grow our business not only in Asia but also in the Americas and EMEA, as these companies expand.

These are actually global companies.

During the first quarter, I traveled in the region, meeting customers and reviewing performance with our teams.

I was impressed with the progress we made over the last year and enthusiastic about the customer opportunities we're working on.

Again, I'm very pleased to see that translating into results in the first quarter and a strong pipeline for the second half of the year and into next year.

The Americas business also exceeded our top and bottom line expectations.

The top line was stronger because of owned dealers and because we had more orders received and shipped within the first quarter than normal.

Bottom line was better because of strong operational performance.

In fact, the gross margin improvement would have been even more apparent if not for some specific warranty reserves we booked in the quarter.

We talked last time about the weakness we were seeing in America's order patterns and our belief that they related to an earlier drop in CEO confidence.

This was confirmed more recently, when the government's business capital spending report showed a significant decline during this period and of course, the most recent job growth report was very weak.

Our order decline in the quarter was driven by our Insurance and Federal Government customer segments, which were up against tough comparisons.

And the Energy sector, which is down significantly because of oil prices.

Yet, just as we said last time, we still have reasons to be optimistic, and I think the argument for optimism is actually strengthening.

We still have uncertainty, of course; the US political landscape is unresolved and issues around Brexit and global trade continued to depress CEO confidence, but CEO confidence has increased slightly two quarters in a row.

The Architectural Billings Index rose sharply recently, which is consistent with what I'm hearing from principals in major A&D firms.

NeoCon was very busy, and the size and quality of projects being discussed is quite encouraging.

And I feel very good about our competitive position and the things we're doing to deliver more value to customers.

Our pipeline of projects won, but not yet ordered, is significant.

We've had some very large wins recently.

Beyond that, the pipeline of project opportunities is much larger than what we saw last year at this time.

The products we launched earlier this year have been well-received by the marketplace and we're increasing our forecast for first-year volume for some of those products.

We had a very successful NeoCon with five product awards, more than any other major competitor.

I was on the floor every day to personally see and hear the reactions from existing and potential customers.

We showed how products from our Steelcase, Coalesse, and Turnstone brands can be applied to respond to the growing demand for inspiring social and collaborative spaces and do so with unique performance attributes.

We can offer customers a wider range of quality solutions in a wider range of price points than most others in our industry who might focus only on the luxury design segment or the lower performance residential segment.

We showed how architectural products like VIA and our Furniture Solutions can be applied to support the new work modes made possible by products like Microsoft Surface Hub.

We showed how new sensing technologies could help users find a new space more effectively, and help building managers use space more efficiently.

Our health business demonstrated how new products could help build stronger connections and mutual participation of patients and physicians, potentially resulting in better outcomes.

Our education business showed how student success can be improved by changes in pedagogy, supported by new ways of applying classroom furniture.

We had a lot of great stories to tell and for us, this was a great year for NeoCon to be crowded.

Finally, Interior Design Magazine recognized our Vice President of Communications, Gale Moutrey, with the HIP Marketer of the Year Award.

We always knew she was great and now everyone else does, too.

With that, I'll turn it over to Dave to discuss our results in more detail.

Thank you, Jim.

Overall, as Jim said, we were pleased with the first quarter revenue and earnings approximating the top end of the estimated range we provided in March.

Incoming orders, however, were lower than we expected, negatively impacting our outlook for the second quarter.

But the near-term outlook may not be indicative of what to expect over the balance of the year for a number of reasons, some of which Jim just referenced.

First, our pipelines for project business expected to be ordered and shipped during the next four quarters in the Americas, EMEA, and Asia-Pacific have meaningfully strengthened, both sequentially compared to the end of the last quarter, as well as compared to this time last year.

Second, last week's survey of the Business Roundtable suggests CEO sentiment may have bottomed out, as the latest report suggests a slight improvement in sales, hiring and investment in the coming quarters.

In addition, the Architectural Billing Index improved by 5% to 53.1 in May compared to April, and inquiries also improved.

Third, we have recently launched a number of new products and enhancements which we expect will continue to gain momentum in the market.

And fourth, some of the markets where we have experienced significant reductions in demand linked to the price of oil will soon be lapping the start of their declines.

I will cover our financial results first, noting where results differed from our expectations and highlighting year-over-year and sequential quarter comparisons.

And then I will talk about our balance sheet and cash flow before getting into our order patterns and outlook, providing some additional color to what Jim already highlighted in his remarks.

Revenue in the quarter was better than we expected in the Americas and Asia-Pacific due to favorable timing of project deliveries and installations, and EMEA benefited from better-than-expected day-to-day business, a good sign that dealer confidence and the stability of our new manufacturing and logistics footprint continues to improve.

Revenue at PolyVision and Designtex also varied compared to our expectations, but by smaller amounts, with stronger revenue at Designtex, offsetting a shortfall at PolyVision.

From an earnings perspective, operating income was stronger than expected, largely driven by the better-than-expected revenue but we also posted better-than-expected gross margins in EMEA and the other category, mostly driven by favorable business mix and product mix compared to our estimates.

These favorable results were partially offset by a higher-than-expected effective tax rate, linked to net unfavorable discrete tax items recorded in the quarter.

Switching to year-over-year comparisons, organic revenue growth of 1% was driven by strength in the other category, which boasted 12% organic growth.

Asia-Pacific was the biggest contributor, benefiting from a strong year-end backlog which helped drive broad-based organic growth of more than 20%.

This marked the fifth consecutive quarter of year-over-year organic revenue growth in this region.

Designtex also contributed to the double-digit strength of the other category, while PolyVision declined compared to the prior year.

Recall the prior year for PolyVision included revenue from a large project in Turkey which we won more than two years ago and have mentioned on previous calls.

Other PolyVision business grew modestly compared to the prior year.

EMEA organic growth of 3% also benefited from a strong year-end backlog and reflected a favorable shift in business mix, including lower revenue from large projects and improved day-to-day business.

For the Americas, the organic revenue decline of 1% reflected a double-digit percentage decline in large project revenue, primarily from customers in the Insurance Services and Federal Government sectors, each of which had a very strong prior year, and the Energy sector, which continues to be challenged by relatively low oil prices.

When combined, revenue from customers in these three vertical markets declined by more than 25%, while revenue from all other vertical markets in the Americas netted to approximately 6% growth.

The $0.18 of adjusted earnings per share in the quarter compared to $0.17 in the prior year and reflected improved adjusted operating income, partially offset by the higher effective tax rate.

The improvement in adjusted operating income was driven by a 130 basis point improvement in cost of sales, and the 1% organic revenue growth, partially offset by higher operating expenses.

And it included improvements in EMEA and the other category, lower adjusted operating results in the Americas, and higher corporate costs.

For EMEA, the $5.4 million improvement in adjusted operating income was driven by lower disruption cost associated with our manufacturing footprint changes which are nearly complete.

Benefits from the organic revenue growth and favorable business mix in the quarter were largely offset by increased operating expenses associated with the new Munich Learning and Innovation Centre, which will begin to open this fall.

The other category also posted improved operating results, primarily due to the organic revenue growth in the quarter and foreign currency benefits in Asia-Pacific.

These benefits were reduced by approximately $600,000 of costs related to the steel anti-dumping proceedings impacting PolyVision that I've discussed over the last couple quarters.

In the Americas, our adjusted operating results reflected lower cost of sales and higher operating expense as a percentage of revenue.

Lower cost of sales was driven by lower material costs; favorable business mix; ongoing cost reduction efforts; and improvements in negotiated customer pricing, partially offset by approximately $6 million of higher warranty retrofit costs associated with legacy products launched many years ago.

Higher operating expenses were driven largely by investments in sales and marketing.

Lastly, higher corporate costs were driven by higher earnings on deferred compensation, offset, in part, by higher COLI income compared to the prior year.

Otherwise, corporate costs increased modestly.

Sequentially, first quarter adjusted operating income was higher compared to the fourth quarter, primarily driven by higher variable compensation expense related to the two significant items recorded in the fourth quarter.

Switching to restructuring costs.

They were in line with our estimates and primarily related to our manufacturing footprint changes in EMEA and the Americas, which are now substantially complete.

For the balance of FY17, we expect to record approximately $2 million of remaining restructuring costs linked to our move to Munich.

Moving to the balance sheet and cash flow.

Cash used in operating activities in the current quarter included the seasonal payments of employee compensation liabilities related to prior year variable compensation and retirement plan contributions, which were higher compared to the first quarter of the prior year.

In addition, the prior year included approximately $26 million of proceeds from the settlement of foreign exchange forward contracts compared to much smaller amounts in the current year.

Beyond these items, operating cash flows in the current quarter also reflect improved working capital and reductions in VAT recoverable compared to the prior year.

Capital expenditures totaled $14 million in the first quarter, including $3 million of final payments related to a replacement corporate aircraft.

We continue to estimate capital expenditures for the full year will approximate $75 million to $85 million.

This estimate excludes expected proceeds from the sale of an existing aircraft.

We returned approximately $30 million to shareholders in the first quarter; $15 million through the payment of a cash dividend of $0.12 per share; and another $15 million through repurchasing approximately had 1 million shares under our share repurchase authorizations.

Turning to order patterns.

I will start with the Americas, where our orders in the first quarter declined by approximately 6% organically compared to the prior year, which grew by approximately 8%, and reflected double-digit growth in Project business and very strong growth in the Insurance Services and Federal Government vertical markets.

In addition, orders from customers in the Energy vertical market declined by more than 50% in the current quarter compared to the prior year.

To build on what I said in the earnings release, first quarter orders in vertical markets, other than Insurance Services, Federal Government and Energy, represented approximately 85% of total product orders and grew modestly.

This growth was driven by the healthcare, financial services, and manufacturing sectors as well as our untracked sector, which includes retail customers and other vertical markets not large enough to track separately.

Collectively, orders from this untracked segment comprise approximately 20% of our total orders.

Other vertical markets, technical, professional, information technology, education, and state and local government, declined compared to the first quarter of the prior year.

Year-over-year order comparisons by month during the quarter were impacted by the pull-forward effect on orders of implementing a list price adjustment in April of the prior year and we did not implement an adjustment in the current quarter.

Customer order backlog at the end of the quarter was down 9% compared to the prior year, which you'll recall, included an unusual level of orders scheduled to ship beyond 90 days.

Quarter-end backlog scheduled to ship in the second quarter of this year fell by approximately 6% compared to the prior year.

Across quote types, project orders in the Americas declined by approximately 5% during the first quarter, compared to a strong prior year, which grew by approximately 11%.

Orders from continuing agreements also declined by 5% in the current quarter, and orders related to our marketing programs aimed at smaller day-to-day business declined by 12%.

The decline in orders across all quote types in the current quarter compares to a prior-year quarter, which posted increases across all quote types.

Given the ongoing uncertainty in the broader economy and political landscape, it is not surprising that orders have remained soft over the last couple of quarters.

However, recent CEO sentiment from the Business Roundtable suggests we may see an improvement in the quarters to come.

That sentiment is consistent with what we are seeing in our project pipeline.

Specifically, our project pipeline of projected project revenue over the next four quarters has meaningfully strengthened, both sequentially compared to the end of the last quarter as well as compared to this time last year, both with the recent impact of the very large wins Jim mentioned in his remarks, and without.

This pipeline calculation includes project business from customers we expect will generate more than $3 million of revenue over the next four quarters, and which we have already been awarded but which has not yet been ordered, or which we believe we have a significant probability of winning.

It's only one piece of data and these aren't binding commitments and it's possible, of course, that the ongoing uncertainty could negatively impact business from continuing agreements and marketing programs.

But we feel good about this data point and it's not just a few large projects that are driving the improvement in the pipeline.

It is also being driven by a larger number of smaller-to-medium size projects compared to the prior year.

Switching to EMEA.

The organic order decline of approximately 12% for the quarter compares to 1% growth in the first quarter of FY16 and 17% growth in the first quarter of FY15, which you'll remember was adjusted for the extra week in FY14 and was driven by several large project wins in France.

Customer order backlog for EMEA ended the quarter down 14% compared to the prior year.

We are not entirely pleased with our win rates across EMEA in the current quarter and we're taking actions, we believe, will change that trajectory.

But the strength of the first quarter in each of the past two years is also important historical context to remember.

As we said in the release, the decline in orders during the current quarter was driven by continued weakness in the Middle East and Africa, which experienced strong growth in the first quarter of the prior year, followed by significant weakness during the remainder of the year.

The UK also posted a significant decline in orders, likely impacted by Brexit-related uncertainty, but it's also a market where we believe we should be doing better, and have recently appointed new leadership.

Orders outside of the UK, Middle East and Africa represented approximately 88% of total orders and were flat.

It is also important to note that our project pipeline for all of EMEA is also up modestly compared to the prior year.

And the pipeline includes a couple of large projects in the Middle East, which could ship at the end of this fiscal year or early next fiscal year, depending on the related building construction schedules.

Within the other category, orders in total grew 5% compared to the prior year, reflecting growth across PolyVision, Asia-Pacific, and Designtex.

To summarize, orders in the Americas declined in the quarter, driven by a reduction in the Insurance Services, Federal Government and Energy vertical markets.

Elsewhere, orders grew modestly and we continue to feel good -- pardon me, and we continue to see a good level of activity in small-to-medium size projects as well as an improvement in large project activity.

We are also excited about our recent product launches as well as the number of new product introductions at NeoCon which are targeted toward evolving market trends and are expected to launch over the coming quarters.

For EMEA, order comparisons were impacted by strength in the last two years as well as significant declines in a few markets compared to the prior year.

Again, orders outside of the UK, Middle East, and Africa represented approximately 88% of total orders in the current quarter and they were flat.

We are also pleased with how our manufacturing and logistics model in the new footprint continues to stabilize, which we believe contributed to an increase in day-to-day business.

It is also enabling us to shift more of our resources toward improving efficiency in the new footprint, realizing the targeted savings from the footprint changes and driving lean manufacturing principles and continuous cost reduction programs.

Asia-Pacific orders grew organically this quarter and we are securing more and more business with leading organizations, particularly those headquartered in China and India.

Against the backdrop of macroeconomic uncertainty in China, we are pleased with the momentum our local sales teams and dealers continue to build.

Before I turn to our outlook, I want to give you an update on PolyVision and the anti-dumping proceedings we have discussed on previous calls.

In May, the US Department of Commerce issued a final determination that the dumping margin for the Japanese producer of the specialized steel that PolyVision uses would be 71.35%.

And that circumstances require this duty to be applied retroactively to steel imports going back to December 2015.

Yesterday, the International Trade Commission affirmed the Department's determination as to the dumping margin but overturned the retroactive application of the duties for the period from December 2015 to March 2016.

A final anti-dumping duty order will be entered which concludes the investigation proceedings.

PolyVision has been pursuing various mitigation efforts, including attempts to qualify domestic sources as well as discussions with government officials and the petitioners representing the domestic steel industry to revoke the duty specifically associated with the porcelain enameling steel that the US Steel industry has not been able to produce.

Depending on the timing and outcome of these efforts, PolyVision's profitability in FY17 could be negatively impacted by up to $4 million in costs associated with these actions, including approximately $1 million across the first and second quarters, and approximately $3 million across the balance of the fiscal year.

Turning to the second quarter of FY17, we expect to report an organic revenue decline of between 3% and 6% compared to the prior year, which reflected 7% organic growth compared to FY15.

We expect a significant year-over-year improvement in EMEA cost of sales as a percentage of revenue, primarily due to the expected elimination of disruption costs and inefficiencies associated with the manufacturing footprint changes in EMEA.

We also expect reduced year-over-year benefits from lower material costs and improvements in negotiated customer pricing in the Americas, following several quarters of more significant benefits.

And with the recent increases in steel prices, we expect higher year-over-year material costs in total over the second half of the fiscal year.

Lastly, we currently estimate our effective tax rate for the second quarter and balance of FY17 will approximate 36%.

As a result of these factors, we expect to report second quarter earnings within a range of $0.29 to $0.33 per share, including minimal restructuring costs which results in the same range for adjusted earnings.

We reported diluted earnings per share of $0.30 and adjusted earnings per share of $0.35 in the prior year.

For the balance of the year, I know there are a couple of questions on your minds, one related to levels of demand in the back half of the year and another related to the probability of EMEA posting breakeven or better adjusted operating results in the third and fourth quarters.

On these two fronts, we don't have anything more to add to what we have already said on this and previous calls.

On the demand front, as I stated earlier, we feel good about the project pipelines but predicting day-to-day business and revenue from marketing programs can be challenging in relatively uncertain economic and political environments.

So we see reasons to be both optimistic and somewhat cautious.

Related to EMEA and the back half of FY17, we expect year-over-year improvement in cost of sales as a percentage of revenue for the balance of the year.

How much improvement we are able to achieve beyond the elimination of prior-year disruption costs will be dependent on our ability to improve our efficiency in the new footprint, realize the targeted savings, and drive lean and continuous cost reduction programs.

Reaching breakeven will be dependent on the level of progress we are able to achieve as well as the level of demand and the type of business mix we experience at the same time.

Beyond breakeven, we target to further improve our gross margins from a number of initiatives which Jim has mentioned on previous calls, including additional improvements in our business mix, enhanced pricing strategies, continuous cost reduction initiatives, and others.

From there, we will turn it over for questions.

(Operator Instructions)

Our first question comes from Budd Bugatch from Raymond James.

Your line is open.

Good morning, everyone.

This is Bobby filling in for Budd.

Thank you for taking my questions.

I was hoping to start with EMEA there.

Dave, I was hoping maybe you could comment a little bit about the day-to-day business?

Where the mix is today, or I guess this quarter, where it's been on your historical levels and then where do you think the mix could go eventually?

I don't have the specifics, Bobby, but I'll tell you, it had eroded quite significantly during the worst of our disruption that we were experiencing last year.

And it started to come back a little bit in the fourth quarter and it came back a little bit more in the first quarter and we hope that it will continue to come back.

Whether or not it gets back to average levels by the back half of the year remains to be seen.

It -- how does that -- I guess the follow-up, how does that compare to the mix inside the Americas segment and is there anything structural between the two segments or the two markets, I guess, that would prevent the mix from being at a similar level once you guys get operations improved there?

I think as operations continue to improve, we will get back to a -- it's reasonable to assume that we would get back to a normal level of mix.

The mix is a little different in Europe than it is in the Americas for two reasons.

One is we don't have in Europe today the same level of mix from marketing programs that we have in the Americas.

And we also have in Europe a little bit of a dynamic that's linked to country mix.

As we've stated on previous calls, our margins in the export markets of Middle East, Africa, Eastern, Central and Southern Europe have tended to be a little bit better than Western Europe and the mix of that business has declined versus its average, for obvious reasons, linked to oil prices.

While I would expect that to improve a little bit as oil prices are coming back, it would be remarkable if that bounced back quickly in, say, two or three quarters.

Okay.

I appreciate that detail.

On the Americas segment, inside the orders detail, I appreciate all the color you gave us around the different verticals.

It's clear the Government, the Energy and Insurance verticals are facing some headwinds.

Can you maybe refresh us on when those comparisons will start to ease going forward?

Yes, just bear with me for one second.

So if I look back on the Insurance Services, it grew significantly in the first quarter of last year and then on each of the last four calls, including today, we've referenced that it has been down.

So I would expect those comparisons to ease in the second quarter and more significantly ease in the third and fourth quarters.

For Federal Government, it's been a bit lumpy as we give color on this on every analyst call.

So if I go back and remind myself of what we've shared, it was -- Federal Government was up significantly in the first quarter of last year, then down, then up, then down and down again in the current quarter.

So I would consider Federal Government a little bit more lumpy.

And lastly, on Energy, we still grew orders a little bit last year and then they started to decline in the second quarter and the declines accelerated to more than 50% in the current quarter.

So I think we've got a couple of quarters yet where we're going to be speaking to impacts from the Energy vertical market, from an orders perspective.

Okay.

I appreciate that detail.

And then lastly from me, just on the Americas OpEx, it was up this year while -- with flat sales and you touched about in your prepared remarks, a good portion of that's from the investments.

Can you comment a little on the outlook for that line item going forward?

It's really no different than what we said last quarter that we -- as really the last two quarters, where we expect the operating income margins in the Americas to begin to level off and not continue to improve because of our intention to invest back into the business.

So I think you're going to continue to see some year-over-year growth in operating expenses for the balance of the year.

Okay.

I appreciate the detail.

Best of luck going forward.

Thank you.

Thank you.

And our next question comes from Matt McCall with BB&T Capital Markets.

Your line is open.

Thanks.

Good morning, everybody.

Good morning, Matt.

So I'm going to ask maybe a follow-up on Bobby's questions a little bit.

So Dave, you talked about the pipeline and you talked about products that -- or projects that were won, not yet ordered.

Can you put some more meat -- well, I'll finish the questions.

Won but not yet ordered.

And then you talked about the pipeline of activity being, I think you said much larger year over year.

Can you just give us more quantification around those numbers?

I'm trying to get at the visibility angle of what you said.

You've got to remember, Matt, this is a piece of our aggregate pipeline, right?

So I'm not taking everything in the pipeline.

I'm taking only the pipeline where we believe we have an 80%, or let's say a relatively high percentage chance of winning or higher.

And that includes projects that we've been awarded by a customer but they have not yet been ordered.

And that is up significantly on a sequential basis and it's up double-digit compared to last year, both with and without some of the large wins that Jim was referencing.

So it's up meaningfully.

The rest of the pipeline is also up but when I -- if I start aggregating the entire pipeline, that includes all projects where we would consider that we might have a -- less of a chance of winning; then it gets a little bit messier.

Okay.

So double-digit, because -- so I guess that could mean 10% or 99%.

I'm just trying to understand, are we talking about teens type of growth?

And then am I understanding that metric, is that the project portion of your business could be up double-digits if this is an indication of the back half of the year?

Is that the way to think about that portion of the business?

That's right.

So it is -- it's about the project business, which you know runs in the neighborhood of 40% normally, it is a little bit more recently and its revenue expected over the next four quarters.

So we have -- our pipelines go out further than that but I just tried to quantify what we would see over the next four quarters that had a relatively high probability and -- of winning.

And it is interesting to see that it's up double-digit and you're right, it is somewhere between up 10% and 99%, but it's closer to 10%.

(laughter) Okay.

All right.

Okay.

So then you talk about (multiple speakers) -- yes, sir.

But Matt, remember I said it's up strongly, not only with all of the projects but without some of the larger projects that Jim mentioned that we've won recently, right?

Because every once in a while, we have projects that are a little bit more than average.

So even setting those aside, it's still up meaningfully.

Got it.

All right.

So then when you broke out the three categories, down 25%; the rest, up 6%, as we look forward and we look at the rest of the business, you -- I think in the previous question, you answered what the comps looked like for the three categories causing the pressure.

But when I talk about the rest of the business, are there any comp issues that we should be cognizant of or is 6% a nice way to look at it for the rest of the year?

I'm just trying to understand what might -- what I might not remember from previous calls.

Remember, the 6% reference was on revenue and everything I was answering to Bobby was about orders, right?

And orders excluding Federal Government, Insurance and Energy, were actually up modestly.

Well, was the 6% -- the 6% number was revenue.

Was -- do you know what the comp was for that portion of the business a year ago?

Not off the top of my head, no.

But do you recall anything that would cause that number to be crazy for an assumption for the rest of the year for that part of the business?

Is that kind of indicative of the growth rates you're expecting to experience this year?

Well, I think it would be a little aggressive to assume 6% for the rest of the year when I just told you that orders for that portion of the business in the first quarter were only up modestly.

Okay.

Sorry, I missed that.

All right.

I know I'm supposed to do three -- but I've got one -- two.

I've got one more quick one.

So just making sure I understand.

I think you said that EMEA profitability depended on a few things, some improved efficiencies, continued growth and then the mix of business.

And I think that mix of business is more of that day-to-day stuff coming back from where you struggled, I think, last year.

But then you said the project pipeline was encouraging and strong and so does that imply that the mix could actually work against you in the back half and not for you?

Well, remember, I said that the project pipeline in EMEA is also up but by a lesser amount relative to the Americas.

So but yes, theoretically that could hurt us a little bit but I'm hopeful that day-to-day business will continue to improve.

And I'm also hopeful that we'll see some improvement in our export business over the next four quarters, which is another element of the mix in Europe that we pay attention to.

This is Jim.

I'd add that the story related to the strong project pipeline of either won not entered, or simply still pending but we feel high confidence in them, that story is probably the strongest for Americas and APAC.

EMEA is a slightly different story.

We'd have to go region by region and talk about country by country factors.

So it's a slightly different story there.

Okay.

Perfect.

Thank you guys.

Thank you.

Our next question comes from Kathryn Thompson with Thompson Research Group.

Your line is open.

Good morning.

This is Steven Ramsey on for Katherine.

Hi, Steven.

I had a couple questions about the other category.

There was nice improvement there and operating expenses as a percentage of sales.

Can you talk about the potential for improvement there over the course of FY17 and if longer term, there are structural reasons that it can't move in line with the other two segments.

Well, the biggest challenge we face in the other category, at least for the near term, is this anti-dumping issue at PolyVision which I quantified as, in my comments, as being approximately $3 million of an impact in the back half of the year.

So it's linked to the level of volume that we ship, but you wouldn't be far off if you assumed a $1.5 million impact per quarter with the second quarter maybe being more significant next year, if we're not able to resolve that issue.

Beyond PolyVision, though -- or beyond the anti-dumping issue, we expect PolyVision to continue to perform at strong levels.

It's a solid business.

It's been doing well and we would expect it to continue to do well outside of this dumping issue.

Designtex has been a Company we've talked about over the last couple of years as a business we've invested back in to a number of growth ideas and it's nice to see that starting to post some solid growth not only in orders, but revenue.

And we'd expect that business to continue to improve.

I'm not going to predict that it will continue to grow double-digit, like it did in the current quarter, but we're pleased with what we're seeing out of the Designtex team.

And Asia-Pacific, as Jim commented in his remarks, they had another good quarter and their pipeline looks pretty good as well.

So we're hopeful that, that business will continue to show top line strength, but I would remind you that our longer-term strategy is really about growth in that region.

So we'll let some of that growth benefit the bottom line but we'll also be strategically looking to invest some of it back into the longer term.

So long story short, yes, I think you could see improvement in the other category, except for the impact of the anti-dumping effects.

Okay.

Makes sense.

Switching to EMEA.

I guess I'm trying to reconcile, you talked about win rates being below satisfaction and some of that being beyond your control with macro issues, some of that being in your control, and putting in a new sales team, I believe you said, in the UK.

I guess I'm trying to reconcile that with the strong pipeline that you called out.

Again, just to be clear, what -- and I said was our pipeline in EMEA was up modestly.

And then in Americas, it's up strong as well as Asia.

It has -- it's solid.

But the pipeline in EMEA is only up modestly.

And when we talk about things within our control and out of our control, you -- maybe I'll give you a little bit more color on that.

Of course, we have the Middle East and Africa which are driven by a lot of external factors.

So those are mostly -- there, our performance is largely a function of the overall economy and we continue to see oil prices strengthen.

It would be reasonable to expect we started seeing volume come back to historical levels.

The UK is a combination of external factors but also some things on our side where we can improve our own performance.

And in the mature markets of Western Europe, in the Eurozone, it is, again, a combination of things.

Some of the things that we did internally over the last year are starting to pay off and we're seeing some improvements in our win rates but we've also had some project losses.

And every time we have a loss, we gather around and we talk about what happened and we learn from that.

And so there's continued -- I'm not going to be more specific but there continues to be opportunities for us to build deeper relationships with customers, demonstrate more value to customers, and improve our competitiveness.

And it is, as we move forward, not simply a matter of some of the operational issues we faced before but now the emphasis shifts to sales and marketing initiatives and it will be a combination of those things that will help us improve our own performance over time.

So maybe that helps a little bit.

That does.

Thank you.

And last quick question.

With the share price coming down and your strong cash and financial position as well as strong cash flow, what is your appetite for repurchasing shares?

Thank you.

Well, we have, I think, $153 million left on our share repurchase authorizations from the Board and we are in the middle of a 10b5 program that we put in place, I believe, back in the spring, April time frame or late March.

And that's scheduled to run through September.

And you know, Steven, our approach has been opportunistic.

We take advantage of stock price volatility.

So when we've seen the stock price decline for whatever reasons, we've typically been in the market and when it doesn't, we haven't been in the market.

So we'll see what the stock price does over the balance of our 10b5 program and whether or not it hits any of the buying tiers that we established back in March.

Great.

Thank you.

Okay.

Thanks.

Thank you.

(Operator Instructions)

Our next question comes from Peter van Roden with Spitfire Capital.

Your line is open.

Hey, guys.

Hi, Peter.

So to start, I guess someone has asked the same, but one of your big competitors reported this morning and they posted, what I would call, fairly strong results in the North American segment, both on revenue and orders.

And I'm curious to get your guys' perspective as to where you guys think you're lagging in the market in terms of products and geographies versus them?

And just to get a little bit more color around that.

It sounds like you guys are hoping to fix that in the back half.

But was hoping to get a little bit more color around where the differences are.

This is Jim.

So I won't comment on any particular competitor.

I think from quarter to quarter, we face a wide range of competitors.

It's always been a competitive industry.

And from quarter to quarter, we can see individual companies having good quarters and the next quarter, it's somebody else.

So I will comment just on us.

I would say that when we look at our history, I'd say last year, we were aware of some product gaps that we had and we commented on those in these calls.

We moved very quickly once we identified those.

In fact, some of the products we launched were about 12 months after the time we initiated the product development effort.

So we had those gaps last year and they were across a range -- there was no one area but I would say there was a range of opportunities for us to close gaps.

And also we're not just in the business of closing gaps.

We also want to make sure we're innovating and leading the industry and using our insights to do so.

So we had a lot of efforts going on last year, and the first half of this year, we are launching those products.

Many of the products that are -- that we're developing launched during the first quarter, so we're getting early reads on demand and volume and we've been very happy.

We've had higher-than-expected volume so far in some of the products we launched over the last year.

We are actually increasing our internal forecast, as I mentioned before, for some of those products and we're making investments to increase our operational capacity in the second half of the year so that we're ready for the demand we see building.

So we're happy about that.

But -- and I'd also say that as a result of new product development as well as other things we're doing on the sales and marketing front, we've seen a nice improvement in win rates since, let's say, late last year on larger projects.

And that is part of the reason why we're seeing this building up of the pipeline of awards that are not yet entered or an increase in our confidence in the projects that are out there.

We think we've got a stronger product portfolio today than we did a year ago and we're seeing that start to pay off.

And other efforts we've also done around sales and marketing.

So maybe that's a way of answering the question.

Today, there's always -- the industry's always changing but we're happy with where we are.

We're continuing to work on new product development.

As I mentioned, we just came out of NeoCon with five awards for products across all of the Steelcase brands, or a lot of the Steelcase brands, and felt good about the reaction the customers have to those products.

But we never stop.

So there's always a new opportunity building.

There's new ways people are working.

The industry is very dynamic right now and we are responding quickly as we see those -- the demand change for new products.

Got it.

Okay.

That's very helpful.

And then in the EMEA segment, I know it's hard to predict when you expect to get to breakeven given all of the different moving pieces that you have, but I'm curious to get a little bit more perspective on how you guys see gross margin potentially improving, ex those factors.

If I look back and compare Q1 2017 to Q1 2016 gross margins and I exclude disruption costs, gross margins were actually flat year over year.

And so I'm just wondering why that might be and then when you should start to see real gross margin benefit from the cost savings that you are -- that you hope to achieve.

Yes, well, one of the reasons they're flattish -- I haven't done the math that you just did so I'll assume that, that's correct.

But one of the reasons would be that the business mix has changed.

It -- a year ago we were -- we had a -- we would have had a higher percentage of day-to-day business.

And we would have had a higher percentage of business out of the Middle East and Africa, which as I've said, has higher gross margins, right?

And I've also said, too, we're not -- we've realized some of the savings from some of the manufacturing footprint changes but we're masking some of the benefits of others because of our level of inefficiency in the facility.

Yes, operations have stabilized, which is great, but we still have to many people in the organization.

Our scrap levels are too high.

Our throughput is not quite where it needs to be, and that's normal.

So, we'll -- and our intention is to work through that and as we work through that and remove the rest of the disruption, you should see gross margins improve from where they were in the first quarter on similar levels of volume.

And if our business mix can continue to improve, you could see even further improvement.

And then beyond that, as Jim has mentioned on previous calls and I commented briefly on at the end of my remark, we have a number of sales and marketing as well as additional cost reduction initiatives that we're working on to try to drive our gross margins even higher in Europe.

Got it.

And do you guys have a -- or are you willing to share a medium-term gross margin target, assuming that you get the cost savings and then start to see some more benefit from the other initiatives that you're taking?

With the level of volatility that we had last year in our results, I -- we're going to stop short of providing a mid-term estimate on gross margins.

But we have stabilized over the last two quarters.

We don't see anything in front of us that would suggest any new challenges and like I said, the team is working on driving the efficiency and trying to capture the savings that we were after.

And if they're able to do that and mix improves, we should see improvement over the back half of the year.

Okay.

Great.

Thanks, guys.

Thanks, Peter.

Thank you.

And I'm showing no further questions at this time.

I'd like to turn the call back to Mr. Jim Keane for closing remarks.

Thank you.

And thank you, everybody, for joining the call.

Again, we were pleased with our first quarter results, and we see strong reasons for optimism as we look to the future.

Thank you for your interest in Steelcase and we'll see you next time.

Thank you for participating in today's conference.

That does conclude today's program.

You may all disconnect.

Everyone, have a great day.