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Edited Transcript of SCS earnings conference call or presentation 20-Jun-19 12:30pm GMT

Q1 2020 Steelcase Inc Earnings Call

Grand Rapids Jun 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Steelcase Inc earnings conference call or presentation Thursday, June 20, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David C. Sylvester

Steelcase Inc. - CFO & Senior VP

* James P. Keane

Steelcase Inc. - President, CEO & Director

* Michael O'Meara

Steelcase Inc. - Director of IR & Financial Planning and Analysis

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Conference Call Participants

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* Gregory John Burns

Sidoti & Company, LLC - Senior Equity Research Analyst

* Matthew Schon McCall

Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst

* Robert Kenneth Griffin

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* William J. Dezellem

Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer

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Presentation

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Operator [1]

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Good day, everyone, and welcome to Steelcase's First Quarter Fiscal 2019 Conference Call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would like to turn the conference call over to Mr. Mike O'Meara, Director of Investor Relations, Financial Planning and Analysis.

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Michael O'Meara, Steelcase Inc. - Director of IR & Financial Planning and Analysis [2]

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Thank you, Daniel, and good morning, everyone. Thank you for joining us for the recap of our first quarter fiscal 2020 financial results. Here with me today are Jim Keane, our President and Chief Executive Officer; and Dave Sylvester, our Senior Vice President and Chief Financial Officer.

Our first quarter earnings release, which crossed the wires yesterday, is accessible on our website. The 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 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 will respond to questions from investors and analysts.

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

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James P. Keane, Steelcase Inc. - President, CEO & Director [3]

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Thanks, Mike, and good morning, everyone.

Our business is performing very well with 9% revenue growth, 18% operating income growth and 15% order growth year-over-year in the first quarter. Our revenues, and therefore our profits, were less than we expected, primarily because of timing in the Americas. More of that strong order growth occurred in April and May, which had less impact on first quarter shipments. Plus, we saw many orders placed with requested shipment dates that were further out than what we typically see. In addition, some U.S. customers asked us to delay shipments already planned because they are having problems completing construction of new office space on time because of labor shortages in their local markets.

We expect 6% to 9% organic revenue growth in the second quarter, and that's up against a pretty strong quarter in the prior year. In fact, it's expected to be our second-largest second quarter in our public company history. Our outlook reflects our expectation that we'll still see longer order-to-ship cycles because of ongoing labor shortages. By midyear, we expect to be right on track towards our full year targets for growth in revenue and profits.

We were very pleased that our EMEA segment was profitable in Q1, which is a continuation of the improved profitability we've been delivering in that segment. The 9% organic revenue growth and 10% order growth were primarily driven by Germany and France. We're fully aware of the economic pressures in Germany, yet our orders and win rates are holding up, in part because we're underweighted in certain customer segments where the threat of tariffs is a primary concern. Overall, this was an important milestone quarter for EMEA, but we also realized we have a lot more to do. EMEA needs to be consistently profitable so we can confidently invest in future growth. We have dedicated teams working on a series of initiatives to continue improving our performance.

Our Asia business remains quite strong, including in China, where we grew despite strong prior year revenues. Our business in India got off to a slow start but began to build order and pipeline momentum towards the end of the second quarter.

In the Americas, CEO confidence is still okay but not as good as it was. Concerns about tariffs and trade disputes with Mexico, China and Germany are a factor. We were all happy to see the steel and aluminum tariffs with Mexico and Canada end, and we were appreciative that the U.S. and Mexican governments were able to reach agreement and avoid another tariff. We are only modestly impacted by the U.S. and China tariffs and are taking steps to adjust our supply chain to further reduce the impact.

Every one of these twists and turns is a distraction that pulls our people away from initiatives focused on growth and innovation. CEOs I've spoken with in the last few weeks talked about the difficulty in making long-term capital decisions without some sort of consistent framework for what the playing field will look like.

Last week, I joined a group of CEOs in a series of conversations with legislators and senior administration officials in Washington to talk about the importance of getting USMCA passed and the need to rebuild confidence and stability in the global economy and the principles of free trade.

We're proud to have grown our Michigan manufacturing employment by about 20% over the last 3 years because of the strong economy and the benefits of tax reform, but we need a fair and free trade to keep that going. We have every reason to believe we will keep that going. Our Americas orders in Q1 were strong, and our pipeline continues to grow as we look at how Q2 is shaping up.

As we look to the second half of the year, we expect to shift a lot of projects that are already won but not yet ordered, and there is a very healthy pipeline of second half opportunities where we are still competing. There are a lot of positive forces, but we also know it's a tight labor market, and we are likely to continue to have customers who face project delays because of labor shortages. We are reaffirming our full year targets at this time and expect to refine them over the course of the year as we have more visibility and, hopefully, more clarity related to trade.

NeoCon was last week, and we were pleased some of you were able to join us in the showroom. We have a strong point of view about the future of work and the workplace, full of energy, of pace, of variety and of vibrancy. Our showrooms were full of new products and full of customers, architects and interior designers. Traffic was really strong and quite sustained. And we won several awards across the company, including Steelcase Flex Collection and our Roam product, which is a collaboration with Microsoft.

Flex is a broad system of components designed specifically for individuals and teams using agile work processes or using design thinking processes to solve complex problems. These teams need furniture and work tools that will allow for a fluid workplace where the users themselves can change the space on demand.

Roam supports Microsoft Surface Hub 2 and allows the users to fluidly move digital content throughout the workplace without interrupting flow. A battery in the cart will allow the device to continue to work even when AC power is not available.

Our 3 acquisitions grew their revenues more than 15% organically in the quarter and were all visible at NeoCon. Orangebox is facing some order softness in the U.K., as you'd expect with Brexit pressures, but demand in our other markets is very strong and building.

Orangebox made its debut in our main showroom this year with pods and they're away from the desk portfolio, which was integrated into the overall story. NeoCon was perfect timing to fully introduce Orangebox to our global customers.

Smith System and AMQ had their own showrooms and were represented in the Steelcase showrooms as well. Both of these acquisitions are ahead of their targets, and we've just invested to add additional U.S. manufacturing capacity for both companies.

Our West Elm relationship was announced at last year's NeoCon, but we were just starting. One year later, we have more West Elm workplace products than we could display in one place, and most of the new products are made in Steelcase facilities.

In our WorkCafé showroom at NeoCon, we featured the Greenpoint collection by West Elm, which includes benching and private office applications. We had many other West Elm workplace products in our March showrooms, but we also established a pop-up showroom a few miles from the mart to show more of the range of our offering. Customers and designers appreciated the power of combining West Elm designs with Steelcase engineering, manufacturing, quality and logistics.

The Steelcase legacy brands, our acquisitions, our partnerships like Bolia and West Elm, and all of the other relationships have combined to expand our offering in the U.S. to include an amazing breadth of products. But this isn't just about offering a lot of objects. We're integrating that offering into a system that helps customers, designers and dealers select, specify, price, order, receive and install those products. This is the year we plan to bring scale to our customers' need for more choice and the users' need for more control over how they work.

Our strategy is working. By midyear, we expect to be on track to achieve our fiscal 2020 targets. We're looking forward to what we expect will be a very strong second quarter.

And now I'll turn it over to Dave.

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David C. Sylvester, Steelcase Inc. - CFO & Senior VP [4]

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Thank you, Jim, and good morning, everyone. My comments today will start with some highlights related to our first quarter results, balance sheet and cash flow. I will then share a few summary remarks about our outlook for the second quarter before finishing with an update regarding our targets for fiscal 2020.

As Jim just mentioned, first quarter results were a little lower than our expectations, largely due to timing of orders and shipment dates. But our outlook for the second quarter anticipates that we can make up the shortfall. As a result, the revenue and earnings we expect to report for the first half of the year is largely consistent with what was assumed in the fiscal 2020 targets we shared in March.

For the first quarter, our revenue and earnings were impacted by customer requests for extended shipment dates in the Americas, which were much higher than normal. In addition, our strong order growth in the Americas occurred later in the quarter than we anticipated. As a result, our organic revenue growth of 6% was just below our estimated range of 7% to 10%, and our earnings in the quarter also fell short of our estimates. However, customer order backlog in the Americas ended the quarter significantly higher than the prior year, which is contributing to our strong outlook for the second quarter.

Beyond the timing of orders and shipments in the Americas, a few other points are worth mentioning. First, operating expenses were a few million dollars less than we anticipated, largely due to the timing of project spending, which shifted to the second quarter.

Second, gross margins were largely consistent with our expectations after adjusting for the impact of the lower-than-expected volume. Our gross margin continues to reflect unfavorable shifts in our business mix, but the year-over-year comparisons of business mix are beginning to abate as the prior year includes some of these impacts. Plus, we are also beginning to benefit from pricing, net of inflation, after this being a headwind for much of last year.

As a result, our gross margin in the first quarter was within 30 basis points of the prior year after much of last year, reflecting more than a 100 basis point year-over-year decline. A leveling off of the business mix impacts and continued benefits from pricing, net of inflation, along with continued improvement in our gross margin in EMEA are key assumptions behind our target to improve our overall gross margin in fiscal 2020.

And that leads to another point, which is that EMEA posted a 60 basis point improvement in its gross margin and was profitable in the first quarter, a very nice start to the fiscal year.

Switching to year-over-year comparisons. We grew revenue by $70 million, or 9% in the quarter, with $47 million representing broad-based organic growth of 6%, with the Americas growing 5%, EMEA growing 9% and the Other category growing 10% on an organic basis.

I won't repeat everything Jim just summarized but simply reiterate that our strategy is working and customers are responding, and it's showing up in our continued market share gains in the Americas and many other markets around the world.

For earnings, the $0.15 of earnings in the quarter compares to the $0.14 in the prior year. Our operating margin improved by 20 basis points due to a 50 basis point improvement in our operating expense leverage, offset in part by a 30 basis point decline in our gross margin.

In the second half of fiscal 2017, we began ramping up our investments in product development and other growth strategies, including partnerships and acquisitions. And over the last 4 quarters, we have been realizing revenue growth from those investments, which has improved our leverage and operating expenses.

In addition, we continued to drive fitness across our business model, which is helping to reallocate existing resources to support growth initiatives as well as drive process efficiencies and improve profitability.

For gross margin, we posted year-over-year improvement in EMEA and the Other category in the first quarter, but this was more than offset by a 40 basis point decline in the Americas. The Americas continued to experience unfavorable business mix impacts, but these were partially offset by absorption benefits associated with the higher volume plus the benefits of pricing actions taken over the last several quarters, net of higher commodity and freight cost. Our overhead costs are also higher than 1 year ago in support of our growth and business continuity strategies, but this was largely offset by benefits from our continued cost reduction efforts.

As it relates to orders in the quarter, the 15% order growth was driven by 15% growth in the Americas and 21% growth in the Other category, while orders in EMEA grew 10% compared to the prior year. These comparisons were favorably impacted by a list price adjustment in February 2018, which we estimate accelerated orders from the first quarter of fiscal 2019 into the fourth quarter of fiscal 2018, thereby favorably impacting our current quarter growth rate by a few hundred basis points.

Consolidated backlog at the end of the first quarter was approximately 15% higher than the prior year.

Moving to cash flow and the balance sheet. We used $71 million of cash to support the seasonality of our operations in the first quarter, including the payment of accrued variable compensation and retirement plan contributions. Increased working capital reflected normal seasonality plus increased inventory to support Smith System's summer seasonality as well as some impact from the extended shipment dates mentioned earlier.

Capital expenditures were $15 million in the quarter, and we continue to expect the full year to total approximately $85 million to $95 million. We returned approximately $17 million to shareholders in the first quarter through the payment of a cash dividend of $0.145 per share. And yesterday, the Board of Directors approved the same level of dividend to be paid in July. The share repurchases during the quarter were associated with [the vesting] of equity awards and satisfaction of participant tax obligations.

Related to the balance sheet, we adopted the new lease accounting standard this quarter and recorded an operating lease obligation totaling $219 million. This obligation represents the present value of lease payments for our offices and showrooms, manufacturing and distribution facilities and vehicles and equipment. Our adoption of the standard did not impact retained earnings nor did it impact our statements of income or cash flow. You can read more about our adoption of this standard in our Form 10-Q, which we plan to file tomorrow.

For the second quarter, we project double-digit revenue growth, which translates to expected organic revenue growth of 6% to 9% after adjusting for currency translation effects, acquisitions and a small divestiture.

From an earnings perspective, we expect to report $0.41 to $0.45 per share, which compares to $0.41 in the prior year. Recall the prior year included a $7.5 million gain on the sale of property in the Americas segment, which had the effect of increasing earnings by approximately $0.03 after consideration of related variable compensation expense. The prior year also included favorable warranty, product liability and workers' compensation cost and the initial effects of purchase accounting related to Smith System. These last 2 items will also impact the year-over-year comparisons of gross margin and operating expenses in the Americas segment. But in total, they largely offset.

For the full year, recall we are targeting revenue growth between 5.5% to 9.5%, which includes an organic component as well as net benefits from some inorganic items. Our pipelines of potential project activity for the balance of fiscal 2020 reflects strong growth in most markets, and we are pleased with our win rates, which we believe have been supported by our expanded product offering, sales deployment strategies and ability to help customers navigate changes in the workplace. We have also seen improvement in demand for day-to-day business in several markets. Thus, we continue to target organic revenue growth between 2% and 6% for fiscal 2020. This target assumes that average industry growth percentages across our markets will approximate low single digits, and we are targeting to grow faster than the industry again in fiscal 2020 by continuing to implement our growth strategies.

Based on how our organic revenue growth accelerated during fiscal 2019, the organic revenue target for fiscal 2020 anticipates higher growth rates in the first half of the year compared to the second half. In addition, our revenue will benefit from the inorganic impact of consolidating Smith System and Orangebox for a full year, which will mostly benefit the first half of the year. Plus, we will report an extra week of revenue in the fourth quarter of fiscal 2020 due to the timing of our year-end. Together, these impacts are expected to contribute approximately 4% growth in our reported revenue this year.

Regarding currency translation effects, several foreign currency exchange rates in countries where we report revenue has continued to devalue relative to the U.S. dollar. Accordingly, the translation of our revenue could be negatively impacted, and the impact on our growth rate could exceed the approximate 0.5% we estimated in March, which was based on exchange rates at the start of our fiscal year.

For earnings, we are targeting fully diluted earnings for fiscal 2020 between $1.20 and $1.35 per share. This target is consistent with our mid-term objective to grow earnings at 2x the rate of organic revenue growth by continuing to leverage our scale, improve our profitability in EMEA and drive fitness across our business model. In addition, we expect a few pennies of earnings associated with each of the inorganic growth drivers I just mentioned.

Our targets for fiscal 2020 assume a relatively stable geopolitical environment and continued growth in the major economies around the world. The recent reductions in CEO sentiment and various projections for slowing economic growth are notable, and could continue to temper capital spending growth. However, we believe our industry share of capital spending could be more resilient than it has been in the past when global economies faced similar headwinds. We believe C-suites are increasingly viewing their workplaces as strategic assets, which need to be modernized if they are going to help drive growth and productivity, compete for talent and strengthen their cultures. And we believe our innovation and knowledge uniquely position us to work with these organizations during their transformation.

From there, we will turn it over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Bobby Griffin with Raymond James.

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [2]

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Congrats on the strong order growth. First, I wanted to dive into EMEA a little bit and some of the success you're having there. When you look at the verticals of that business, can you maybe expand upon verticals you're seeing better wins at than you historically did and some of the performance improvement that maybe the new Munich innovation Center is driving? Just give us a little bit more color on some of the success that's going on there.

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David C. Sylvester, Steelcase Inc. - CFO & Senior VP [3]

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Well, I would say, based on the customer lifts that I'm seeing and the names of customers that are visiting the link, nothing is jumping out from a vertical market perspective, not necessarily seeing any particular sector that stands out. So it's been, I think, pretty broad-based.

Munich is definitely -- has been helping our sales teams illustrate what the value that we can bring to customers who are thinking about using their spaces more strategically. Those customer visits have been high and stayed high since we opened almost 2 years ago. So I think that's a pretty significant contributor to the success we've been seeing in EMEA, but we also have had and continue to drive a number of gross margin improvement initiatives across our business, which range from things that the sales organization is driving or activities that our marketing organization is pushing or continued cost-reduction in our factories as well.

And we've also been pushing on fitness. I've referenced several times over the last few years that we are working very diligently to try to hold our spending relatively flat in that region while we're driving the revenue growth. And we've been able to -- not hold spending perfectly flat, but we've been driving a fair amount of fitness, and we've seen some improvement in gross margins, and we've seen nice growth on the top line from our product offerings and win rates. So it's all kind of working right now.

But at the same time, I mean, you read the same thing we do in the news. It is a little bit more uncertain, and the economic environment is a little bit, let's say, less stable in Europe than it is in other parts of the world. So we're -- we remain pretty cautious about the outlook for EMEA.

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James P. Keane, Steelcase Inc. - President, CEO & Director [4]

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I'll add just a couple of points to that. You might remember, Bobby, a couple of years ago, we were talking about sales alignment efforts, helping get our sales force focused on key accounts. That worked, and I have to give our salespeople and our sales leadership a lot of credit for that vision and for implementing that really well.

And also 2 or 3 years ago, we were going through some operational changes that triggered some disruption that caused us to probably lose a little bit of customer confidence for a little while. And operations team has done a great job with on-time delivery and performance and quality. So I will just use your question as an opportunity to congratulate our people for a lot of good work in rebuilding confidence with sales -- with customers and rebuilding relationships with customers.

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [5]

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Okay. Yes, that's a -- so is it -- it seems like a combination of new customers and a combination of better share of wallet with those customers. Is that the way to think about the success here and the better order growth that we're seeing?

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James P. Keane, Steelcase Inc. - President, CEO & Director [6]

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Yes. And I would add, there is customers we've served in the past who, for a variety reasons, had done recent projects with other manufacturers, and we've had some signs of them coming back to Steelcase, which is also great.

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [7]

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Okay. Great. I appreciate that. That makes sense. And then when we look at the -- then if we look at the second half earnings growth versus the first half earnings growth in your implied guidance and we try to net for some of the gains last year, is it implying second half earnings growth roughly the same or accelerates a little bit? Maybe just walk me through what your expectations are embedded in your guide where we can try to tune up our model a little bit better for this year.

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David C. Sylvester, Steelcase Inc. - CFO & Senior VP [8]

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Well, I mean, to -- if you look at where our earnings were in the first half of last year relative to what we reported in Q1 and what our guidance is in Q2, it implies, obviously, earnings growth in the second half of last year or the second half of this year, that would be more significant than what we saw in the first half. So why is that? I mean, some of that has to do with the prior year comparisons. You might remember in March, I went through a little bit of a dialogue where I tried to walk you to a starting point of what I thought was a good baseline for you to project from looking at fiscal 2020. I think we reported $1.05 last year, but it had some puts and takes in it that I was walking each of you through to get you to a starting baseline. And some of those puts and takes include like the land game that we have in Q2 that if you adjusted for last year, would have shown certainly more earnings improvement in the first half relative to what we reported in Q1 and our guidance for Q2.

The more significant improvement in the back half of the year has to do with some of the targeted, I'd say, tailwinds that we've been talking about, that were headwinds for much of last year related to price cost or beginning to lap some of the business mix issues that started to -- we started talking about early in last year and improvements in EMEA. So a combination of all those 3 things are what would help drive the earnings expansion in the back half of the year.

Now that's earnings. Let's talk about revenue for a second, because I want to make sure that you all remember that last year, our organic revenue growth throughout the year accelerated. It was flat in Q1, 8% growth in Q2, 13% growth in Q3 and 15% growth in Q4. So we've got some pretty challenging comparisons that we're up against in the back half of the year. We've got some good pipeline of project activity and nice momentum in our order rate recently. We feel good about the second quarter, but we're coming up against more difficult comparisons. So while the revenue growth likely won't pace at the same rate in the second half that it did in the -- is projected to do in the first half, we could see stronger earnings in the second half because of some of the things I just mentioned.

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [9]

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Okay. And then I guess lastly, when we think about the extended deliveries, we kind of -- I guess we all got kind of caught by surprise here from when we spoke last in March with deliveries getting pushed out. What have you assumed in the 2Q guide and maybe the rest the year for delivery time in returning to more normalized basis or still some pushouts? Or help us frame what your assumption is, and then we can kind of work with our model from there.

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David C. Sylvester, Steelcase Inc. - CFO & Senior VP [10]

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We kept them at a relatively high level. So what we did is look -- we looked at the gap that we saw in Q1 relative to history, and we carried that gap into our modeling for Q2. So we anticipate that these same drivers will play -- have a negative impact on our conversion rates, let's say, in the second quarter. And that's because the drivers that we see are really, we think, mostly related to labor shortages in the construction industry.

Now what is interesting, if you go back to Q4, we had a strong Q4, beat our revenue estimate, I recall, in part because we had an acceleration of orders and shipments, so in other words, our project completions were faster than anticipated. So it has moved around a little bit on us. And we anticipated more, let's say, historical consistency in Q1, and then we saw a significant amount of pushout.

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James P. Keane, Steelcase Inc. - President, CEO & Director [11]

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So the outlook we have for Q2 is relatively conservative because we assume that, that's just going to continue as it did in Q1 now.

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Operator [12]

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(Operator Instructions) Our next question comes from Matt McCall with Seaport Global Securities.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [13]

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So Dave, maybe I'll start with the operating expense line. I think you said it was lower than you all would've expected based on, I think, you said the top line shortfall. It was actually higher than I had modeled from a percent of sales perspective. Can you just talk about maybe the outlook for that line item, how we should think about operating expenses for the remainder of the year and maybe what's in guidance?

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David C. Sylvester, Steelcase Inc. - CFO & Senior VP [14]

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Well, in Q1, you saw, I think -- $16 million or approximately $16 million higher operating expenses than a year ago. And the number we reported, I think, in the low 230s was a few million less than we were anticipating. So -- and I suggest that some of it shifted to Q2.

So for Q2, I mean, if I were you, I would say, all right, it's going to be at least $16 million, probably more. And then I would model the fact that the profitably is significantly higher in Q2 than it is in Q3, which will drive higher variable compensation expense not only sequentially but year-over-year. So I mean, if you do all that, you're going to get to a place where you would imagine, I would assume, OpEx in Q2 to be higher than prior year by something in the $20-plus million range. So the balance on the year, it depends on the pace of our project activity and whether or not we're closer to the 2% part of our fiscal 2020 growth or the 6% part of our fiscal 2020 target.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [15]

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Okay. So what -- how much of a Delta in those 2 scenarios would we have, so from what to what?

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David C. Sylvester, Steelcase Inc. - CFO & Senior VP [16]

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I don't have that in front of me, so I can't tell you. One thing I would take you back to, Matt, though is remember in March when I went into some details about our targets, and I think Mike's included this again in our investor deck that is live today, we talk about how we're targeting improvement in our operating margin from both improvement in gross margin as well as our operating expense leverage. So we're cognizant of that. We're targeting it. We had it in Q1, and we would expect to continue to see that improvement in leverage. Now why you modeled a lower number, I'm not entirely clear, but you -- I assume you modeled a different gross margin as well.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [17]

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Yes. Well, a little bit, but that's okay. The -- well, I guess that leads to the gross margin. Can you give any -- and you talked about some of the opportunities, price and mix, or price cost, the leveling out of the mix pressures and then the EMEA improvements. Can you just talk about maybe a way to think about gross margin progression by segment for the remainder of the year, what's assumed in the guidance similar to the last question?

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David C. Sylvester, Steelcase Inc. - CFO & Senior VP [18]

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Well, I'll start with the Other category. I mean that one does move around a little bit, but more often than not, you should expect, I think, flat to positive year-over-year gross margin.

If I go to EMEA, we have been talking about our targets to improve our gross margin. We've been improving our gross margins year-over-year. Not every quarter, but certainly more often than not over the last several.

And in the Americas, where we have felt the most significant impact of inflation outpacing pricing last year, that is -- turned to a tailwind now, and it really boils down to volume and business mix.

And business mix, there are just too many variables for me to try to predict how that's going to play out. What I do feel good about is the fact that our day-to-day business, that demand has started to improve more recently, which has certainly been a drag on our business mix where it's been largely driven by a growth of project business. So the fact that we're seeing some improved demand in day-to-day business is a positive influence on business mix, whether that sustains through the back half of the year, I just can't predict. And then trying to predict demand by product category is also pretty challenging as well.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [19]

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That actually leads to the next question. So it's just a broader question about average selling prices, and I'm thinking about like-for-like products and specifically the trends we saw with [test] seating and adjust white desks and now you've got some ancillary. I'm just -- I'm curious about the broader trends, and maybe this is one for you, Jim, the broader trends with average selling prices and have we kind of seen a stabilization as we saw some less expensive products kind of industry-wide be introduced? Is there still pressure? Are we seeing stabilization? Maybe the way to think about it -- sorry, long-winded question, is dollars per foot or dollars per employee. I know we've looked at those in the past. Just anything you can tell me about the trends with ASPs?

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James P. Keane, Steelcase Inc. - President, CEO & Director [20]

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Sure. So I'd say, first of all, if you think about the part of the business that we address, we had chosen to participate at price points above a certain level. And then over the last couple of years, we've added more options for our customers to choose that are -- include prices below that level.

And so our business, if you just look at it from a Steelcase perspective, you go, yes, we've seen more of our business come from lower-priced products, so that's because we weren't selling them before. It's not because the customers weren't buying them. The customers may have been buying them from other manufacturers at the price of the industry. And so we're recapturing some share of wallet that were in those price points.

So I stop short of saying we're seeing this broad shift down market. I don't feel it as that so much as it is we have a broader offering today that allows us to compete across a broader range of prices. And that's speaking about seating in particular.

In other categories like height-adjustable tables and so on, it's a relatively new category still for the industry. And so you would expect, as we saw with systems furniture, cubicles and so on in the past, that over time, as that segment of the industry matures, you have offerings that are at lower price points, that have more basic solutions and so on. Our competitors have done that. We've done that. Customers have chosen sometimes those products.

But it doesn't mean that every segment, everything we sell is moving in that direction. So that is -- I'm kind of acknowledging your point. But I'd also say if you step back now and go what about spending per white collar worker? Isn't it interesting that as those trends have happened, we're also seeing BIFMA grow faster than it's grown in prior years. And that's because of the forces of change that Dave and I both talked about.

So as CEOs and senior executives look to their workplace and say, "You know what, we've owned all this furniture, but it's just not supporting the way we're working anymore. We need to do something fundamentally different." The actual spending per white collar worker goes way up versus doing no projects at all. So it's actually a really good time for the industry because of growth. You have to have products that are at the right price to deliver the right value, and we've done that. But it's not as simple as just mix shift.

I'd say moving from a state of sort of -- a period where the industry was flat and there wasn't much change going on in the workplace and there was a danger of products becoming commoditized. Now we're in a very different world, a very different world where people are fundamentally be thinking of workplace. Now the competitors are not all on top of each other. We're all actually quite different. You could see that at NeoCon so offering some real choices to our customers. So I think it's a much healthier, more vibrant industry than, I'd say, 5 or 10 years ago.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [21]

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Okay. That was very helpful. I'm going to sneak one more in. The comment you made Dave about projects already won, maybe it was you, Jim, projects already won and yet to ship, can you talk about the size of those wins and how much visibility it gives you in the back half? And then maybe the -- maybe expand on the health of the pipeline that you referenced as well?

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David C. Sylvester, Steelcase Inc. - CFO & Senior VP [22]

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Well, when I referenced the pipeline of opportunities, it includes both won but not entered and projects that we're still competing for that have varying degrees of confidence by our sales organization where we stand in that competition. That pipeline in total is up pretty significantly as I referenced. What I would remind you of though is that's the pipeline of project activity. There is not necessarily a pipeline of day-to-day business, which is more than half of our overall revenues....

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James P. Keane, Steelcase Inc. - President, CEO & Director [23]

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Even we can't see it.

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David C. Sylvester, Steelcase Inc. - CFO & Senior VP [24]

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We don't have an ability to predict that. So it's really just the component. And it's really the pipeline of project activity, it's really -- it only represents a percent of the total potential project revenue that we would expect to ship in the balance of the year. So it's an indicator of year-over-year improvement, which is good. And it's up a fair amount, which we feel quite good about. Our win rates have been solid. And some of those projects we've actually won and they haven't been ordered yet. So it's all good, but it does not, by any means, give you a complete picture for the balance of the year.

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James P. Keane, Steelcase Inc. - President, CEO & Director [25]

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We have a lot of other soft indicators like conversations we have with salespeople, conversations we have with dealers, conversations with architects and designers. We can look at things like the number of project pricing requests we're getting for larger-sized projects. And I'd say across-the-board, all of those are really quite positive. And so that's why we're feeling positive about that pipeline. But again, there's a lot of projects in there that are still to be won.

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Operator [26]

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And our next question comes from Bill Dezellem with Tieton Capital Management.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [27]

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I have a couple of questions. First one, you referenced the updated tools for the designers that allows them to select and order products. Given that you called that out in the press release, I'm hoping that you'll go into some more detail about that and just how significant you think that could be for gaining mind share with those designers.

And then secondarily, would you talk where you're feeling like your business has the least and most momentum, but not from the numbers perspective, we can see that and the relation to the commentary, but more from a qualitative perspective. And if it's the same as the numbers, then you can dismiss the question.

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James P. Keane, Steelcase Inc. - President, CEO & Director [28]

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Okay. Good question. So the -- first of all, related to the tools. So when I talk about designers here, I'm talking about designers that are inside our dealerships, first of all, but also designers that are inside architectural design firms.

Our dealer designers have always had tools that help them select from Steelcase's offering to design great workplaces for their customers, to turn those designs into orders and so on. So we've had systems for that, and we continue to enhance those systems. What's changed is, in the last few years, as we've broadened our product portfolio to include a lot more of what the industry calls ancillary furniture, so this is residentially inspired furniture, you end up with a dramatically larger group of SKUs to learn and to select from. And as that happens, we believe that our dealer designers need better tools for that to make it easier for them to see what's available and pick just the right products for their customers. But also that people who work inside architectural design firms need the same sets of tools, and this gets into a little bit of the complexity of our industry. Sometimes the dealers -- dealer designers really make the decision about which products will be offered to the customer. Sometimes it may be the designer working inside an A&D firm whose making that decision and then passing those decisions on to our dealers. So it's necessary for us to have the capabilities at the fingertips of both, both in the design firm and inside our dealers.

Up until now we've offered basic kind of catalogs and web selection tools and so on, but we've really enhanced those digital tools. So we created a tool that our dealer designers can use and architects can use just to identify what they need, select what they need, be able to sort through our offering in lots of different ways using lots of different screens and filters and then convert that to something that goes to our dealer. Our dealer then convert it to an order and the entire order can be delivered, for example, on a single truck or be sequenced to the job site as appropriate. So that end-to-end system is really what we're talking about. The front end of that is the tool that it connects to those back end systems.

On your second question about most least momentum, before I answer, maybe -- can you maybe clarify a little bit more or talk a little bit about what kind of -- which vectors would you like me to talk about? Like momentum among product or region or customers or -- and then I can give you a more precise answer.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [29]

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All right. The answer is yes, yes, yes. Really trying to grasp what we might not be able to see with the numbers themselves and what might be behind the numbers in terms of where you're feeling there is some momentum that's building even if it's not yet in the numbers? And maybe that would be -- from a geographic perspective. Maybe it would be from a product perspective. Wherever, if there is such a thing, an area maybe where there is less momentum that you're trying to understand. And again, it may not be showing up in the numbers, but just trying to grasp that front-end component from a lead perspective.

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James P. Keane, Steelcase Inc. - President, CEO & Director [30]

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Okay. So I'll give you one example of that. And, I'd say, a few years -- and I'll draw a contrast between momentum we might have seen a few years ago versus what we see today.

So a few years ago -- and really I'd say probably over the last 10 years, Steelcase and our competitors would talk about, both in the industry, as being driven by job growth. So just companies adding headcount, hiring more people, running out of room and needing to find a way to increase density inside their existing office footprints. Or as companies have grown, they've maybe grown through the addition of satellite facilities that complement their main headquarters, and every now and then, they try to consolidate those facilities in order to save on lease cost. And that is a trigger -- it's historically been a trigger for office furniture purchases. That still happens. I don't want to say it's done. But not -- I would say not to the same degree as before. I'd say there's less momentum on that, in part because job growth is tough. It's hard to hire people at the levels that people were hiring 5 or 10 years ago. So straight up just -- we're adding 1,000 people and we need more space, we need more furniture, a little less momentum on that side.

Now what we are seeing in terms of new momentum, and again, building not overnight but building up over the last several years, are more CEOs, more companies saying, hey, we have plenty of space, we have plenty of furniture. It's not just working anymore. We can't attract the people we want. We can't retain people. We can't inspire people. We can't adopt new processes like design thinking and agile. We say were nonhierarchical and yet all the desks are still lined up in pretty hierarchical ways. And it's all those forces combined that are causing them to say, this workplace we've had that is big enough and it's -- and the furniture isn't wearing out, but it just isn't meeting our needs anymore. And so every conversation starts with that. So that's one area of momentum.

And I'd say the other one, and you can kind of heard it -- heard me hint about it but I'll just make it more explicit. So a lot of these conversations are evolving C-suites or start at the C suite, whereas in the past, it might have started with someone in the facility suite trying to find a way to save a little bit on real estate, and now it's really about competitiveness. And I think that's what's driving -- that's the new momentum. And I think that's true here. We wondered actually a little bit whether we'd see the same thing in EMEA because the install base in EMEA is different than the install base in the Americas. In the Americas, we're largely systems furniture and cubicles as people call them. In Europe, it literally wasn't that. It was a different starting point model. So do they have the same stickiness in the install base that causes it to go obsolete at the same rate? It turns out the answer is yes. We're getting exactly the same conversations now as countries like Germany and France who's celebrating entrepreneurialism, celebrating start-up culture, beginning to adopt agile, design thinking in their internal innovation processes even in the largest companies. So we're seeing those same forces take shape. So maybe that helps at least begin to answer the question.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [31]

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It does, Jim. Are you -- so you're seeing that strength in the Americas and in EMEA. Are you also seeing it in Asia or is that still to come there?

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James P. Keane, Steelcase Inc. - President, CEO & Director [32]

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I think Asia is a different story because with Asia, I can't really talk much about the install base. If you think about places like China, the companies we're serving are all very new, big, fast growing companies that are locally headquartered. So they're growing from -- those are still start-up mode. You don't have many 20, 30, 40 year old companies with install bases that are shifting from one state to the other. So we don't talk about cultural change so much in those places because they're just trying to figure out how do they scale up and how do they support their growth, both in the country, in the region and around the world. So the momentum there is more of a globalization strategy. And we have a really good advantage there because of our global footprint.

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David C. Sylvester, Steelcase Inc. - CFO & Senior VP [33]

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But in those scale-up strategies, you'd say there -- we certainly see that they're -- those organizations are competing for talent, and the C-suites are leveraging their space to help compete for talent. So there are some overlaps.

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James P. Keane, Steelcase Inc. - President, CEO & Director [34]

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That's true. Yes.

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Operator [35]

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And our next question comes from Greg Burns with Sidoti & Company.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [36]

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What number or how many partnerships do you currently have? And is there an optimal number of partnerships that you're looking to get to? And how do you assess the economic relationship you have with these partners or the success? And just how do you assess whether that partnership is valuable to Steelcase?

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James P. Keane, Steelcase Inc. - President, CEO & Director [37]

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So the -- how many questions, I get asked that a lot, and I'll give you some numbers, but I'm going to do it with some hesitancy because every partnership is different. So we have partnerships like Bolia and West Elm now that have broad product offerings and are at a different scale than smaller partnerships that we offer through our system that might only be a few products from a small manufacturer somewhere in the U.S. We need them all because customers have a broad set of interests, and we love them all. But they're all different. And the cost of each -- of establishing each one is quite different.

So you could say we have more than 40 in total. But again, I would put an asterisk on that and say that includes a lot of partnerships that are quite small.

In terms of assessing them, when we established them, a lot of these partnerships are very new. The ultimate assessment is whether it captures the imagination of customers, the designers, our people specifying those products. And we believe that some of those partnerships will be kind of based on industry trends. So as customers' demands for certain kinds of products come and go, some of those partnerships will grow. And then some of those partnerships over time, they may turn out that it's not lucrative for us or for the partner, and then we may end the partnership or we may move on. But we will likely continue to add new partnerships as new design trends continue to emerge in our industry. So the partnerships are meant to be really dynamic, the ability to add new partners is anticipated.

The economics of partnerships are good. We've been asked about that before. We feel that from an EVA perspective, there are very attractive partnerships. Once we have a partnership established on our tools, then the startup cost is cast and then we just have the opportunity to grow our business together.

So for us, we are happy when we sell partner products. We're happy when we sell Steelcase products. We don't see them as in competition from an e-commerce perspective.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [38]

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Okay. And then in terms of steel and the price cost gap, looking forward, as steel continues to decline, do you think you'll be able to hold price low? What is -- how has the industry behaved historically when steel is fluctuated?

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David C. Sylvester, Steelcase Inc. - CFO & Senior VP [39]

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Well, I mean I'll go back to how you started that question, if steel prices continue to decline. We've seen a lot of volatility in steel prices over the last decade, in 5 years and even over the last 12 months. So I think it remains to be seen what steel prices actually do, and it also remains to be seen what all of our other commodities are doing. But we meet quarterly inside Steelcase and look at our entire basket of commodities and how they're tracking as well as look at labor rates and delivery costs, fuel prices, et cetera. While there might be some recent decline from the peak in steel prices, and there are some projections by different organizations that steel prices could continue to come down at the same time, what we're seeing is labor rate increases in our factories as well as in the offices because of the war for talent that we're in the middle of. And freight and delivery has continued to challenge our year-over-year commodity cost basket.

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Operator [40]

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

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James P. Keane, Steelcase Inc. - President, CEO & Director [41]

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Thank you. So again, we're very pleased with customer, designer and dealer reaction to our new products and with the strong order momentum we're seeing, particularly in the Americas. I'd like to thank you for your interest in Steelcase, and thank you for joining today's call.

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Operator [42]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may all disconnect. Everyone have a wonderful day.