Raj Mehan - IR James P. Keane - President and CEO David C. Sylvester - SVP and CFO

Budd Bugatch - Raymond James Steven Ramsey - Thompson Research Group James Chang - Sidoti & Company Julian Allen - Spitfire Capital Peter van Roden - Spitfire Capital

Good day, ladies and gentlemen, and welcome to Steelcase's Fourth Quarter and Fiscal Year 2016 Conference Call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would like to turn the conference call over to Mr. Raj Mehan, Director of Investor Relations, Financial Planning and Analysis, and Assistant Treasurer. Please go ahead.

Thank you, [Annie] [ph]. Good morning, everyone. Thank you for joining us for the recap of our fourth quarter financial results. Here with me today are Jim Keane, our President and Chief Executive Officer; Dave Sylvester, Senior Vice President and Chief Financial Officer; and Mark Mossing, Corporate Controller and Chief Accounting Officer. Our fourth quarter earnings release, which crossed the wires yesterday, is accessible on our Web-site. This conference call is being Webcast and this Webcast is a copyrighted production of Steelcase, Inc. Presentation slides that accompany this Webcast are available on ir.steelcase.com, and a replay of this call will also be posted to this site later today. Our discussion today may include references to non-GAAP financial measures and forward-looking statements. Reconciliations to the most comparable GAAP measures and the risks associated with the use of those forward-looking statements are included in our earnings release and Webcast slides. We are incorporating by reference into this conference call the text of our Safe Harbor statement included in yesterday's release. Following our prepared remarks, we will respond to questions from investors and analysts. I'll now like to turn the call over to our President and Chief Executive Officer. Jim? James P. Keane: Thanks, Raj. Good morning. This week we are announcing fourth quarter and full year results that demonstrate significant earnings growth for the year and are in line with our expectations. As we shared in updated guidance earlier this month, there are some unusual items in this quarter's results and Dave Sylvester will provide some more details on those in a few minutes. Several parts of our business delivered better than expected results, including Asia-Pacific which improved profitability by over $10 million from the prior year despite economic challenges in the region. We're also especially pleased with adjusted operating margins in the Americas which neared 12% for the year. In our December call, I focused my comments on our efforts to stabilize operations in EMEA and on order patterns in the Americas. I want to give you an update on those topics today. We narrowed our loss in EMEA compared to the previous quarter and we saw clear signs of operational improvement. In fact, the EMEA revenues and operating results were better than our own internal expectations. Our plant in Durlangen is officially closed and our plant in the Czech Republic continued to increase capacity and reduce lead times. We ramped this plant up to full volume faster than any other plant in memory, which involved some execution risk. For the most part, the project was very successful. But as you know, we encountered some problems in the second and third quarter related to a faulty sprinkler head and some equipment reliability issues, and we worked through those problems. Since then, the teams in Stribro have been singularly focused on stabilizing and strengthening operations and I'm pleased that in the fourth quarter we had no new major incidents. We saw improvements across a number of metrics, including on-time delivery. We're still installing some new production lines in the Czech plant as we enter the first quarter and we expect this to go smoothly. We can now shift our attention towards continuous improvements in productivity, not only at this plant but at all of the plants from which we have drawn resources in support of the EMEA manufacturing changes. We are taking some additional steps to improve our EMEA logistics and distribution capabilities, so we can expect to have a more resilient system as we enter the busy season this spring and summer. Beyond operations, we are continuing to improve the front end of our EMEA business. For example, our French business is showing improved win rates as we strengthened our owned dealership in Paris and we refocused our sales organization on key customers. The new Munich Learning and Innovation Center remains on schedule and we expect to begin occupancy late this summer. This third year of our EMEA reinvention strategy is focused on preparing for growth. By being able to turn our attention toward continuous cost reductions, which have helped the Americas improve their gross margins, and by leveraging the growth initiatives as they take root over the next few years, we can get more and more confident we will achieve our longer-term target of a mid-single-digit operating margin for our EMEA business. In the Americas, order patterns continued to weaken during the quarter and in fact we had a slight year-over-year organic decline. We believe some of this is related to an ongoing decline in CEO confidence which has a strong historical correlation with BIFMA order rates. I attended the recent Business Roundtable meeting in Washington along with many other CEOs across a range of industries and it's clear there remains a general sense of uncertainty about both economic and political factors. And in fact, over the course of this year, BIFMA has adjusted its forecast downward and BIFMA orders in December and January were down. At the same time, the most recent CEO conference data from the Business Roundtable was up slightly versus the previous quarter and our own data around customer visits and mock-up requests would suggest there is some reason for optimism as we enter the new fiscal year. We continue to believe our industry will grow modestly in calendar 2016. Across our most similar competitive peers, there are some doing better and some doing worse in terms of revenue growth and we believe we're holding share with the peer group overall. Yes, we have some segments like insurance and energy that are quite weak versus strong prior years, but it's likely our peer group has exposure to these segments also. We remain very committed to the idea that we compete based on innovation and we continue to invest in new product development, even in a softer economy. This year we are launching 20 new products in the U.S. alone and the first of those launches already took place during the fourth quarter. Many more will launch in the first half of our new fiscal year. It will take a couple of quarters for the ramp-up to build to a point where the impact is noticeable on total orders and revenues, but we are very pleased with early demand signals for these products for both customers and dealers. We have also seen some shifts in demand to categories where Steelcase and our peer group have lower market share than in our core categories. When we analyze recent BIFMA data, we see evidence that the largest manufacturers are losing share to the rest of the industry and we believe this is because of the shift towards different categories, for example ancillary furniture influenced by residential and hospitality trends. Within our own business, across all of our brands, we see our ancillary products growing much faster than the rest of our portfolio. We are already taking steps to fully leverage our existing products and to expand the ways we address this important and growing segment to our Steelcase, Coalesse and Turnstone brands. In February, Steelcase published its most comprehensive report on engagement in the global workplace. It shows a strong correlation between workplace satisfaction and employee engagement and it explores the differences across a number of countries. We were delighted that more than 2,000 reports were downloaded in the first week by people all over the world. Our ability to translate insights like these into new products and applications is one of the reasons Steelcase moved up with an industry ranking this year on Fortune Magazine's list of most admired companies. In summary, this was a strong year for Steelcase, thanks to our team of more than 12,000 people around the world. We're pleased to be able to increase the quarterly dividend for our shareholders and reward our employees through our bonus programs, and we see plenty of opportunities to be even better. We are working quickly to address these opportunities and drive profitable growth. I look forward to seeing many of you at NeoCon in June for the next chapter in our story. Now I'll turn it over to Dave Sylvester. David C. Sylvester: Thank you, Jim. I will start with a few high-level comments about our fourth quarter results and balance sheet, provide some additional color around our order patterns and outlook for fiscal 2017, and then we'll move to your questions. Overall our fourth quarter results were consistent with the updated guidance we issued on March 7. Organic revenue growth approximated 1% and adjusted earnings per share totaled $0.64, including $0.42 related to the two significant items we called out in the updated guidance and yesterday's earnings release. I will cover these two items first and then I will talk about the balance of our results. As you saw in our release, we reversed our remaining tax valuation allowance recorded against net deferred tax assets in France and recorded the related $56 million benefit as a reduction of tax expense in the fourth quarter. Recall in fiscal 2015, we implemented changes to align our tax structure with the way we manage our globally integrated enterprise. This new model resulted in a significant reduction of income taxes that would have otherwise been paid in the U.S. and generated taxable income for our French subsidiaries, allowing for the partial utilization of net operating loss carryforwards in France throughout fiscal 2016. Since the adoption of the new model, we have disclosed in our public filings that sufficient positive evidence might become available in fiscal 2016 to cause us to reach a conclusion that the remaining French valuation allowance could be reversed. During the fourth quarter, such evidence became available including acceptance of our new tax structure by the IRS, sustained profitability in France and other factors, which led us to reverse the allowance. The second significant item related to a gain from the partial sale of an investment in an unconsolidated affiliate. As you know, we enter into joint ventures and other equity investments from time to time to expand or maintain our geographic presence, support our distribution network or invest in new business ventures, complementary products and services. During the fourth quarter, we sold part of our ownership interest in one of these investments for $18 million and recorded a pre-tax gain of $8.5 million in 'other income, net'. We have included a Webcast slide summarizing the impact of these items on our results for the quarter, including the related variable compensation expense and income tax effects. Regarding the balance of our results, organic revenue growth of approximately 1% was at the top end of the estimated range we communicated in December. EMEA organic growth of less than 1% was better than we expected as various project deliveries toward the end of the quarter remained on schedule compared to some anticipated delays. The growth in EMEA compares to 23% organic growth in the prior year, which was primarily driven by a number of project orders received in the first half of fiscal 2015 for which revenue was predominately recognized in the third and fourth quarters of fiscal 2015. For the Americas and the Other category, revenue in total was close to our expectations but the modest organic revenue growth in the Americas included a different mix of business than we anticipated, that is less revenue from manufactured products sold to our dealers and customers offset by higher revenue from our owned dealers. As it relates to adjusted earnings of $0.64, I will speak to our performance excluding the $0.42 impact from significant items recorded during the quarter. The remaining $0.22 per share fell in the middle of the estimated range we communicated in December. With the organic revenue growth at the top end of our range, we would have normally expected adjusted earnings to also be at the top end of our range. The difference of approximately $0.02 per share was driven by the unfavorable shift in Americas business mix I just mentioned, partially offset by better-than-expected operating results in EMEA linked to revenue performance and the Other category driven by Asia Pacific. Within the Americas, we also recorded approximately $3 million of unfavorable adjustments to inventory balances and related reserves, but those were mostly offset by favorable labor efficiencies and lower-than-expected overhead spending in the quarter. Below adjusted operating income, the impact of foreign currency losses recorded in 'other income, net' were largely offset by lower than expected effective tax rate in the quarter. Beyond the benefits related to the reinstatement of the research credit in the U.S., which we contemplated in our earnings estimate, adjustments related to reconciling our tax provision assumptions to our tax filings around the world were less than anticipated. Switching to year-over-year comparisons, the decrease in fourth quarter adjusted operating income was entirely driven by variable compensation expense related to the two significant items recorded in the current quarter. Otherwise, fourth quarter adjusted operating results were flat compared to last year, reflecting a decline in the Americas and improvements in the Other category and EMEA as well as lower corporate costs. The year-over-year decline in the Americas was driven by the shift in business mix and inventory adjustments mentioned earlier and higher operating expenses, partially offset by lower material and freight costs and improvements in negotiated customer pricing. The year-over-year improvement in the Other category was driven by Asia-Pacific which had another strong quarter, benefiting from broad-based organic revenue growth, improved gross margins from favorable currency impacts and business mix, and lower operating expenses due to cost containment efforts launched earlier in the fiscal year. Year-over-year adjusted operating results for EMEA were favorably impacted by lower disruption costs and inefficiencies and initial savings related to our industrial modernization, which aggregated approximately $5 million in constant currency. However, these benefits were largely offset by the impacts of unfavorable shifts in business mix mentioned on previous calls and higher operating expenses linked to our investments in the Munich Learning and Innovation Center. Sequentially, fourth quarter adjusted operating income was lower compared to the third quarter, primarily driven by variable compensation expense related to the two significant items recorded in the fourth quarter. In addition, lower operating results in the Americas were partially offset by a significant improvement in the operating results in EMEA. In the Americas, the seasonal decline in revenue was a little worse than historical patterns and the unfavorable shift in business mix was a compounding factor in the sequential comparison. For EMEA, our teams worked hard in the fourth quarter to address the continuing impacts of the manufacturing and distribution challenges experienced in the second and third quarters, complete the exit of our manufacturing facility in Durlangen, Germany and increase manufacturing capacity for some of our newer products which helped reduce lead times to more normal levels. As a result, EMEA's fourth quarter adjusted operating loss improved significantly compared to the third quarter. For reference, the adjusted operating loss of $7.4 million in the fourth quarter includes $1.8 million of variable compensation related to the two significant items recorded in the quarter, $2 million to $3 million of disruption costs and inefficiencies, $1 million to $2 million of costs related to the Munich Learning and Innovation Center, and unfavorable business mix compared to our historical averages, that is a relatively low mix of day-to-day business in Western Europe and a low level of business from several of our export markets in EMEA which have historically reported higher than average gross margin. And as our operational performance continues to stabilize, we expect to realize the projected annualized savings related to our industrial modernization over the course of fiscal 2017. Switching to restructuring costs, they were in line with our estimates and primarily related to the exit of our facility in Durlangen, Germany. In fiscal 2017, we estimate total restructuring costs of approximately $6 million. We expect to incur the remaining restructuring costs of approximately $3 million related to our manufacturing footprint changes in EMEA and the Americas during the first quarter, while remaining restructuring costs linked to our move to Munich are expected to be incurred over the next several quarters. Moving to the balance sheet and cash flow, capital expenditures totaled $23 million in the fourth quarter and $93 million for fiscal 2016, including $26 million of payments related to a new replacement aircraft which we expect to take delivery of in the first quarter of fiscal 2017. We estimate capital expenditures for fiscal 2017 will approximate $75 million to $85 million, including the final $4 million payment related to the replacement aircraft. This estimate excludes expected proceeds from the sale of an existing aircraft. We returned approximately $56 million to shareholders in the fourth quarter, $42 million related to the repurchase of 3 million shares and $14 million related to the payment of a quarterly cash dividend of $0.1125 per share. And yesterday, the Board of Directors approved an increase in the quarterly dividend to $0.12 per share for the current quarter. Turning to order patterns, I will start with the Americas where our orders in the fourth quarter declined by approximately 2% organically compared to the prior year and reflected continued softness in large project orders and a decline in orders for manufactured products sold to our dealers and customers, partially offset by growth in orders at our owned dealers. Order patterns during the quarter reflected 1% growth during December followed by a 2% decline in January and a 4% decline in February. Customer order backlog at the end of the quarter was down 3% compared to the prior year, which included an unusual level of orders scheduled to ship beyond 90 days. Quarter-end backlog scheduled to ship in the first quarter fell by less than 1% compared to the prior year. Orders through the first three weeks of March have continued to reflect typical seasonal patterns but have grown by a solid single-digit growth rate compared to the prior year. Project orders in the Americas declined by approximately 8% during the fourth quarter, compared to a strong prior year which grew by approximately 17%. Project orders greater than $3 million declined by more than 30%, while project orders less than $3 million grew by a mid-single-digit percentage. Orders from continuing agreements grew by a mid-single-digit percentage and orders related to our marketing programs aimed at smaller day-to-day business declined by a similar percentage. Given recent weakening of CEO confidence metrics, it is not surprising that large project orders have seen a lull, while demand from continuing agreements continues to grow. In fact, orders from continuing business have seen growth in each of the last four quarters, while project orders have declined in each of the last two quarters. Across vertical markets in the Americas, we experienced strong order growth in healthcare and education sectors as well as our untracked sector which includes retail customers and other vertical markets not large enough to track separately. Collectively, orders from this untracked segment comprised approximately 20% of our total orders. Most of the remainder of the 10 tracked vertical markets declined compared to the fourth quarter of the prior year. Declines in the insurance and energy sectors, which enjoyed very strong orders from a number of large customers in the prior year, were the most pronounced and had the combined effect of reducing total orders in the Americas by approximately 6%. Switching to EMEA, organic order growth of approximately 3% was driven by Western Europe again this quarter and reflected strength in Iberia and France, partially offset by year-over-year declines in Germany and the U.K. The balance of EMEA as a group was down more than 10% due to weakness in the Middle East and Africa, partially offset by growth in Central Europe. Customer order backlog for EMEA ended the quarter up 3% compared to the prior year, which included the last piece of a large government project in France. Adjusted for this large project in the prior year, remaining backlog grew by nearly 10%. Within the Other category, orders in total grew 9% compared to the prior year, reflecting strong growth across Asia-Pacific, solid growth late in the quarter at Designtex and modest growth at PolyVision. To summarize, orders in the Americas declined again this quarter, driven by a reduction in large project business, most notably in the insurance and energy sectors. Customer sentiment seems to reflect the near-term economic uncertainty but we continue to see a good level of activity in small to medium sized projects and from our continuing business, and we remain optimistic about the industry demand potential driven by the need for companies to modernize their spaces. We are also excited about the number of new product launches planned over the coming quarters which are targeted toward certain evolving market trends. For EMEA, we are pleased with the continuation of order growth in the quarter and how our manufacturing and distribution performance continues to stabilize. Asia-Pacific orders grew organically again this quarter against the backdrop of macroeconomic uncertainty in China. We are pleased with the momentum our local sales teams and dealers continue to build. Before I turn to our outlook, I want to give you an update on PolyVision and the anti-dumping action we have discussed on previous calls. Earlier this month, the U.S. Department of Commerce preliminarily determined the dumping duty margin on the specialized steel that PolyVision uses to be 71.35%, and they instituted retroactive application of the duties on imports going back to December 8, 2015. While their determination is subject to finalization and review by the International Trade Commission, we are currently required to make cash deposits for these duties related to our imports dating back to December 8, all or a portion of which may be refundable to us based on the outcome of the International Trade Commission's review. We expect to record these deposits on our balance sheet until the related inventories are consumed by production and recognized as cost of sales. If the duties are upheld and PolyVision is unsuccessful in developing alternative sourcing strategies or passing some or all of these costs onto its customers, their profitability could be negatively impacted by up to $7 million in fiscal 2017. Turning to the first quarter of fiscal 2017, factoring out an estimated $2 million of unfavorable currency translation effects and the impact of a small dealer acquisition, we expect to report organic revenue results within a range of a 3% decline to 1% growth compared to the prior year. Compared to the fourth quarter, this estimate translates to a sequential organic decline of between 8% and 4%, which is more significant than our historical seasonality and a reflection of the reduction in large project business. We expect the Americas to return to a normal mix of sales generated from manufactured products in the first quarter and we anticipate further reduction of disruption costs and additional improvement of our operational performance in EMEA. Offsetting some of these sequential improvements, we anticipate the initial impact on cost of sales related to dumping duties at PolyVision. Lastly, we currently estimate our effective tax rate for the first quarter and all of fiscal 2017 will approximate 36%. As a result of these factors, we expect to report first quarter earnings within a range of $0.12 to $0.16 per share, including restructuring cost of approximately $0.02 per share, which translates to an adjusted earnings range of $0.14 to $0.18 per share. We recorded adjusted earnings per share of $0.17 in the prior year. For the full fiscal year of 2017, we expect revenue growth again this year and we expect to expand our adjusted operating income margins largely from the projected gross margin improvements in EMEA. How much we are able to expand our operating margins will be a function of many things, including volume and pricing, the mix of business, the pace of material cost inflation, resolution of the anti-dumping situation affecting PolyVision, and the level of investment in future growth ideas including our pivot to a focus on growth in EMEA. In addition, the level of disruption we are able to eliminate in the amount and timing of savings achieved related to the completion of our manufacturing footprint changes in EMEA could cause our results to vary from our current estimates. From a revenue perspective, we expect the low single-digit growth in the U.S. contract office furniture industry and we are targeting revenue growth rates in excess of industry averages. However, we believe our growth rates in the Americas could continue to lag the industry until our more than 20 new products gain full traction in the market in the second half of this fiscal year. Our pipeline of project activity remains solid and mock-up activity in the Americas strengthened in the fourth quarter versus the prior year in terms of both the number of mock-ups as well as total estimated sales potential from them. For EMEA, we also expect modest revenue growth as we shift organizational energy from industrial modernization to growth. Lastly, we are targeting growth across the Other category during fiscal 2017. As it relates to our expected operating leverage associated with the revenue growth, we expect the Americas to fall within a range of 10% to 20% as we plan to invest in our business in order to sustain our market leadership and strong adjusted operating margins which are approaching 12%. For EMEA, we expect our operating leverage to be higher than the Americas as we target the elimination of disruption costs and inefficiencies incurred in fiscal 2016, pursue the targeted savings from our industrial modernization, further stabilize our manufacturing and distribution performance and begin to focus our manufacturing teams on continuous cost reduction efforts. These estimated benefits are expected to be partially offset by investments in our growth initiatives including the opening of our Learning and Innovation Center in Munich. From a variable compensation perspective, increases in fiscal 2017 associated with targeted improvements in adjusted operating income, particularly in EMEA, are expected to be offset in part by reductions associated with the impact of setting bonus targets for fiscal 2017 at a higher level given our performance in fiscal 2016 and the nonrecurring nature of various gains recorded during fiscal 2016. So we expect another solid year in fiscal 2017 and we are committed to improving our competitiveness in EMEA. From there, we will turn it over for questions.

[Operator Instructions] Our first question comes from the line of Budd Bugatch with Raymond James. Your line is open.

Thank you for all the color. My question for you is, Jim, you talked about I think that CEO confidence recently has ticked up. Although it weakened, I think in the most recent area it ticked up. Just curious if you can parse into that and give us your thoughts of what's causing that, when that might likely or if that recent change will continue and how that will affect the outlook for the industry and for Steelcase in particular? James P. Keane: Sure. So the most recent data that I saw that I was referring to in my comments earlier would suggest that CEO confidence dropped quite a bit about a quarter ago and then it stabilized and ticked up slightly in this most recent quarter. And if you dive into the details behind that, CEOs are less confident as they look to the future about growth in employment and a little bit more confident about increases in capital expenditures. So I wouldn't say it's great news but at least it's not falling, and you have kind of this mixed bag of detail underneath it. We tend to do best when both are going in the right direction, when you see expectations for growing employment and you see expectations for capital expenditures. Now that said, we know we're already in a very competitive job market. One of the top issues that CEOs face is attracting the right talent to their businesses, and when that is a concern of CEOs, that's usually also good news for the office furniture industry because that's when people tend to make investments in their space so they can attract the kind of people they want. So we're hopeful that we'll continue to see that confidence rise. As everybody on the call knows, you could imagine what's behind it in terms of the drivers. There's economic uncertainty all over the world of course. The tragic incidents in Belgium this week only contributed to that level of uncertainty. You also have political uncertainty in many regions around the world including United States. And whenever there is uncertainty, CEOs have a hard time making longer-term decisions. So maybe that's as much as I'll say for now, unless you have additional questions on that.

Okay. Now let me go to another one and then I'll cede the microphone. David, I think you said that the PolyVision costs are included in the first quarter guidance of that $7 million of additional cost, is that ratably expected over the year, have you got that in there, or does it impact the first quarter more? David C. Sylvester: It impacts the first quarter actually less because as we make the deposits, it will sit on our balance sheet until we use that inventory in production and then ship it to our customers. So I think we'll get a little – I think the forecast anticipates a little bit of an impact in late April and into May, and then we would be into pretty much full quarter impacts for the balance of the year. That being said, we're still hopeful that the International Trade Commission will see that our small specialized steel really should not be impacted by these duties, but that process needs to run its course and unfortunately they won't reach a conclusion on that until sometime in the summer.

Okay. And if we layer in the Munich cost, you said that was $1 million to $2 million in the quarter, and how does that layer in over the year? David C. Sylvester: I don't think it will be more than a couple of million a quarter. We started incurring those costs in the second quarter and they are not quite at the full run rate. They are from a lease and the lease costs and our project teams are now in full gear, but I think I'd be surprised if it was significantly more than a couple million a quarter toward the back half of the year.

Okay. I'm going to sneak in a couple more. Just quickly if you could, operating margin at the U.S. ticking nicely higher and as you said challenging 12%, where do you think the U.S. or the Americas operating margins can wind up? David C. Sylvester: That's a fair question but there are so many variables that are impacting it, the most significant of which is the top line. If we grow modestly, then I think they could be peaking more at 12%. If we grow significantly, they could potentially go a little bit higher. But a couple of quarters ago, we started talking about our belief that they were beginning to peak and that we were going to stay invested, like we have in the past, in a variety of different growth initiatives, and with our expectation for growth being holstered to a low single-digit next year, I think you'll see that pushing much beyond 12% is going to be a challenge.

Okay. And lastly for me, on EMEA, which is one of my favorite topics, you had I think previously indicated I think breakeven by the third quarter again. Is that still in the cards, is that the way you look at 2016? David C. Sylvester: Yes, I mean that's what we're targeting, and you know we were targeting that in the back half of fiscal 2016, and with issues that we experienced, cross-manufacturing and distribution, that caused us to be delayed in eliminating the disruption and realizing the savings. So, yes, we're currently anticipating breakeven or profitable results in the back half of the year. There are a number of variables that impact that, and what would certainly help our cause would be if we could get the business mix back to a more normalized level, because low day-to-day business in Western Europe and low mix of export market business that tends to have higher gross margins is hurting the business quite significantly right now.

Okay. Thank you very much.

Our next question comes from the line of Kathryn Thompson with Thompson Research Group. Your line is open.

This is Steven Ramsey on for Kathryn. Couple of questions. In EMEA in Q3, orders were up about 20% year-over-year and then in Q4 organic sales came in at up 1% year-over-year. Can you just help me reconcile there how that gap happened? David C. Sylvester: Sure, Steve, and it has to do with prior year orders that were very strong in the first half of the year and shipped in the second half of the year. And one particular order that we've talked about for over a year now is this large French government project which was ordered early in fiscal 2015 and began shipping late in the fiscal year. And we had some other large projects that followed similar patterns, again ordered in the first half, shipped in the back half. So, adjusted for that, you would see an organic growth rate that is more aligned with the recent order trends that you are referencing.

Helpful. Thank you. And then of your distribution channels, is there any color you can give by channel, any trends that you're seeing that would be more permanent long-term changes or just short-term trends within those channels? David C. Sylvester: When you say distribution, do you mean our vertical markets or are you talking across regional dealers from a distribution perspective?

Regional and dealers distribution perspective. James P. Keane: We don't see any intentional changes in that, so I'll just kind of go around the world and give you a brief picture of that. So in the Americas, we sell primarily through dealers, we always have, and we think that's a very good model for us and we continue to sell primarily through dealers. Dealers continue to evolve their business and reinvent their businesses and we are very proud of how strong our dealers are in the Americas. In Europe, the model varies from country to country because of regional histories. It also varies even within a country where in urban areas like Paris and London for example we own our dealers, but in the provinces of France and in other areas around England we sell through independent dealers just as we do in the U.S. And I'd say that model in EMEA continues to evolve. We continue to find ways to serve our customers most appropriately through a combination of independent dealers, owned dealers, some direct business, but we haven't discussed any major shift in our strategy. And then in Asia, it's much of the same. In some markets we sell largely direct because that's the way the business model has evolved in the industry over time, but in countries like China we have a combination of direct business and dealer business that varies primarily based on geography again where in the largest cities like Shanghai and Beijing we sell direct and in the areas outside those major cities we sell through dealers.

Excellent. Thank you. And then one last quick question, which you talked about a minute and on Slide 38 about Americas growing faster by the end of 2017, just to get maybe a little more clarity or to confirm, is that just the new products you have starting to flow into the results and build momentum or is that expected improvement in certain verticals? David C. Sylvester: It's the former. We've had good feedback from our dealers and customers about the products that had been introduced and will be introduced and we expect that to help get us back to growing faster than the industry by the back half of the year. James P. Keane: And we are also seeing good momentum in terms of customer visits and mock-up requests and things like that, that if we use our normal timing, much of that would develop into revenues in the second half of the year.

Great. Thank you, guys.

Our next question comes from the line of [James Chang] [ph] with Sidoti. Your line is open.

So I don't know if you guys read China's latest five-year plan, but they are aiming for a double per capita income growth by 2020 and increasing white-collar job growth. Can you give some color on what, if any, new initiatives are in play for China specifically? James P. Keane: So I'll talk about China. We're very pleased as we said earlier with our performance in Asia in general and particularly our performance in India and China this past year. We've been giving a lot to make sure we've got the right products for the market. We have a manufacturing facility, as you probably know, in China that continues to grow in importance for us in the region. We have a very strong team of people that we've developed over the last several years. And importantly, if I were to kind of think back on our evolution in China, as well as really the rest of Asia, at first we were serving a lot of companies that we know very well from Western markets, companies that might be headquartered in the Americas or headquartered in EMEA, and that has helped us get started and establish our brand and establish our footprint and do all the things we've done up till now. But one of the things we've been doing successfully in the last couple of years is making sure we are also focusing on locally headquartered companies, Chinese headquartered companies, and making sure that our products and our relationships are relevant to them, and we're really pleased with that success. And so as you look at the outlook for economic growth in China, it is several different markets that are still – there's the industrial segment that has been the kind of export model, you've got the large Western headquartered companies that continue to expand research facilities and other facilities to serve local market, but really importantly you're seeing a lot of local Chinese companies that have now reached a level of scale where they are among the largest companies in the world and those are really important customers for our feature. So that's really where we've been putting our focus and we'll continue to do so. We also have made sure that as we have invested in our own research, like that survey I talked about before that is looking at the relationship between engagement and workplace effectiveness, that we were quite intentional about including countries like China and India in that survey so that our insights are fueled by what's happening in those markets as they continue to evolve, so that our products again can be as relevant as possible.

Okay. So in terms of, I guess you guys [were like the] [ph] work hierarchy in the Asian countries, are you guys working with Chinese companies specifically to come out with I guess new workplace models a little different from Western but a little more progressive in terms of I guess traditional Asian office basis? James P. Keane: Absolutely. In fact that's one of the most interesting things. As you watch a lot of these local Chinese companies evolve, they are evolving their businesses but they are also evolving their workplaces. We are seeing the emergence of what I'll call global trends, not trends that I really think of as American trends or European trends, but their trends are becoming more universal around the world and they are being adopted as quickly by some of these leading organizations in China as they are at anybody else. We have actually also quite intentionally put some product development resources in China so that as we develop new products, we can do so side-by-side with some of these customers. So we're getting input from these customers about whether they agree that the products we're developing are relevant for the way their business is evolving. And yes, as it relates to hierarchy, both the survey I mentioned here but also previous surveys that focused on the differences in the role of work and the changing nature of work country by country all around the world included countries like China where thinking about hierarchy and thinking about collaboration and thinking about the workday and just thinking about the relationship of work into people's lives has continued to evolve and we want to ensure that we're ahead as that evolution takes place.

Okay, thanks for that. And just one more. Can you give us some color on sales growth within industry verticals for the U.S. in I guess the coming fiscal year, I mean it looks like energy is going to be down but for the other sectors where you see the most opportunity? David C. Sylvester: I would tell you that what we saw – you are right, energy, we expect to continue to be down. What we currently believe is that the insurance vertical could face a difficult comparable for another quarter. Beyond that, I would tell you that we don't have a strong view that there is risk in any particular vertical or tremendous opportunity in any particular vertical. So they all I would say we would consider having the opportunity for modest growth, with the exception of the first two that I mentioned.

Okay. So for the other sectors, just I guess single-digit growth and then energy down and insurance is down again? David C. Sylvester: I think that's right. And we're getting close to lapping some of the down comparisons in the energy order pattern, year-over-year orders.

Okay. And would you guys feel you guys are in the cycle right now? David C. Sylvester: Everybody wants to know. We don't really know so we don't pretend to know. We continue to believe that as long as the U.S. economy is doing okay and growing a little bit, that will help CEO confidence, drive capital investment, and with the work for talent continuing to be front and center, we believe that's going to be a force that drives companies to continue to want to modernize their spaces. And so we think as long as that continues to play out, we'll be in good shape. James P. Keane: [Indiscernible] three of us were kind of laughing at that is because we were circulating a piece internally here over the last few weeks by somebody outside the Company who wrote about how maybe the idea that the economy follows a certain cycle of seven years for example, you often hear that number thrown out, when you go back and you actually test it, it's not so clear that it's seven years. Sometimes it's shorter, sometime it's longer, and it's always because of some factor. So maybe the whole idea of it being kind of an inevitable time-based cycle isn't really as relevant as will we have another financial crisis, will we have a political crisis, will we have something else that could cause uncertainty and therefore growth to slow down. What we felt again is that we saw some signs of a slowing down in our industry over the last several quarters, particularly as we got into December and January, but now we are feeling some resurgence of confidence, at least a flattening out of that trend. So hopefully that was a moment and hopefully we'll see some growth develop in the quarters to come.

Okay, all right, thanks. Thanks guys.

Our next question comes from the line of Julian Allen with Spitfire Capital. Your line is open.

Just two quick questions. The first on EMEA profitability, I think that you mentioned that with some improvement in mix, you might be able to achieve breakeven towards the second half of this year and mid-single digit margins over the longer term. So with respect to that mid-single-digit margin target, what has to happen with respect to mix or countries or volumes to achieve that and what sort of timeframe do you think you might get to those mid single-digit margins? David C. Sylvester: We're targeting mid-single-digit margins within the next three years. We need normalized mix in the business, we will need growth and we will also need gross margin improvement. Jim mentioned on the last call in December that we were beginning to initiate a number of gross margin improvement initiatives across our business and we'll need for many of those to gain some traction as well. James P. Keane: So one example of mix, just to drill down on one, is project versus day to day business that Dave talked about earlier, and over the last couple of quarters we've seen a weakening in the day to day business in EMEA and some of that, most of that in fact, was related to the operational challenges we faced because when we were going through the restructuring of the factories, we saw lead times rise on some of the key products. Now some of that is because of the restructuring, some of that is because of the new products we launched that had demand that was higher than we expected, but we had combination of those reasons. Nonetheless, we saw lead times go up. And when lead times go up, you can still compete very effectively on projects, but you have a harder time competing on day to day business because customers who just want to buy a few products don't want to wait 10 weeks for those products. So as we build that capacity, which we have; as we stabilize operations, which we have; lead times should fall, and they have; and as they fall, we should see a resurgence in that day to day business. But that's only a part of it. There is also just traditional patterns wherein some countries, some regions in EMEA, we've had a stronger historical mix of day to day business and in other countries we haven't been as strong in day to day business, and we are taking separate steps to address that, working with dealers and working with our customers to make sure that the people are using Steelcase both on projects and the day to day business. And another mix would be product mix, and again we have some countries where our product mix is quite different than in other countries, mostly because of the historical reasons or the way our brand has been perceived, and we are taking steps to address that. So those are just two maybe deeper levels of color around what we're talking about.

Great, thank you. And then my follow-up relates to the design of the variable compensation plan, and this is sort of more so that we can understand some of the design thinking that goes into it, but the plan seems to provide rewards to the broader group for things like change in tax structure and a gain on sale of an investment or an affiliate, which are both non-operating items and outside of the purview of the vast majority of the operating managers of the Company. So I'm just curious if you could share some of the design principles about which category of gain goes into that bucket and how it's sized? So for example if you were to sell the old corporate aircraft this year for a book gain, does that feed the general variable compensation pool? James P. Keane: Good question and something we do think about a lot. So our philosophy is to be an all-in company. So that means that we take the charges to our compensation that affects everybody, and we take the gains through compensation that affects everybody. So, if we sell an asset and we get a gain on that asset, that gain will flow through compensation. Sometimes it may flow through in that year and sometimes it might be spread over a few years. But when we are taking impairments, the same is true. So when we buy a business and basically impairment, we will also have those impairments run through compensation. But as it relates to the tax valuation allowance, now there was a time when we were losing money in EMEA and normally you would have a tax benefit from those losses, but because we were not accruing any additional deductions, the compensation was actually reduced during those periods for employees across the whole Company. And so what's really happening now is those costs that flowed through the compensation before are now being reversed and will flow through the compensation over a period of three years. So we take those both ways, both the costs and the charges as well as the gains. Dave? David C. Sylvester: The only thing I would add is, all the restructuring charges that we incurred in EMEA over the last few years and the Americas over 10 years were charged against compensation for employees. And the idea there too was that if we would reap the benefits of the payback, so we should feel the consequence of the investment of restructuring. But as Jim said, the foundational principle is we're an all-in company. James P. Keane: One last thing on this is, as Dave said in his comments, when we do get something like that tax benefit and it's spread over the three years, because of the way the bonus system is set, it actually – if we have a strong year, the next year's target is raised, and this time part of the reason we had a strong year for [indiscernible] is because of that tax adjustment, and therefore the target goes up. [Indiscernible] you don't get the full benefit of it, you still have to improve every year. And I'm glad you used the word 'design thinking' because we really do practice that in all parts of our business, including this. We want to make sure that the principles we're using are balanced and fair [indiscernible].

Great. Thank you very much.

[Operator Instructions] Our next question comes from the line of Peter van Roden with Spitfire Capital. Your line is open.

Sorry you're going to get Spitfire back to back here, but just quickly on the America's incremental margin, Dave, you talked about incremental margins of 10% to 20%, and at the low end that would imply that margins would actually go down year-over-year on an incremental basis. So how do you guys think about kind of dialing back expenses if you kind of are approaching that 10% incremental margin, so that margins would still be able to go up year-over-year? David C. Sylvester: The way we think about it is a careful balancing act of staying invested for the mid and longer-term and continuing to post solid results. So it is possible that we could see a scenario of low growth next year and stay invested, and that's why we gave kind of the low end being 10%, but it's also possible that we could grow faster than we expect and stay invested and expand our operating margins a little bit to the upside.

Got it. And then just on the PolyVision impact, is the $7 million kind of a worst-case scenario? How do you think about that over the longer term? I mean does this mean the other segments' operating profit will be down $7 million for the next couple of years if the Trade action isn't reversed, or talk to us about the different scenarios there? David C. Sylvester: It is estimated to be worst-case at the moment. It's the margin that they have preliminarily determined and we've run that through our models for next year and imagined that's how it will impact cost of sales for next year based on our sales assumptions. There is a possibility that it could be zero if the International Trade Commission were to disagree with the Department of Commerce's preliminary duty. And of course we're working on alternative supply opportunities. In fact, the team continues to work through a number of different ideas and strategies which could reduce the $7 million, or could be potential benefit for us if the ITC were to not approve the Commerce's proposal. But we felt it was important that you guys understand that we are looking at a number that could be as high as $7 million if all goes in the wrong direction for next year.

Got it. Okay, that's all I had. Thanks, guys.

Thank you. I'm showing no further questions. I'd like to turn the call back to Jim Keane for closing remarks. James P. Keane: Okay, thank you. So as we enter this new year, we are pleased to have the EMEA restructuring work behind us and we are eager to put that new manufacturing model to work in EMEA, and we believe the investments we made in becoming more globally integrated are creating new opportunities as our customers also become more globally integrated. So, looking forward to this next year. 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 all disconnect. Everyone, have a great day.