Q2 2020 Earnings Call
Thank you Kevin Good morning, everyone. Thank you for joining us for the recap of our second 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 second 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. a replay of this webcast will be posted on IR dot steelcase Dot 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.
They 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, Thanks, Mike and good morning, everyone.
Our business continues to perform well in fact this was one of our strongest quarters in the past two decades, as we delivered 14% revenue growth and 26% operating income growth.
We grew orders, 3%, which was against the strong prior year quarter in which we grew 12%.
Our earnings of 50 cents per share beat our estimates as we executed really well operationally and did a good job controlling commodity costs and overall spending.
We also faced typical challenges in the quarter, we had a couple of businesses. Mr. Estimates, we took a few small charges and we face economic headwinds in markets like China, the UK and to some extent Germany.
Well, we were able to more than offset that softness with business, we've won new customers and strong underlying performance across the company.
So it really was a good quarter.
I'll share a bit more about our business and then turn it over to Dave to go through the financials.
In the Americas, our industry is doing well with just not showing 9% shipment growth for the most recent three month period.
Pre payment over the previous three month period.
And we outgrew BIFMA in both of those periods. So we are gaining share.
Why does the industry growing and why are we growing even faster.
Customers are really seeing the connection between their business challenges and their workplace.
Yes, it's related to the war for talent, but it's also related to innovation the adoption of new work processes like agile and other efforts to improve workplace productivity.
Last week I met with customers here in Grand Rapids work consumer product manufacturers financial service providers healthcare providers and major universities. These customers are from the U.S., Canada, Australia and all over the world.
Customer visits the Grand Rapids are up versus a year ago, and our pipeline of opportunities it's higher than it was last year.
And because we continue to update our product offering and we have more proud partner products to sell our win rates have remained strong as well.
Revenue from our marketing partnerships is ahead of our expectations and the feedback from dealers and designers is we're succeeding in making it simpler to specify an order from our expanded portfolio.
We developed and launched our digital selection of specification to last year, and we continue to see steady increases in adoption and use by dealers and designers.
We acquired in Q Smith system, an orange box over the past two years and establish value creation plans for each business.
Through the second quarter. The acquisitions are collectively meeting the value creation plans, we established the revenues have grown 12% so far in fiscal 2020 against the prior year and that includes some softening at Orange box, which is based in the UK and is of course going negative effects from Brexit in that market.
Capturing maximum value from these acquisitions remains key to growing faster than our industry.
The other category grew 20% organically on the top line in Q2, Designtex had a particularly good quarter in Asia Pacific grew across the region, but exceptionally well in India based on winning many large projects with multinational corporations.
It was our highest revenue quarter ever in Asia Pacific.
As I mentioned earlier, our business in China, and Hong Kong is starting to see some downward pressure.
We expect to continue to see solid growth across Asia Pacific.
EMEA always spaces profit challenges in the second quarter because of August holidays, and shutdowns in some markets, we narrowed our loss versus the prior year, because our continuing profit improvement initiatives more than offset softness in the UK.
Moving forward our growth plan in EMEA is similar to the Americas were focused on driving growth through our new product pipeline, which remains healthy our partnerships that expand our offering and the value creation plans from our acquisitions like expanding orange box across Continental Europe .
We believe we will achieve our fiscal 2020 target of being profitable in EMEA.
I also want to give you an update on products, we talked about on previous calls the flex collection of products supporting agile teams is now in regular production in the Americas, and we'll start taking orders in the other regions before the end of the calendar year early customer interest in actual orders are quite encouraging.
Rome, a product collection, we developed to support the Microsoft surface hub too is now available in all our regions and selling ahead of expectations.
You might remember that these products allow users to move digital content throughout the workplace without interrupting flow. It's another example of the potential for success with furniture technology in space are designed together.
In summary, we feel good about overall demand in the commercial furniture industry. We believe our strategy is helping us win with customers looking to invest in their spaces to drive innovation and compete for talent and we keep seeing tangible evidence of this.
Our first half results were a little better than we had planned at the beginning of the year.
Taking into account our outlook for the third quarter. We are now targeting to finish the year at the higher end of our EPS target range of $1.20 to $1.35.
Now I will turn it over to Dave for more about our performance and our outlook for Q3.
Thank you Jim and good morning, everyone. My comments today will include highlights related to our second quarter results and cash flow plus a few remarks about our outlook for the third quarter and targeted earnings for the full year.
As Jim just mentioned, we had a very strong second quarter growing revenue by 14% in total were 9% on an organic basis, and we delivered earnings growth in excess of 20%.
Providing evidence that our growth strategies are resonating with customers and our longer term target to grow earnings at twice the rate of organic revenue growth is achievable.
Relative to the estimates we provided in June 2nd quarter revenue of $998 million was slightly higher than the top end of our guidance and the 50 cents of earnings per share exceeded our estimate range estimated range by five cents.
For revenue, our 14% growth included the impact of acquisitions and other inorganic items, plus 9% organic growth, which benefited from a strong beginning backlog of customer orders.
Our estimated range of revenue for the second quarter took into consideration the ongoing uncertainties related the tariffs slowing the global economic growth and Brexit.
But their impact on our quarterly revenue was not as significant as it might have been and the results of our growth strategy is more than offset any direct consequence. As a result, we were able to report revenue higher than the top end of our guidance for the quarter.
The Americas organic revenue growth of 9% was broad based across geographic regions vertical markets and product categories and included an improving mix of revenue from customers with whom we have continuing agreements.
The quarter included seasonal strength that Smith system, which we believe could represent approximately two thirds of their annual revenue again this year.
Similar to the first quarter orders in the Americas included customer request for extended shipment dates which remained higher than historical averages, but were largely consistent with what was assumed in our revenue estimates.
EMEA posted organic revenue growth of 5% despite the challenging environment in the UK.
The revenue growth was better than expected and our opportunity pipelines continue to reflect growth for the second half of the year.
The other category had a very strong quarter with your organic revenue growth of 20% being driven by a record level of quarterly revenue from Asia Pacific and strong growth from Designtex across the Asia Pacific Region, India revenue growth was very strong, but all other markets also posted year over year growth.
With the inclusion of a full quarter of revenue from Smith system, our second quarter seasonality has increased historically the sequential increase between the first and second quarters approximated the mid single digit percentage and this year the increase approximated 21%.
First quarter order patterns, and the resulting high level of backlog at the start of the second quarter also contributed to the sequential revenue increase but Smith system and other seasonality in our business were the primary drivers of the sequential increase this year.
Compared to the prior year, the 9% organic growth stacks on top of 8% organic growth in the second quarter of fiscal 2019.
Over the balance of the year.
Our prior year comparisons become even more difficult as we posted organic revenue growth of 13% and 15% in the third and fourth quarters of fiscal 2019, respectively.
For earnings we exceeded the top end of our range by five cents due to favorable gross margins and operating expenses, both of which were reflected year over year improvements as a percentage of revenue and helped improve our operating margin by 70 basis points to 8.5% in the quarter.
Better than expected price yield commodity costs and business mix drove the favorability to our estimates.
Lower than expected operating expenses also played a role in our favorable performance in the quarter as our employees continue to drive fitness improvements across the business plus some projects spending didnt materialize as quickly as we estimated.
Across the segments, the Americas and other category were the largest contributors to our better than expected performance, but EMEA results and our corporate costs were also better than expected.
As you can see we had a lot of things working in our favor this quarter, which contributed to our earnings exceeding the top end of our estimates by five cents.
Diving, a little deeper into the year over year comparisons, we grew revenue by $122 million or 14% in the quarter with $83 million coming from broad based organic growth of 9% and $39 million, representing net inorganic benefits, which included 40 $747 million of revenue at Smith system, an orange box before we acquired them in the prior year net of a small divestiture.
And $8 million of unfavorable currency translation effects.
For earnings the 50 cents in the quarter compares to 41 cents in the prior year, which included some unusual items, including a property gain that had the effect of increasing earnings per share by approximately three cents after consideration of related variable compensation expense.
The prior year also included lower warranty product liability and workers compensation costs and the initial purchase accounting effects related to Smith system, but these items largely offset.
Our operating income improved by $17 million over the prior year or approximately $22 million adjusted for the effects of the unusual items in the prior year.
A few million dollars of the improvement can be attributed to the acquired revenue after consideration of purchase accounting impacts and the balance represents the operating leverage or contribution margin related to the organic revenue growth, which exceeded 20% in the quarter.
Beyond the absorption benefits related to our fixed cost the strong operating leverage also included improved pricing lower commodity costs and benefits from cost reduction and fitness initiatives, partially offset by unfavorable business mix and investments to support growth initiatives.
After facing significant inflation for much of last year, which pushed pushed us to take multiple pricing actions commodity cost pressures are beginning to abate while at the same time the benefits of our pricing actions are kicking in more fully.
We expect net pricing benefits for the balance of the year, but at lower levels. As we are beginning to lap initial benefits.
In the prior year and on cost reduction in fitness, we supported increased investments in sales marketing product development and a few other areas of our business, while delivering an improvement in our operating expense leverage in the quarter demonstrating the significance of our fitness efforts.
As it relates to orders in the quarter to 3% order growth compares to a strong prior year, which posted 12% order growth compared to fiscal 2018 across the segments. The Americas grew 3% on top of 9% growth in the prior year.
EMEA declined 1% after 22% growth in the in the prior year.
And the other category posted 9% growth on top of 15% growth in the prior year.
As a reminder, at the beginning of the year, we indicated that our organic revenue target for fiscal 2020 anticipate is higher growth rates in the first half of the year compared to the second half based on how our order patterns inorganic revenue growth accelerated during fiscal 2019.
And thus far in the current year, our order and revenue patterns as well as our revenue estimate for the third quarter are consistent with those expectations.
Moving to cash flow and the balance sheet.
Free cash flow generation was strong in the second quarter, nearly reaching $100 million and exceeding the prior year by more than $40 million a year over year improvement was driven by the strong earnings growth in the quarter, but we also benefited from lower consumption of working capital and timing related to capital expenditures, an estimated income tax payments capital expenditures were $18 million in the quarter, bringing year to date spending to $33 million, we expect higher levels of spending in the second half of the year, primarily related to manufacturing investments, but we now expect the full year to total approximately $80 million to $90 million.
We returned approximately $19 million to shareholders in the second quarter through the payment of a cash dividend of 14.5 cents per share plus a modest level of share repurchases.
And yesterday, we announced the same level of dividend for the third quarter, which will be paid in October .
For the third quarter, we are projecting revenue in the range of $920 million to $945 million or growth between two and 5%.
Because the estimated unfavorable currency translation effects of approximately $9 million or offsetting the remaining $7 million or acquisition impact related to orange box.
The projected organic growth range is also 2% to 5%.
And again this growth estimate compares to a strong prior year, which grew by 13% on an organic basis compared to fiscal 2018.
From an earnings perspective, we expect to report 33 to 37 cents per share, which compares to 31 cents of earnings in the prior year were 36 cents of adjusted earnings after excluding the impact of a pension charge.
As you update your models for the third quarter recall. The prior year also included favorable adjustments to accrued promotions, a favorable tax adjustment and lower interest costs in advance of our debt issuance in the fourth quarter as these items in total impact the year over year comparison by approximately four cents per share.
Taking into consideration our year to date performance and outlook for the third quarter. We are now targeting to finish the full year at the higher end of our EPS target range, which takes the following factors into consideration.
Furniture industry growth through July of calendar 2019 in the Americas as reported by BIFMA appears to be stronger than the slowing growth of capital spending over the same period, whether derived from macroeconomic data or from looking at capital expenditures across the S&P 500 or fortune 800.
This suggests that our industry share of capital spending may be gaining resiliency as organizations continue to invest in their work spaces to help drive productivity and compete in the war for talent, our backlog of customer orders at the beginning of the third quarter is up approximately 3% compared to the prior year our opportunity pipelines for the next six months continued to reflect growth for the Americas, EMEA and Asia Pacific overall sentiment from our sales leaders and and dealers remains positive.
Which we believe should support normal end of year end of calendar year seasonality across our customer base. We are pleased with our win rates in most regions around the world and believe our research and innovation is resonating with business leaders contemplating investments in their work environments.
I share those points because many of our individual investor conversations centered around the economic uncertainties.
And it's important to note that recent industry growth and our performance has been quite good at the same time.
From there we will turn it back to the operator for questions.
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Our first question comes from Bobby Griffin Raymond James.
Good morning, everybody I appreciate you, taking my questions and congrats on a good quarter.
Thank you.
Dave I guess first if we could just start on EMEA I'm, just curious maybe a little bit more color on the confidence around the back half and flip into profitability for the year and implies a pretty nice improvement.
On the third and fourth quarter versus last year can you, maybe just give us some details of what you're seeing in the business that excites you, where you think some of the upside in improvement will come from anything.
Anything else to help us get a better level of confidence in our models of of that business flipping to profitability for the year.
Well as I said, our pipeline of opportunities that we're competing for is reflecting growth.
So Jim mentioned, we've won some nice business that has offset some of the pressures we're feeling in the UK.
Our win rates are pretty good in most markets or improving customer visits at the link.
Learning and innovation center in Munich continued to be solid we're introducing a lot of the new products and EMEA that we've launched in the us.
So we're we're we're not feel and I were not.
Super excited about.
The broader economic environment, but our business is steady and the performance of our teams is quite solid so thats, giving us confidence to continue to show year over year improvement I'll add operational performance has been very strong.
In terms of.
Really across all the metrics we track but.
On time shipments and quality and all those.
Things that eventually translate into better gross margins so.
And on top of all the things Dave mentioned I think Thats also been important factor.
All right I appreciate that color and then maybe can we can we also talk a little bit how the how some of your partnerships or are coming along in particular, the west Elm partnership how what type of growth you're seeing is it starting to move the needle a little bit any early learnings you can share with us. It was a great set up their need to comment I saw a few months ago, but anything else would be would be great.
Sure so.
We are happy with our partnerships overall as I said they are ahead of our expectations and.
We can see that in terms of.
Shipments, we can see it in terms of orders and we can see it too in terms of the feedback we're getting from.
Dealers and dealers include both dealer principles here, but also dealer designers and and others, who are using the digital tools, we created a year ago. Their adoption of those tools is continues to increase and has increased since we first launched them. We have as you may remember we're on our second read already have that tool. So we continue to make investments in that and the products are also getting great reaction as it relates to west Elm specifically.
While we continue to launch new West Elm products, we launched exposed a lots of the market back at Neocon.
Those products are all passing their their first order entry data per ship dates as this year continues. So we've had several those products already begin shipping summer couldn't begin shipping here in the next few weeks. So when you look at West Elm, specifically, where.
Really optimistic and hearing lots of positive feedback from everyone.
Moving the needle, it's probably not material yet to our results, but we are happy with the trajectory we're on.
Okay, and then lastly, I guess I'll try to sneak one more in here, but Dave on the free cash flow year to date, it's up pretty nice versus last year year to date is that more just functions of timing or any should kind of reverse a little bit in the second half or should we expect that strong trend to continue through threeq and Fourq you.
Well I think it's being driven by the strength of our earnings improvement for us and but we're also very focused on working capital across all three components inventory receivables and payables.
So the fact that we're seeing a little bit of improvement there is hopefully sustainable no. The teams around the world are working very diligently on.
On various initiatives in that regard and then we did have some timing that I do think is going to.
Will result in more outflows in the back half of the year for example, our Capex. We still think we're in a 80 to 90 million range for the full year and we spent 33 in the first half that implies timing or more investments in the back half.
And our estimated income tax payments zero or little less than expected this quarter. So I think the.
Thats also timing as well.
Okay I appreciate all three I would say.
All right.
Yes, I appreciate the detail on that its very helpful and congrats again on a good second quarter and best of luck going forward.
Thank you.
Our next question comes from Matt Mccall with Seaport Global.
Thank you good morning, everybody and that's.
So.
Let's say maybe start with.
Gross margin.
Maybe start David I think you gave some of the detail, but I just want to ask it.
Maybe to put everything together.
Can you talk about price.
Price cost any tariff issues are mix issues in the quarter, specifically obviously.
Curious about steel prices and then I think you mentioned some OPEC.
Project spending delays can you quantify what the benefit was if any in the quarter.
Well I'll start with the last question the Opex.
Delays not a big deal it was just a contributor.
We just had some projects that we thought would pace it a little differently than they did.
But but not it's not a meaningful number a little bit on the gross margin and then all the puts and takes.
I'll start with tariffs because there is impacting us, but they're not impacting us dramatically and really.
Weve our teams have worked very hard to offset much of that impact whether it's through.
Negotiating with our supply chains, adjusting our supply chains, taking pricing.
Actions to offset it.
So its in our numbers, but it's really not a headline for us.
On pricing and commodity costs I lead with pricing as the number one.
Driver of our gross margin improvement as well as our performance versus our estimates it is a little bit better than expected its largest contributor after many quarters of.
Significant inflation outpacing.
Our pricing efforts were finally.
Move to more of a meaningful tailwind on that same time steel prices as you know has come down from recent highs.
And thats benefiting the whole industry right now.
Business mix and also because our procurement people a lot of credit for doing their job in helping us to recapture some of those commodity cost increases. So it's both the back of course is but also a lot of our internal efforts.
Good point.
Business mix is still a negative year over year, it's still hurting us, but it's hurting us less than it has been.
Yes in recent quarters in part because we're beginning to lap.
The origination of some of this unfavorable business mix, but also because we are starting to see.
Improving benefit of business off of continuing agreements with our customers.
So we.
Starting to abate a little.
Yes, thanks for the detailed a day so it was.
Just on the price cost Brian .
With price cost, maybe excluding the tariff I don't know if we can do that but we price cost positive in the quarter.
Yes.
And can you quantify for us and then what's and what's the expectation and the guidance and as we progress through the year.
We're we're not able to quantify precisely enough to share basis points.
Our modeling requires a lot of.
Assumptions as to what's actually driving it and trying to tease mix apart from it and.
And pricing so we're going to stay away from quantifying it but it was the most significant driver.
Okay.
So maybe a quick one on the other category you called out India specifically.
Is there is there something going on there where this type of growth is going to be consistent I think you had some positive things to say about the pipeline, but what's what's what's driving that growth specifically interested if you could call it India specifically.
Yes, I'd say first of all we have a terrific team of people and they build great relationships with the customers in that market and we continue to serve new customers in that market.
So I have to start just by saying we have a great team and they're doing a great job just straight up performing in the market. We've also made some investments over the last couple of years in broadening our pipeline to address specific apps that we saw developing there now I want to be careful as I say this because we've talked about product gaps before I would have done that it's usually that gap that existed maybe for a couple of years that we.
We'll come back to you and develop products to fill that gap that's not the case here a lot of times. These gaps here emerging very quickly and we're on it as quickly as their emerging so.
We might see a very short period of time, where we had opportunities to win some jobs and we lost because we just didnt have the right product. So we've been.
Billy intentional about trying to fill some of those gaps.
And and also in that case kept filling isn't just about.
Kind of basic commodity products. This also about innovation. So series. One for example that we launched a couple of years ago.
Started as a response to opportunities we saw emerging in India and as we as we develop the price for that market and for the Asian market lease opportunities to sell that product all around the world.
So our India I'll just summarize this and we have a great team and we've made investments in.
Product development that helped make us more relevant to our customers in that market.
We've also invested in our supply chain, so expanding our factory capabilities, there, adding wire products to the list that factory can manufacture.
Has that improved our lead times.
Has aligned our cost more completely with that market. So a lot of good work across a lot of different functions, but and we're really pleased with that performance and although we called out India I have to also say that really across Asia I could talk about southeast Asia, Australia Didnt do badly this quarter. We've had we've had good performance really across.
The region.
In a broad way, China, we're seeing some.
Some headwinds there of course because of the things going on in China, but in other parts of Asia, and really really strong, but even parts of China are doing better than others. We had some good performance in certain markets, Yes cross the Chinese market wasn't all pressured.
Okay.
I will switch gears again the.
The.
The comment you made I think Jeff about making it.
Or two specified order our products coming up it seems to be a theme that I'm hearing maybe across the industry I guess the question is.
Wherever these efforts stand for you what was expected to be the benefit going forward is this a differentiator or is this becoming kind of a.
A requirement for participation or entry in the industry I feel like this I've heard this elsewhere and I just want to hear what you guys.
Well if I were to go back a couple of years I I'd say first of all you have the rise of ancillary which is another way of describing that sand that rise of ancillary created a lot of additional work.
Without really a lot of additional margin for our dealers and for designers in.
In architectural design firms and for customers, who are trying to now fragment, thereby across a much broader range of.
Manufactures vendors, so that might be buying products from one company at a couple of products for another company. So you can just imagine the workload of trying to.
Learn about all those products select those products.
Be able to see samples on those products ultimately price and what are those products receive those products and on and on so that was the starting point was a shift from a fairly consolidated by two we have more fragmented by and it drove cost and complexity for really the rest of the value chain. So the.
Our move was to.
Begin to carefully select partners as well as developing our own products and to connect all those together into a supply chain and it makes it.
Easier for dealers and designers to two other things I just said.
And that's not easy to do and Theres a scale advantage here investing in those sorts of tools I think there's probably only a handful of.
The companys that can make those sorts of investments we will clearly one of those I think one differentiators that we're not just providing the tools. We're also in many cases manufacturing the products. So we talk about west Elm earlier, but the idea that that partnership is founded on the idea that west Elm design the products that we manufacture and manage logistics.
Takes it to one more level of reliability. So that it's not just a matter of specifying and wondering if it does it actually show up on time and with the warranty that we stand behind related to the to our our role in that process. So I think there's lots of opportunities for differentiation. It plays to our strengths around scale. Both in terms of the digital tool itself, but also our entire logistics system or manufacturing system.
Okay. Thanks, Jim.
Our next question comes from Steven Ramsey with Thompson Research group.
Good morning, I wanted to.
Kind of dig in on more on the project and continuing business. Maybe can you can you quantify the breakout between project in continuing through Q2 this year versus last year.
And does.
Acquisitions like Smith in particularly the they permanently shift this mix in any way and then I guess do you expect the continuing business to grow as a percentage of sales.
In North America through the back half.
Well I'll make a few comments about it Stephen I'll, probably stop short of giving actual quantification, but directionally. We've been talking for the last couple of years about how project businesses represented a higher mix than historical averages.
And therefore was.
Pressuring our gross margins a little bit from a mix perspective, we've also talked about how winning project business is really important because at the same time you put in place, but continuing agreement with that same customer for smaller projects and smaller initiatives that they have in their business.
And what we've seen more recently is that starting to move back toward a more balanced split.
I don't know that it will ever go back to where it was in the past we just don't have a view on that.
But it is it is seen we are seeing increased.
Business off of continuing agreements now some of that can include projects off of continuing agreements, but the fact that we are seeing business offer continuing agreements is a good thing.
And it's helping our overall mix.
Impacts.
That's great. Thank you.
And does the Smith have a continuing component as well or is it more project based.
I think they are more project based.
Driven off of and it's being driven by bonds that.
Our floated for school districts to read.
Or to redo different us.
School buildings or campuses.
But I would imagine they have continuing agreements in place as well.
Their business like our business I think.
There was a time in our industry. When there is a clear divide between what is project what is continuing and as you could hear as Dave described that it's getting Blurrier, where you now have projects coming from continuing in some that are in that in and build sometimes you have contracts that have negotiated project pricing because out a few years.
So we still talk about it because it's still a fundamental way that we win business and when customers and it has an effect on margins, but it's getting harder and harder to get this thing which is which.
Okay.
Great that makes sense.
Thinking too on North America investment in the past few years you.
I spent more to innovate and it's paying off clearly on the top line.
Are you expecting that level of investment.
Will be needed to continue to drive growth maybe.
Kind of thoughts on an absolute dollar basis, and a percentage of sales basis.
I'm thinking a little more longer term.
Back half the 2020 into fiscal year 2021.
Well I'll just reiterate what we said at the start of the year in connection with our targets that we are targeting to improve our overall.
Operating expense leverage on sales.
But we are continuously evaluating opportunities to grow our business, which could impact.
You know the amount of dollars that we're investing in the business. We don't have a view for next year, we're out several quarters on the dollars. We've said inside the last 12 months that we are more comfortable with the level of spending that we have.
In our business, but with the growth that we've been posting and our desire to continue to grow the business. We know that it's going to require us to continue to fuel product development and put feet on the street et cetera that said, we're driving fitness in the business pursuing productivity and therefore, we want to see our opex as a percentage of revenue.
Continue to improve so we're trying to balance that.
Yes, I'll add one comment on that when we were expanding the capacity of our product development capabilities here in the Americas and again.
Just remind everybody that when we talk about where the product development is it's not necessarily just for products sold in that region. Because these products are sold around the world and when we did that.
We actually believe that we're going to have to invest in even more capacity than we did and the reason we were able to to pull back on the original goals because we were seeing the throughput of our product development group improve at the same time as we embrace agile and other techniques and we are able to improve productivity of product development itself and that's great news. So we don't see it going down, but we do see this leverage keep continuing to improve as Dave said.
Great and then lastly for me thinking.
In Asia Pacific, how how much of this.
Businesses, continuing how much of that is project based and are you able to set up kind of similar agreements over there as you are in the Americas.
The agreements themselves might be slightly different but the principle is still the same in Asia in they can pick any of those markets begin if you think about China or India or any of these markets. When our growth comes from new customers. So customer instead, we often have never served before and that's unique because if you think about it in the U.S.. We've been here forever and we've we serve kind of everybody at some point in time, so and for most of the Fortune 500, we have some level of business with them.
So you go to Asia, where this clients, we've never say never and you get that first project opportunity. It's a chance to build relationships that might help you win another project over time, you do get into a regular rhythm again that me look something like what the continuing business flow is in the Americans that certainly the hoak. So we're pleased by is it's not just.
Broader.
Orders with existing clients like traditionally in Asia, we might have.
Started our business over there serving a lot of companies are headquartered in the us and in Europe , and other places where we were established.
Now because we are serving more.
China headquartered into headquarter companies, we expect to see those business relationships pay dividends for a while.
Excellent. Thank you.
Our next question comes from Greg Burns with Sidoti and company.
Good morning.
Can you just remind me in the other category is the revenue.
Still roughly split about a third a third a third between the three businesses.
Well it was never really split a third a third a third what we always talked about was Asia was the biggest and Polyvision was smallest and that's that's still the case.
Relative size Asia, then designtex and Polyvision.
Okay. Thanks.
And in terms of the profitability of the business.
Well.
I know that the consolidated segment's operating margin or is it lower and how you know maybe how does it stack up against where the Americas and EMEA is.
More broadly for.
For margin improvements in that segment.
Well, we have said in the past that we believed the Asia has the potential to be a similar operating income margin as other parts of the world, but we are intentionally investing.
To grow our presence and grow our market share in Asia. So what I've said over the several times over the last couple of years is you guys ought to think about the other category is somewhere in a mid single digit.
Operating margin range because of how much we're investing back into.
In Asia.
And the fact that it's our business biggest business in the other category.
And you ought to ask a question if the operating margin is less than that or more than that and this quarter. It was more than that and that was driven by the fact that we had a record quarter in Asia Pacific and we also had very strong performance from Designtex.
At the same time at the same time that it's probably visions seasonally best quarter, given their support of school systems as well.
That do much of their work in the summer.
Okay. Thanks, and then.
Just lastly on the guide I I appreciate youre up against tough comps so.
You absolute growth is going to slow in the second half, but the.
The revenue guide at the midpoint was still a little bit below consensus sides.
I was Gonna Street was modeling versus your internal expectations or have you seen anything that may be tempered.
For your outlook, a little bit for growth in the second half. Thanks.
Well I never know what currency rates. The street uses but what I did comment on is that year over year, we're seeing.
About $9 million of unfavorable currency effects and it's not significantly different from the start of the year remember our our revenue range that we said we were targeting for the full year contemplated.
FX or currency exchange rates that were in place at the beginning of the year the dollars since strengthened or euro and other currencies have weakened which has pressured our our revenue.
A bit my sense is that the models built by the street don't take into account or adjust for that currency movement.
As regularly as we do so it could simply be that consensus doesn't have.
The most recent currency assumption and if it did maybe it would be a spot on the midpoint of our range.
Okay, great. Thanks.
Again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then the one key on your Touchtone telephone.
Okay.
And I'm not showing any further questions at this time, let's turn the call back to Jim Keane for closing remarks.
Thank you. So again, we're very pleased with the quarter and with the direction our business is headed.
We look forward to continuing to deliver value to our shareholders. Thank you for your interest in steelcase and for joining the call today.
Ladies and gentlemen, it does conclude todays presentation. You may now disconnect and have a wonderful day.