Steelcase Inc (SCS) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to Steelcase's fourth-quarter and fiscal year 2017 conference call.

As a reminder today's call is being recorded.

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

Thank you, Katie.

Good morning everyone.

Thank you for joining us for the recap of our fourth-quarter and fiscal 2017 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 fourth-quarter earnings release which crossed the wires yesterday is accessible on our website.

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

A replay of this webcast will be posted to IR.

Steelcase.com later today.

Our discussion today may include references to non-GAAP announced 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 incorporated by reference into this conference call the text of our Safe Harbor statement included in the release.

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

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

Thanks, Raj, and good morning everyone.

I will begin with some comments on the quarter and then some perspective on the full year.

The Q4 results that we announced yesterday exceeded our estimates.

Revenue increased 3% over the prior year and orders were up 6% in the same period.

EPS in the fourth quarter of both years was affected by tax items and other unusual items and if we look past those we can see a nice year-over-year improvement in underlying profitability.

In the Americas our project business remains strong with project order growth of 17% in the quarter compared to the prior year.

Day-to-day business continues to be considerably softer, likely because of the ongoing decline in demand for traditional private offices and open plan cubicles.

Customers are shifting to new solutions like our Ology height-adjustable desking line, which delivered strong growth again this quarter.

The new products we launched over the last 12 months respond to these trends and have collectively performed above our expectations in this last quarter and for the year as a whole.

As a result of these products and some large orders that are currently shipping, we believe we are beginning to regain the market share we lost a year ago versus our peer group.

Our EMEA business reported an operating loss in the fourth quarter after a strong and profitable third quarter.

We forecasted the loss but unfavorable mix and other factors caused it to be a bit deeper than expected.

On the other hand, despite ongoing political and economic challenges our revenues in EMEA were higher than expected.

Our operational performance continues to improve and is no longer an issue.

Asia-Pacific, to put it very simply, had its best quarter ever and exceeded our profit expectations with strong growth in China, India and Southeast Asia.

We are increasingly serving leading Asia headquartered companies in the region, many of whom we are also serving as they expand into other parts of the world.

Moving to the full-year view, we reported our best operating income margin since 2001 and our best total operating income since before the financial crisis.

I want to thank our teams around the world for everything they have done to drive profitability.

Asia-Pacific, of course, exceeded our expectations for the year.

France, Spain and Central Europe were also strong.

Still at an Inc.

level for the full year we did not grow top-line revenue, and that's disappointing.

In our largest, most established markets customers are reducing their re-investments in legacy applications and products where we have a large installed base and, therefore, a large annuity stream of replacement business.

Those end customers are investing in new projects and embrace a wide range of new trends.

In the short run, these forces are causing customers and design firms to spread their spending across a larger number of contract and residential manufacturers.

We believe this is why the larger companies in our industry seem to be struggling with growth.

On the other hand, we are excited about the opportunity to reactivate the installed base.

When customers are looking for something new it's good for our business.

We are seeing our own business growing rapidly where we have new products that are on trend.

Recently that growth roughly offset the decline in our legacy business.

But as we continue to build our offerings through our own product development and through partnerships we hope to recapture our share of wallet by delivering the quality, reliability and scale efficiencies our customers expect from Steelcase.

We also believe our customers are looking for more than just trendy new offices.

Customers are trying to grow, but the job market is tight so they can't just hire more people.

They need to more fully engage their existing workforce, and we know the workplace is strongly correlated with engagement.

They want offices that authentically support creativity and innovation by helping their people do their best work.

This was the genesis of our recently announced alliance with Microsoft.

We are going to be working together on a couple of fronts to solve the customer issues about how to integrate space and technology to unlock creativity and productivity of people.

We are already beginning to share some of these new ideas with customers and you will see more at NeoCon in June.

So in summary, we had a good year with very strong operating income margins, growth has been a challenge for us and for others in the industry because customer needs are changing but our new products are growing fast.

And our Asia-Pacific business is the highlight of the year in terms of top-line and bottom-line performance.

We also announced yesterday that we are welcoming a new member of our Board of Directors.

Todd Kelsey is President and CEO of Plexus Corp., a leading electronics engineering firm that helps their clients manage product utilization.

Todd and Tim Brown, who joined our Board in December, each bring a strong technology development background and new perspectives to our Board.

Dave?

Thank you, Jim.

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.

As Jim said, we were pleased with our results for the quarter capping off a year which reflected our highest operating income margin in more than 15 years.

Fourth-quarter revenue exceeded the estimated range we provided in December and earnings were also better than our estimates after adjusting for the French tax charge which we highlighted as a potential item last quarter.

I will cover revenue and earnings in a moment, but first I want to share a few broader highlights, some of which Jim just reference.

First, the Americas order growth of 5% in the quarter benefited from very strong project activity which grew 17% compared to the prior year.

In part because of orders from the very large project we have mentioned over the last several quarters, but more so because of smaller to midsize projects which in total contributed more significantly to the project growth rate than the one very large project.

Orders from day-to-day business in the Americas were mixed, reflecting ups and downs across the months and across vertical markets for the quarter but declined by 7% in total compared to the prior year.

As Jim said, day-to-day business is likely being impacted by the ongoing decline in demand for traditional private offices and cubicles, but it's also possible that recent improvement in sentiment has not yet completely translated into broader increases in capital spending.

Second, Asia-Pacific posted record levels of revenue, orders and operating income in the quarter and we are beginning fiscal 2018 with a record level of backlog in the region.

We are continuing to secure more and more business with leading organizations headquartered in China and India, which is also helping to generate business for us in other parts of the world.

Third, the majority of the antidumping duty exposure affecting PolyVision we have been discussing over the past year has been officially resolved.

And remaining duty exposure is not material.

As it relates to revenue in the fourth quarter, the organic growth of approximately 4% in the quarter was better than our estimated range of down 1% to up 2% and our growth in the quarter continued to be negatively impacted by the significant reductions in revenue from the energy sector.

We exceeded our internal revenue estimates in each of the Americas, EMEA and Asia-Pacific.

For the Americas our owned dealers and services business generated higher revenue than expected and this revenue carries much lower gross margins compared to our overall average.

As a result, our operating leverage relative to the better-than-expected revenue in the quarter was minimal.

For EMEA revenue exceeded our internal estimates due to improved win rates related to small and midsize projects in a few markets as well as better-than-expected business from our owned dealers in other markets.

And in Asia-Pacific we experienced only a few changes in customer installation dates near the end of the quarter, which allowed more projects to be completed and recorded as revenue than we had estimated.

From an earnings perspective the $0.21 in the quarter included an $8 million charge related to the change in the French tax rate which reduced our earnings by approximately $0.06 after consideration of related variable compensation effects.

In December we highlighted to potential items which could reduce our earnings in the fourth quarter: one related to the potential change in the French tax rate and another related to our plans to annuatize some of our smaller defined-benefit pension plans.

We did not include these items in our earnings estimate as a number of factors affecting their completion were outside of our control.

As it turned out, the French government enacted the change in their statutory tax rate during the fourth quarter but the benefit plan terminations were not completed until earlier this month.

Accordingly, our fourth-quarter results included the impact related to the tax item and our first-quarter results will include the impact related to the pension plans.

Adjusted for the impact of the tax item, the $0.27 of earnings in the fourth quarter compared favorably to our earnings estimates of $0.22 to $0.26.

Operating income was higher than the level contemplated in our earnings estimate and benefited from a record level of quarterly profit in Asia-Pacific that was better than expected.

In addition, the Americas results were better than expected but somewhat negatively impacted by the mix of business I highlighted earlier.

EMEA reported an operating loss which was a little higher than our internal estimates despite reporting higher-than-expected revenue in the quarter.

EMEA margins were negatively impacted by unfavorable business mix as well as a number of miscellaneous adjustments to year-end accruals which also contributed to operating expenses coming in higher than expected.

Other income net was better than expected due to favorable income from joint ventures and foreign currency gains.

We also recognized net discrete tax benefits before consideration of the French tax item which reduced our tax expense compared to our internal estimate.

Switching to year-over-year comparisons, adjusted operating income increased by approximately $21 million.

Recall that our earnings in the fourth quarter of last year reflected a significant tax benefit and a gain from the partial sale of an unconsolidated affiliate which increased variable compensation expense and reduced operating income by approximately $14 million.

In addition, we recorded $3 million of inventory adjustments last year.

Beyond these items, the current year's results reflected benefits associated with the organic revenue growth plus improvements in our gross margins in EMEA.

These benefits were partially offset by higher operating expenses including investments in sales, marketing and information technology as well as initial costs associated with annuitizing the defined-benefit plans I previously mentioned.

Sequentially fourth-quarter adjusted operating income was lower compared to the third quarter primarily due to seasonally lower revenue.

In addition, operating expense investments in some of the same areas I just mentioned were higher compared to the third quarter, though lower variable compensation expense more than offset these increases.

Moving to the balance sheet and cash flow, cash provided by operating activities approximated $64 million in the current quarter and was similar to the prior year.

Capital expenditures totaled $23 million in the fourth quarter and $63 million for the full year, which was lower than our previous estimates as various capital projects pushed into fiscal 2018.

We returned $14 million to shareholders in the fourth quarter through the payment of a cash dividend of $0.12 per share and yesterday the Board of Directors increased the cash dividend to $0.1275 per share, which will be paid in April.

Turning to order patterns, I will start with the Americas segment where our orders in the fourth quarter grew by 5.3% compared to the prior year.

We posted order growth across all three months but growth rates were strongest in December.

Customer order backlog at the end of the quarter was 8% higher compared to the prior year, and as we mentioned in December it continued to include a higher-than-normal amount of orders from the third quarter with requested delivery dates which fell in the first quarter and beyond.

Turning to vertical markets in the Americas, we experienced growth in six of the 10 vertical markets we track including five with double-digit percentage growth rates.

This growth was dampened by declines in the technical, professional, education, healthcare and information technology sectors, some of which reported strong order growth in the fourth quarter of the prior year.

Across quote types, project orders grew by 17% while day-to-day business declined by 7%, reflecting an 8% decline from continuing agreements and a 4% decline in our marketing programs aimed at smaller day-to-day business.

Net order growth was strongest from customers whose orders aggregated more than $3 million in the quarter.

However, order growth in midsize business also approximated 10% with business less than $1 million declining less than 1%.

Since June we have talked about the year-over-year strength we were seeing in our pipeline of project activity in the Americas which continues to reflect meaningful growth compared to this time last year as well as sequentially compared to the third quarter.

This pipeline is an aggregation of expected revenue from customers, each of which we believe will generate at least $3 million of revenue over the next four quarters, and it includes project business that we have already been awarded or that 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 that day-to-day business could remain pressured but we continue to feel good about this data point as well as the recent improvement in CEO and small business sentiment noted on last quarter's call.

For EMEA the order decline of approximately 3% in the current quarter compares to growth in the fourth quarter of fiscal 2016.

Order patterns have remained mixed across the region, reflecting declines in a couple of markets that posted strong growth during the fourth quarter of the prior year, offset in part by growth in other markets which had much easier prior year comparisons.

Order backlog in EMEA ended the quarter down 17% compared to the prior year and order patterns through the first three weeks of March have continued to reflect year-over-year declines.

Within the Other category, orders in total grew 24% compared to the prior year, driven by the record amount of quarterly orders in Asia-Pacific and solid order growth from Designtex.

Turning to the first quarter of fiscal 2018, we expect to report revenue in the range of $725 million to $750 million, which reflects an expected range of organic revenue growth between 2% and 6%.

Our first-quarter revenue estimate contemplates organic revenue growth in the Americas and across the Other category, offset in part by an expected organic decline in EMEA.

In addition, we expect the Americas organic growth to be dampened by continued declines in day-to-day business.

Related to EMEA, we expect to report an operating loss in the first quarter and it could exceed the level we reported in the fourth quarter due to expected lower revenue driven by the low level beginning backlog and order patterns through the first three weeks of March.

We expect the sequential comparison to benefit from lower operating expenses and the nonrecurring nature of the fourth-quarter accrual adjustments as well as additional benefits from our gross margin improvement initiatives.

However, we expect the negative effects of lower volume to outpace these benefits.

As a result, we expect to report minimal year-over-year improvements in EMEA's gross margin in the first quarter.

We expect continued inflationary pressures in the first quarter, and as I said earlier we also expect the net impact of annuitizing the defined-benefit plans to reduce diluted earnings per share for the first quarter by approximately $0.03.

As a result of these factors, we expect to report first-quarter earnings within a range of $0.13 to $0.17 per share.

Before I turn it over for questions I will make a few comments about the full fiscal year of 2018.

From a revenue perspective we expect a low single-digit growth rate in the North American office furniture industry, and we are targeting revenue growth rates in excess of industry averages.

Our pipeline of project activity remains solid and we are optimistic that improved CEO and small business sentiment will help bolster demand in our day-to-day business.

However, we also anticipate continued pressure on our annuity business until legacy standards become increasingly replaced with current office design constructs and the installed base of our newer designs gets large enough to generate meaningful follow-on day-to-day business.

For EMEA we are targeting revenue growth in this challenging environment as we, one, begin to realize more meaningful benefits of our sales deployment strategies and gross margin improvement initiatives; two, leverage the opening of the customer facing spaces of our Learning + Innovation Centre in Munich later this year; and, three, shift organizational energy more broadly from industrial modernization to growth.

Lastly, we are expecting to leverage our momentum in Asia-Pacific as well as new products at Designtex and PolyVision to drive continued growth across the Other category during fiscal 2018.

We expect additional improvement in our consolidated gross margin in fiscal 2018 due to the fixed cost absorption benefits associated with the expected revenue growth as well as continued improvement in our EMEA gross margins.

How much we are able to expand our gross margins will be a function of many things including volume and pricing, the mix of business, the pace of material cost inflation and the success of our gross margin improvement initiatives in EMEA.

As it relates to operate expenses, we have talked over the last several quarters about our increasing rate of product development and the ramp-up of other longer-term growth initiatives like the Learning + Innovation Centre in Munich, our technology strategy in support of the smart and connected office and most recently the partnership with Microsoft.

The current run rate of spending to support this level of activity plus other initiatives in progress as well as general inflationary pressures across all of our costs are expected to increase our operating expenses significantly in fiscal 2018 compared to fiscal 2017.

Beyond our increased run rate of spending for these existing items, we have identified a larger number of high-quality areas for increased growth investment than in the past.

These areas include feet on the street in various markets around the world, additional marketing and product development activities and certain organizational capabilities to better support our efforts to expand our market leadership globally.

Although the absolute level of additional investment will depend on the number and specifics of each opportunity we evaluate during the year, if these opportunities develop as expected we may further increase our rate of operating expense growth.

Of course, we expect to adjust our spending as we go based on the actual growth rate of the industry and the performance of our previous investments in helping us gain market share.

It would be premature for us to go through any additional specifics today and, of course, there are also competitive considerations related to our investment plans.

However, to help you with your modeling I will share that for fiscal 2018 we will continue to target, one, an operating income margin of more than 10% in the Americas; two, significant progress toward our longer-term operating margin goals in EMEA; and, three, a mid-single-digit operating income margin in total for the Other category.

Lastly, a couple of other data points for your modeling.

Our previously announced restructuring activities are now complete, and we do not currently anticipate any additional restructuring costs in fiscal 2018.

In addition, we are sometimes asked about non-operating costs, so I will share that we do not anticipate any significant changes in interest expense or investment income.

And we estimate other income net will fall within a range of $1 million to $2 million of income per quarter, assuming no significant foreign currency gains or losses.

Regarding the effective tax rate, we are currently modeling 36% based on current tax regulations around the world.

And related to uses of cash, first we expected capital expenditures to fall within a range of $80 million to $90 million in fiscal 2018 driven by our intention to sustain a high level of product development, strengthen our industrial capabilities, enhance our information technology systems and continue to invest in our customer facing facilities; second, the quarterly dividend remains our priority for returning cash to shareholders as evidenced by the 6% increase in the cash dividend approved by the Board of Directors yesterday; and third, to the extent we have excess liquidity we expect to remain opportunistic as it relates to share repurchases, taking advantage of any potential stock price volatility to, at a minimum, offset dilution from equity awards.

There is one other announcement I would like to share today and it's about Raj Mehan who will be moving to Munich this spring to lead finance for EMEA.

This move comes as we are giving some of our finance leaders new opportunities for development, something we have practiced for years at Steelcase.

I want to a knowledge the excellent work Raj has done in the investor relations role for more than a decade and share my enthusiasm for his desire to relocate to Europe for a few years to help drive our EMEA strategies.

We will begin working on Raj's transition later today as we will introduce his replacement Michael O'Meara at the Seaport Global Investor Conference, which the three of us plan to attend.

Mike moves to investor relations after holding a variety of roles across sales and finance during his 16 years with Steelcase.

From there we will turn it over for questions.

(Operator Instructions) Budd Bugatch, Raymond James.

Good morning, this is David on for Budd.

Thanks you for taking my questions and Raj, congratulations on the move.

We will miss talking to you, though, for a couple of years.

First question relates to operating margin overall and in the Americas.

I know you are going to be spending more in SG&A and OpEx on the opportunities, but where do you see the margin in relation to this year and where do you peg the expansion?

Or is it going to be in the 20 to 30 basis point range or are we going to see more likely flat operating margins for next year in that segment?

Yes, I understand the question, David.

And I tried to give you as much color as we feel comfortable giving.

What you are asking for is dependent on the level of revenue growth and the level of investment that we actually make as well as how gross margin plays out throughout next year.

So I don't have any specifics for you, anymore specifics for you other than to just reiterate that we do not see our operating margin in the Americas going below low double digit.

So at a minimum we would expect to report 10% or better.

That's not to say that you should model 10.1% because there are a lot of variables at play.

But we are trying to give you a sense of what we are managing and where the boundary markers are.

Okay, thanks.

Second question relates to the current pricing environment.

Some of your competitors have said that the environment remains pretty competitive given the higher instances of project business versus the day-to-day type business.

Any change from last quarter and any comments on what you're currently seeing?

This is Jim.

Yes, I think the pricing environment remains quite competitive.

It's been competitive for quite some time.

And during each quarter we can see moments when there might be a project that is won at a price that is surprising to us.

But I would also stop short of declaring that to be a trend because that is always true.

In any given quarter there can be competitive pressures and there can be moments where you say this looks like the pricing is changing in some way.

But we look at pricing across the board and we try to maintain a smooth hand as we manage through that.

We want to make sure we remain competitive, of course, and we make adjustments when we need to and we did that a year ago because we needed to in order to respond to competitive pressures.

But I wouldn't say that I've seen anything dramatically different in this last quarter than we saw before.

Okay, thanks very much for taking the questions and good luck next quarter.

Kathryn Thompson, Thompson Research.

Good morning guys.

This is Steven on for Kathryn.

Thinking about Americas market share, would you say that there potentially you guys were maybe slipping some on market share that it was coming, that it's coming more on the day-to-day side instead of the project side?

Or how would you characterize the dichotomy there?

Well, I will start and then maybe Jim will add some additional color.

I would say, you are aware that for years after the financial crisis we gained considerable market share and then for a period of a couple of years we started to give some of those gains back.

And over the last 18 months or so we have invested aggressively in filling some product gaps, offering incentives to help regain share of wallet from our dealers and a variety of other initiatives, which we believe are starting to turn our market share results in the back half of this year.

Now it's hard to tell whether we are gaining share only in the project activity because we don't know exactly where our competitors day-to-day business is coming in.

And the BIFMA data that we get while once a quarter is broken down in pretty good detail around product categories, I don't know that they do the same breakdown that we offer to the investment community between project and day-to-day business.

That's what I was going to say.

It's very difficult for us to compare it because we define it differently.

But we're enthusiastic about the projects order growth that we saw in the fourth quarter.

And as I said before, I think what's happening, apart from marketshare gains or losses competitor versus competitor, you also have this underlying force which is the shift in customer behavior from reinvesting in their installed base of private offices and cubicles where we and many of our competitors have large installed businesses.

And that shift is moving towards new kinds of furniture and we are doing a lot to create new products and to broaden our position in different categories and work with our partnerships to make sure that we have representation across those new product categories.

But that's really where the story is right now, that shift in consumer behavior and Steelcase repositioning itself to be competitive and relevant to customers as their needs change.

That shift, too, could be showing up in our small to midsize project business which I commented also grew nicely in the quarter.

So what historically could have been small or project-light business that ran through continuing agreements because it was reconfigurations of private office cubicle, that could have shifted from continuing agreements to projects because of it encompassing all new furniture.

So there could be some of that going on, as well.

It's really just very difficult to tease apart.

Okay, great.

Then thinking about other, any other category for margin, should we in general think that with continued sales growth should there be that in fiscal year 2018 that there should continue to be modest gross margin expansion even though it's pushing that 35%, 36% level?

I will remind you what I said a minute ago.

We still think that a mid-single-digit operating income margin is a good estimate for the Other category.

You saw this quarter that we were on the high side of a midpoint estimate.

I think we did closer to 6%, 5.6%.

But that was driven by the record level of performance we had in Asia-Pacific, which I would like to think will happen every quarter but records don't usually happen every quarter.

And we continue to plow back a significant amount of contribution margin from revenue growth into additional investments to continue our growth in that region in particular.

So I think from a modeling perspective if you are somewhere in the mid-single-digit OI range you should be -- it should be a reasonably good estimate.

And we will be talking to you why it's on occasion lower or on occasion higher than that.

Excellent, thank you, guys.

Greg Burns, Sidoti.

Greg Burns

Good afternoon.

So I just wanted to dig into the day-to-day business a little bit more.

Could you parse that out between, I guess, the declines you are seeing with your installed base versus the gains you are seeing with your new products?

Are you seeing growth there that might give you confidence that as you fill out your portfolio of new solutions that you might be able to pick up some more business in that day-to-day area?

And then as we look into next year, do you feel like you have any gaps in your product portfolio that need to be filled next year to address the changing trend in that market?

Can you repeat the second question?

I'm sorry.

Greg Burns

I was just asking about next year if there's any product gaps or where you might need to invest to address the changing trends you are seeing in that market.

Okay, so first of all, I think you characterized it well.

The decline we're seeing in day-to-day business is across some of the legacy product categories.

These are products that have been in the marketplace for a long time, and the growth we are seeing is through a lot of the new products, these new initiatives that we've been talking about for the last year.

Some of those are product gap fillers but also some of them are just innovative new products that we have been launching and both are performing quite well.

So collectively those products are above our expectations.

What happens is over time as you have a new product it often is sold for the first time through projects.

And as time goes by those projects become part of the installed base and then people, customers begin expanding their facilities or updating facilities and they begin coming back and ordering more of those products.

And that's how we describe day-to-day business.

So it might take a couple of years for the projects to begin turning into day-to-day because you go through a period on any new project where you get project pricing and then the small orders start to develop.

So, yes, the answer is installed base builds for these new products they should venture into day-to-day business.

On the second question there's always gaps, and what you try to do is by staying ahead and by innovating our focus is always on that front that we want to be the first to market with a new idea.

Products like Brody, for example, which is quite innovative in our industry is something we are very proud of.

So we are always doing things to try to lead the market and that's really where most of our effort.

But there are times when we find ourselves with a product gap and we will always be allocating a portion of our product developments towards those gaps.

Right now we have identified some of those and we continue to make investments as we have over this past year.

So the results we are seeing and the results of the sales of products that were launched early in this past year, we have been launching new products every quarter and we will continue to launch new products every quarter.

And there are a good mix of innovative products as well as some things I would characterize as gap fillers.

Okay, thanks.

And then turning to Europe with the restructuring I guess largely complete now, how much in annualized cost savings did you realize in fiscal 2017?

And, I guess, what is the total that you project, in total what will that yield, I guess, by the end of 2018?

Greg, that's a fair question that we can answer, but we might have to do it off-line because I don't have the data right in front of me.

But it is accessible from our previous filings and different reports.

What we have eliminated from 2016 to 2017 was the disruption and inefficiencies that we disclosed in the previous year.

So in 2016 we had significant disruption and inefficiency costs.

I don't remember the exact amount but Raj can get that to you.

And we disclosed throughout this year that that was essentially eliminated.

So there's a little bit left over this year in 2017, but not very much.

So we would expect that remaining disruption and inefficiency costs that we had in the early part of 2017 to be removed in 2018.

And then from there it's about continuous cost reductions through lean manufacturing and all of the gross margin improved initiatives we've talked about on previous calls.

We think that there is plenty of opportunity for us to improve our gross margins in EMEA within our control through these initiatives.

And then there is further opportunity for gross margin expansion to the extent we can get some growth, significant growth or even meaningful growth out of the top line.

Okay, thank you.

Bill Dezellem, Tieton Capital Management.

Thank you.

I was wondering to what degree are you feeling your European weakness has to do with uncertainty around whether it be US election, Brexit or anything in that arena?

This is Jim, and it's a really good question.

We ask the same questions because I think within our own business as we talk to salespeople, as we talk to our dealers there's a lot of positive sentiment that we were hearing and feeling as we were entering this quarter and even during the quarter.

We can see in some markets that the pipeline of major projects was starting to soften, but that isn't really unusual.

We have quarters where the pipeline builds and quarters where the pipeline softens.

So we weren't feeling anything dramatic building, and yet during the quarter we were surprised by the fact that the orders weren't as strong as we would like to have seen.

So revenue was strong but the orders weren't as strong.

And if you go market by market until you've got the Middle East where we are still feeling the pressures of the oil prices.

We have some of the larger countries in Western Europe where election concerns and issues in their own countries might be a factor.

In the UK, yes, our business has struggled and part of it has been because of Brexit, but part of it is also things that we've addressed that were issues internally before.

And I would say that some of the issues that we are hearing about in Western Europe might be related to things going on in the US.

So there's concern about fixed port imbalances and so on that any time there's a disruption and a cause for people to lose confidence we can see that show up in our order patterns.

So I can speculate that there might have been a factor there related to the political and economic instability.

I can't prove it.

I can't give you any examples, for example, of any particular customers who chose to pull back.

I don't have any stories like that, which would give me more confidence if we were hearing consistently like that.

So we're not hearing that.

But we wonder about the same thing you are wondering about.

Great, thank you for that color.

(Operator Instructions) Peter van Roden, Spitfire Capital.

Hey guys, my question is around America's operating profit.

And so you guys had talked about I guess investing significantly in operating expense there.

Is the plan, and I know you don't want to give specific guidance around what the operating margin will be, but as you guys think about it as a management team is the plan to continue to grow operating income dollars and you will adjust the operating expense growth around that, or are you willing to see operating income dollars decline year over year in order to make the SG&A investment?

It sounds like you and David were texting back and forth saying why don't you try asking the question this way and maybe we can get an answer.

So, again, I'm going to stop short of answering specifically.

It would be highly unusual, I think, for us to show a decline in operating income.

If you look at our charts in the investor presentation that show how operating income has continued to build over the last several years following the depth of the financial crisis.

And even before that, before the financial crisis out of the recession in the early 2000s through 2008 operating income was growing in dollars.

But I'm just going to stop at that point and not get into any more specifics.

I will just add that by far the investments we are making are about growth.

So that is the objective, and every one of those investments has to pass internal metrics and testing discussions to make sure that they will deliver growth.

And I'm pleased with the success we've seen over this last year and the investments we made a year ago in doing just that, helping us grow through these new products that we've launched and through other sales initiatives.

And what we are talking about is really a continuation of that plan.

Got it.

And then I guess that is my, you are getting into my second question is which if you are going to grow operating expenses, and I know you're not going to put a number on it but I will try to in the $30 million range, how do you measure a return on that?

What are the internal metrics to say, okay, that spend is working or is it not?

So we use all the metrics that you would imagine that we should use.

We look at expected gross margin from product development, expected OI, net present value of future cash flow.

We look at EVA, return on invested capital, so we do all of that.

And we hold ourselves accountable.

We have monthly meetings that evaluate the success of our product launches and where we are ahead of our expectations we talk about how we can invest further or push harder to be even further ahead.

And where we are behind we set plans to get ourselves back on track.

As Jim said, the success of our new products that we've launched over the last 18 months to two years has been very good, growing nicely and in total well ahead of our expectations.

So we look at the payback of those investments.

And you should know, too, there is another governor on our level of operating expenses and it's related to variable comp.

Investments aren't free.

We don't get a pass.

So when we make investments through operating expenses it drops variable compensation for the entire Company.

And so we and all of our employees expect a return on those investments through future growth.

So it's not an easy decision to make those kind of investments.

Just like an acquisition, making a decision to acquire a company, we would significantly vet that, as well.

Okay, good luck guys.

I am showing no further questions at this time.

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

Thank you and I'd like to thank everyone else in thanking Raj for your years of service, Raj, helping build relationships with the investor community and with analysts and congratulate you again on your exciting new role.

And also welcome Michael O'Meara.

Mike has had a terrific career with the Company.

I've had the opportunity to work with Mike for a very long time and I want to welcome him to the team.

And to wrap up the call, again we were pleased with the improved profitability we delivered this year and our strong finish in the fourth quarter, particularly reflected in the Americas project orders.

We look forward to another good year ahead of we thank you for your interest in Steelcase.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program.

You may now disconnect.

Everyone have a wonderful day.