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Steelcase (NYSE:SCS)

Q3 2012 Earnings Call

December 22, 2011 11:00 am ET

Executives

Raj Mehan -

James P. Hackett - Chief Executive Officer, President, Director and Member of Executive Committee

David C. Sylvester - Chief Financial Officer and Senior Vice President

Terry Lenhardt -

Unknown Executive -

Analysts

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Matthew S. McCall - BB&T Capital Markets, Research Division

Leah Villalobos - Longbow Research LLC

Todd A. Schwartzman - Sidoti & Company, LLC

Jeffrey Matthews - RAM Partners, L.P.

Operator

Good day, everyone, and welcome to Steelcase's Third Quarter Fiscal 2012 Conference Call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would now like to turn the call over to Mr. Raj Mehan, Director of Investor Relations.

Raj Mehan

Thank you, Javon. Good morning, everyone, and happy holidays. Thank you for joining us for the recap of our third quarter fiscal year 2012 financial results. Here with me today are Jim Hackett, our President and Chief Executive Officer; Dave Sylvester, our Chief Financial Officer; Mark Mossing, Corporate Controller and Chief Accounting Officer; and Terry Lenhardt, Vice President Finance for the Americas and EMEA segments.

Our third quarter earnings release, which crossed the wires yesterday, is accessible on our website. This conference call is being webcast. Presentation slides that accompany this webcast are available on ir.steelcase.com, and a replay of this call will also be posted to the site later today. In addition to our prepared remarks, we'll respond to questions from investors and analysts. Our discussion today will include references to non-GAAP financial measures. These measures are presented because management uses this information to monitor and evaluate financial results and trends. Therefore, management believes this information is also useful for investors. Reconciliations to the most comparable GAAP measures are included in the earnings release and webcast slides. At this time, we're incorporating by reference into this conference call and subsequent transcript the text of our Safe Harbor Statement included in yesterday's release.

Certain statements made within the release and during this conference call constitute forward-looking statements. There are risks associated with the use of this information for investment decision-making purposes. For more details on these risks, please refer to yesterday's press release and Form 8-K, the company's 10-K for the year ended February 25, 2011 and our other filings with the Securities and Exchange Commission. This webcast is copyrighted production of Steelcase Inc.

With those formalities out of the way, I'll turn the call over to our President and CEO, Jim Hackett.

James P. Hackett

Thank you, Raj, and good morning, and happy holidays to each of you and your families. Now this time of year in my family, we're often guessing with each other about what gifts will bring the most delight. And I know today in my house, the news of this quarter at Steelcase is a great reason to celebrate.

It was another very good quarter for us and we're on our way to a very good year as well. I think as you do your analysis, it will become increasingly clear that many of our targeted strategies and projects are producing concrete results. So more than metaphorically, that's a great present to our people who have worked so hard this year. Now Dave Sylvester will take you through the numbers in a few minutes. If you've seen our release, you know that 15% organic growth in the Americas is an extraordinary achievement on any measurement scale. And our order backlog leads us to expect this segment to continue its momentum in the fourth quarter.

We're also very pleased with the work of our teams outside the Americas. We said on our previous call that we expected the EMEA or European, Middle East, Africa segment to return to profitability in the third quarter, and that's exactly what happened. Now Dave mentioned this in the last call, but it was clear to us that the vibe in the media about Europe was overshadowing our own projections of what we're seeing in real performance. We were encouraged by the normal seasonal boost this quarter even though this region is still a volatile mix of markets. We saw revenue growth in some countries while others are down and Spain is still in a deep recession.

But we're vigilant about the sovereign debt negotiations and their potential impact and we believe we're prepared to address any situation that might develop. In a situation like the one in Europe right now, our company is able to represent something special. And that's that our dealers and customers understand we're invested for the long term in that we have a sound financial position. And most importantly, we're continuing to focus on delivering outstanding service to our global customers.

And in that vein, our commitment to Asia continues to pay off. Now this segment performed very well again this quarter. I can't tell you how proud I am of the leadership team there because they've made substantial progress and they're building a great foundation for our future in Asia. I met with the team in India last month to assess progress in the region and work on our strategy and expansion of our capabilities. The region remains rich in opportunities and we're seeing tremendous potential from our global value proposition. And building on our original investment in these markets, we're beginning to see important new initiatives, including localizing our supply chain in India with an in-country manufacturing location and strengthening our dealer distribution in Tier 1 and Tier 2 cities in China.

Steelcase continues to earn recognition around the world for our insight-led product development efforts. The substance of these insights is the gift that keeps on giving. For example, our new Manifesto product line developed by the team in Asia Pacific and sold exclusively there just won a Design for Asia Award. In North America, the mobile and mini versions of our media:scape product were recognized by Interior Design Magazine as among the best products of the year. And there's a new product from Nurture called Empath. It's a recliner and it won a Nightingale Award. This is one of the top honors in healthcare product design. And near and dear to my heart as a proponent of Steelcase as a learning organization, our company ranked among the top 10 learning organizations in the U.S. according to the American Society for Training and Development. The focus of our application was a new workshop that we call the Think workshop. It helps our people apply design thinking skills and methods in every function of our business.

The trek by our customers to see us in Grand Rapids is evidence of their hunger for these innovative notions. To wit, our customer visits hit record levels this quarter, growing about 30% over prior year. We've reminded you more than once that we continue to invest in the future during the last downturn. And you can see with this news today that those investments in products, new markets and cost structure improvement are now paying off.

Our margins in the Americas have improved to high single digits. And based on our internal analysis through October, our domestic order patterns in the U.S. have substantially outpaced BIFMA's reported order growth. These apparent share gains are hard to come by in our industry given the long life of furniture standards inside corporations. But as I remind my team, confidence can breed complacency. It's instilled in our culture that pride comes before the fall, but I have to say the broad base of interest in our products and our brands and the rapid acceptance of media:scape and other insight-based apps has convinced me to ramp up our investment in growth.

Over the course of the next year, we expect to launch new products, services and opportunities for Steelcase to build on the momentum we've been experiencing for the last several quarters. We expect this to create a spike in capital and OpEx even with the continued cost control activities, but I believe it's time to seize this opportunity for the long-term strength of this company.

And that company, which I have had the honor to lead, turns 100 years old in 2012. That's coming around the corner, and we'll be celebrating that milestone in multiple settings over the next year. Always with one eye on the rich legacy built here over the generations and one eye on the future. Today's results are a great lead into our centennial year and I'll let Dave Sylvester take you further into those details. Once again, I want to wish everyday everyone a happy, safe holiday, joyous New Year. And again, thank you for your interest in Steelcase.

David C. Sylvester

Thank you, Jim. I will start with a few high-level comments about the third quarter results and balance sheet, provide some additional color commentary around the order patterns and outlook for the fourth quarter, and then we will move to your questions.

Again, as Jim mentioned, we feel quite good about the results of the third quarter. Earnings were in line with the outlook we communicated last quarter and revenue was slightly higher than our estimated range. All in, a solid quarter. But there were a couple of items that differed from our expectations, and when you net those out, we estimate they cost us a couple of cents in earnings.

First, demand patterns in the Americas remained strong throughout the quarter, particularly with some of our largest corporate customers. The mix of business from these customers was higher than we expected, which had negative consequences on our gross margin and operating income relative to our earnings estimate. In addition, we recorded a higher mix of services revenue associated with our Direct business, which generates lower levels of profitability relative to our core business. The negative effect of these mix shifts was fairly significant to our gross margin, but we also experienced better-than-expected price yield from recent price adjustments which dampened the impact of the mix shifts.

Second, volatility in the equity markets resulted in variable life COLI losses in the quarter compared to income assumed in our earnings estimate. As a result of these factors, earnings fell within the estimated range as opposed to at or above the top end of our estimated earnings, which would have seemed more consistent with our revenue performance. Compared to the third quarter of last year, adjusted operating income improved by $7 million, largely due to operating leverage associated with the organic revenue growth in the quarter, which totaled $63 million or 10%.

The year-over-year comparison was also impacted by the higher mix of revenue from some of our largest corporate customers and services associated with our Direct business, as well as increased spending on product development, sales and distribution strategies and other initiatives and the deconsolidation of IDEO, which had the effect of lowering operating income by approximately $4 million compared to the prior year.

As it relates to commodity cost inflation and benefits from recent price adjustments, we were able to offset the year-over-year inflation with improved pricing in the third quarter, marking the first time in 6 quarters we were able to do so. Sequentially, third quarter revenue exceeded second quarter revenue by $25 million or approximately 4% on an organic basis, and adjusted operating income also increased sequentially by $4 million. The sequential revenue improvement was entirely associated with the EMEA segment, which recorded $5 million of adjusted operating income in the quarter, a significant improvement compared to the second quarter loss. As expected, individual country results remain mixed, but the sequential revenue growth for EMEA in total represented a normal seasonal rebound from the slower summer quarter and was achieved despite the ongoing negative sentiment surrounding European sovereign debt.

Third quarter revenue in the Americas was relatively flat compared to the second quarter. Sequentially higher benefits from recent price adjustments were more than offset by the negative consequences of the shift in business mix. In addition, operating expenses increased as previously mentioned. As a result, adjusted operating income in the Americas decreased by $5 million compared to the second quarter.

Restructuring costs in the quarter were in line with our expectations and included a gain associated with the sale of a facility we are in the process of exiting. Regarding the timing of remaining restructuring costs and related benefits applicable to the North America consolidation plans, we continue to estimate total restructuring cost will approximate $40 million. And we expect the remaining restructuring cost of approximately $14 million to be incurred over the next 3 quarters. We continue to estimate annualized savings of approximately $30 million to $35 million once these actions are completed.

Benefits realized to date have been largely offset by start-up costs in Mexico and redundant manufacturing processes during the product transition periods. Net benefits should begin to show up in our results starting in the first quarter of next fiscal year and build thereafter through the end of fiscal 2013.

Moving to the balance sheet and cash flow. We generated $51 million of cash from operations during the third quarter and capital expenditures totaled $20 million, including $11 million of final payments related to a replacement aircraft and $2 million related to our campus consolidation in Western Michigan.

We currently estimate total capital expenditures for fiscal 2012 will approximate $60 million to $65 million, including aircraft payments of $21 million and campus consolidation costs of approximately $8 million. For fiscal 2013, we expect capital expenditures to remain at a relatively high level, likely at or above the level of spending for fiscal 2012. We have invested little beyond pure maintenance in our manufacturing processes over the last 3 years and we see opportunities to strengthen our agility, drive efficiencies and quality improvements and bring new technologies and applications to our industry, plus we plan to finalize our campus consolidation in Western Michigan next year. And as Jim mentioned, we are localizing our supply chain in India and ramping up our product development efforts globally as we see opportunities to exploit our insights and continue our momentum with our global customer base. We will update you next quarter after we have finalized our detailed planning, but I wanted you to at least have a sense of the direction we are headed.

We expect to offset some of the cash impact of these incremental investments with various property sales linked to our previous manufacturing consolidation activities and the sale of the aircraft we recently replaced, but the amounts and timing of these proceeds are not certain. We returned approximately $26 million to shareholders in the third quarter, $18 million through repurchasing a total of 2.7 million shares and $8 million from the payment of our quarterly cash dividend of $0.06 per share. Approximately $3.6 million of the share repurchases in the quarter were made pursuant to the stock repurchase agreement entered into on November 4. And we have continued to buy back shares under this agreement thus far in the fourth quarter, returning another $5.8 million to shareholders through yesterday. This agreement allows for total repurchases of up to $25 million through March 21, 2012.

As it relates to order patterns, I will start with the Americas, where we experienced year-over-year order growth in the third quarter of approximately 16%. Double-digit order growth in the current quarter is a pretty notable accomplishment as our year-over-year comparisons are now impacted by the strength of last year's rebound we saw coming out of the bottom of the recession. Plus, our prior year orders included a pull-forward effect from a November 2010 price adjustment, which, if set aside, results in an estimated increase of approximately 20% in current quarter orders compared to the prior year. As an aside, BIFMA recently reported that office furniture orders increased by approximately 2% in September and decreased by approximately 7% in October. So we feel very good about the performance of the Americas segment, especially as our order growth rates seem to have outpaced domestic industry performance considerably in 7 of the last 8 months based on our internal analysis, reflecting how well our insights, product applications and experiences are resonating with customers.

Order patterns in the Americas remained steady throughout the quarter and resulted in an ending backlog that was the highest level we have seen in more than 3 years. Even with last year's November price adjustment and the related pull-forward effect on orders, third quarter ending backlog was approximately 20% higher than one year ago. And orders in the Americas through the first 3 weeks of December have remained solid.

Order growth rates in the Americas were the strongest in project business and from our marketing programs targeted towards small to mid-size companies. While the order growth rate and day-to-day or continuing business was impacted by the prior year pull-forward effect previously mentioned. In addition, the mix of both project and continuing business was more heavily weighted toward some of our largest corporate customers, including one particularly large project in the Midwest, mentioned on previous calls, which positively impacted our third quarter order growth rate by a few percentage points.

Vertical market order growth rates in the Americas were the strongest in the energy, Financial Services, insurance and manufacturing sectors. The healthcare and Technical/Professional sectors also grew orders, but at a lower rate than the overall average. Education and Federal Government comparisons were negatively impacted by prior year strength and state and local government declined the most compared to last year as this vertical market continues to cut spending and shed jobs.

Within our product categories and brands, order growth rates in the Americas were fairly broad-based with notable strength in wood details and technology. And across our geographic regions, third quarter orders were strongest in Latin America and the Central and Southern regions of the U.S.

Switching to EMEA. Order patterns in constant currency continued to reflect a mixed bag, remaining flat in total compared to last year. Orders in Northern Europe, which includes the United Kingdom, were exceptionally strong and orders in Germany grew at a high single-digit percentage rate compared to the prior year. Orders in France were down slightly, but reflected an improvement in our win rate following a large decline -- a larger decline in the second quarter. In addition, orders in the Eastern, Central and Southern parts of Europe, Middle East and Africa as a group, were up compared to the prior year.

That just leaves Spain to talk about, which remains in a deep recession but also faced a tough prior year comparison this quarter as the prior year included a large project win, one of only a few such opportunities in all of Spain last year. So Spain remains in recession and was up against a tough comparison. But the rest of EMEA was slightly down, in the case of France, to exceptionally strong, in the case of Northern Europe, growing in total before Spain by approximately 7% in constant currency. I would say pretty good results given the negative undertow of European sovereign debt.

Within the Other category, Asia Pacific grew orders significantly again in the third quarter and remained profitable. Exceptional growth in revenue and benefits of post-merger integration activities continued to more than offset our ongoing strategic investments in this region. PolyVision recorded a modest operating loss in the third quarter as their domestic revenue continues to be negatively impacted by funding cuts imposed by state and local governments. Lastly, Designtex orders grew modestly in the third quarter compared to last year. And we completed a small acquisition of a digital printing company targeted to enhance their Surface Imaging business.

Turning to our fourth quarter outlook. After taking into consideration the strong beginning backlog in the Americas, as well as the broader economic uncertainty, especially in Europe, we expect to report revenue between $675 million and $700 million which includes the dealer acquisition completed during the first quarter of this fiscal year. This compares to $623 million in the fourth quarter of fiscal 2011, which included $5 million of revenue from the small PolyVision divestiture completed during the second quarter of this fiscal year.

Currency assumptions included in our revenue estimate represent small negative effects on the year-over-year and sequential quarter comparisons. After giving effect to these items, we estimate organic revenue growth in the fourth quarter will approximate 7% to 11% compared to the prior year. Sequentially, the fourth quarter revenue estimate translates to a seasonal change in organic revenue of down 2% to 5%, which is better than normal seasonality. We expect the mix of business from some of our largest corporate customers in the Americas to remain relatively high and thus continue to impact our gross margin and operating income.

And as Jim mentioned, we are investing in incremental initiatives to sustain our market leadership and the momentum we have in our business. With respect to commodity costs, our earnings estimate contemplates little or no sequential inflation compared to the third quarter. However, compared to the prior year, commodity cost inflation in the fourth quarter is expected to approximate $7 million. We expect additional pricing benefits in the fourth quarter from recent price adjustments taken in North America and Europe.

As a result of these factors, we expect to report fourth quarter earnings within a range of $0.09 to $0.13 per share, including net restructuring costs of approximately $0.04 per share associated with the manufacturing consolidations in North America.

From there, we will turn it over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Budd Bugatch with Raymond James.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Jim, Dave and Raj, just can you put some color around the incremental initiatives to drive growth over a longer and intermediate term? Can you give us maybe a little color of what some of those are and put maybe some quantification of that in terms of what the cost might be and when we might see some benefit of that?

James P. Hackett

What I can do, Budd, is paint this picture for you. One is the way that we do development is there's kind of a staged, gated process and a lot of the intellectual property is around the notion of this development design phase. So the money that I'm starting to release in new projects that have proven through the first stages that they have lots of promise. Additionally, some things that we started 2 years ago are now hitting the stage at which the tooling and the investments now are ready to start to happen. We call that the plan-to-implement phase and it's basically been confirmed that we are -- got the right design and we're ready to go. And those are in categories this latter comment has to do with categories that you know. I don't want to get more specific than that yet, but they are categories that still have lots of promise and the new products have proven to create a response to top line growth and margin improvement. And then finally, I don't want to call it conservative, but I'd say in a measured way, we look at expanding our capabilities like we did in education and healthcare where we see platform opportunities with products and ideas that can be expanded. The reason I said it's a little conservative is it takes us not too far afield, it leverages investments we have, and then -- so then, it has potential to produce profits. But with that said, these kinds of investments are going to show up in our 3-year plan, and the way the management team works through this is we're now prioritizing for our board presentation in January, the coming 3-year plan. And so that's how we have a handle on the impact right now because we have to get ready for those meetings.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Okay. I mean, last question -- on my last question, second question...

James P. Hackett

I just would add, to go further right now wouldn't serve anybody. But as these things have value, it's our job to make sure you know they're coming and what they might mean and we're going to do that.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Yes. Just talk to us a little bit about the hand off of government to business. And government was the one vertical I think you called out as down year-over-year state and local and federal. Can you kind of give us maybe a quantification, refresh us how much government is a percentage of Steelcase and what the outlook of that might be and how are you thinking about it?

Raj Mehan

Budd, it's Raj. I think as far as the Federal Government is concerned, it represents 4% roughly of last year's FY '11 revenues.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

That's a GSA amount, right, Raj?

Raj Mehan

Yes, yes, exactly. So we update that on more of an annual basis.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

And then what about state and local?

Raj Mehan

It's less, but we haven't specifically broken that piece out.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

So the penetration of Steelcase sales, I just -- and I'll yield to others, just versus competitors that reports probably a lower percentage of your sales than it is for some of your colleagues and some of your comparables.

David C. Sylvester

Yes, we'd turn that the other way. We'd say the bulk of the success that you're seeing in our top line is coming from global customers that are doing business with us all over the world.

Operator

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

Matthew S. McCall - BB&T Capital Markets, Research Division

So I guess I want to hit some of the mix changes. And specifically, when we're talking about the day-to-day versus the project pipeline, I think I don't know if Dave it was you or if it was Jim, you talked about the day-to-day, basically, it was more of a comp issue. But as you look at some of the trends of day-to-day, some investors' first response would be, "Well, that's indicative of the quicker trigger for customers from a day-to-day perspective." Meaning things are softer now and more uncertain, so they're going to pull back on some of those initiatives. Do the trends there cause you any concern or is it simply just a tough comp issue?

James P. Hackett

No, I'll let -- Terry's pulling up the trailing 12 months data to take a look at, but it really isn't. I don't recall seeing anything alarming in the day-to-day or continuing purchases bought off of agreements on a day-to-day basis. And our run rate has been fairly steady. The comp versus last year was attributable to the pull-forward effect on orders, where we had more pull forward come in. But Terry, do you want to add anything from the chart you're looking at?

Terry Lenhardt

Matt, despite the pull forward last year, our Continuing business still grew upper single digits for orders this quarter and the growth is pretty broad based between our largest customers and beyond.

Matthew S. McCall - BB&T Capital Markets, Research Division

Okay. And I guess the next question, as we look out in the next year, Dave you mentioned the $30 million to $35 million that you're going to recognize beginning really in Q1. Is the full recognition going to occur next year? I know you said it's going to build or is it going to be of some fraction of that, that we'll recognize? And then you also mentioned price cost, still on a year-over-year basis, causing little pain in Q4. What's the outlook if we assume flat commodities from here based on what the current pricing trends are, would that be a net benefit to next year's earnings relative to what you experienced this year?

David C. Sylvester

Yes, on your commodity versus inflation in the third quarter, we actually offset the inflation, and we expect that tailwind, so to speak, to continue -- go forward. Now a lot of that is dependent on what inflation does and what pricing does in the market. But if pricing was to stay relatively consistent with what we're experiencing and inflation was relatively flat then yes, we should have a tailwind over the course of next year.

Matthew S. McCall - BB&T Capital Markets, Research Division

And then the savings recognition?

James P. Hackett

The $30 million to $35 million?

Matthew S. McCall - BB&T Capital Markets, Research Division

Yes.

James P. Hackett

That -- we are seeing some of those benefits already. I don't know the exact count of the number of people that have transitioned or -- and I don't want to get into which product lines have moved to this point. But we have moved a fair amount of production to the receiving facilities, but we are incurring start-up costs and other inefficiencies as we train staff and move products, so it's currently about a push. I expect that to get moved to a net benefit in the first quarter and build from there. And our current estimates are that we will finish the activities by about a year from now, maybe a little bit better than that. But we've changed those a couple of times because we have been growing significantly, and we're trying to balance the moves with not disrupting our customers.

Matthew S. McCall - BB&T Capital Markets, Research Division

Okay. And I apologize, I want to sneak just one in on the COLI. Just could you quantify the losses relative to your expectation? And then, what's baked into the outlook, so we'll know what to expect based on what the market does over the next quarter.

David C. Sylvester

We lost, on the variable life COLI and nonoperating income, we lost $1.1 million in the quarter versus what was baked in our estimate of $1.5 million of income. And that's the same number that's baked into our fourth quarter estimate.

Matthew S. McCall - BB&T Capital Markets, Research Division

So the income?

David C. Sylvester

Yes, we typically assume a 4% or 5% return on our variable life policies. And we had that more often than not during the quarter, we just -- the equity markets did not finish November very well or at least through November 25 anyway, our quarter end.

Operator

And next in line, we have Mark Rupe with Longbow Research.

Leah Villalobos - Longbow Research LLC

This is Leah Villalobos filling in for Mark. Just on the Americas, I know you called out a couple of regions, the Central and the South that were stronger. I was just wondering if there were any regions where you actually saw some declines during the quarter?

James P. Hackett

Where of any regions -- at the summary level, that's declined. I'm sure if you drilled into the sub-territories, state-by-state, there might have been a few areas. But, no, the growth was pretty well dispersed, just was stronger in the South.

Leah Villalobos - Longbow Research LLC

Okay, great. And then there was in the presentation, there was some commentary about Nurture being kind of growing steadily above average, but healthcare growing slightly below average. And I just wanted to kind of get your take on how we should think about that.

James P. Hackett

Yes, that's a great question, Leah. The Nurture -- when we refer to Nurture, it is the collection of our off-carpet products and applications that we take to clinical spaces. Whereas when we refer to the vertical market opportunity, it includes the administrative settings as well.

Leah Villalobos - Longbow Research LLC

Okay. Great, that's helpful. And then just lastly, on the Education business, I know it was a difficult comparisons and so expected to see growth there slow down a little bit. But just looking kind of broader at the market, for that end market specifically, what do you see and kind of how should we think about that market going forward?

James P. Hackett

Well, I think that at one level, learning as a field has an infinite range of potential. It applies in civic kind of settings that are schools and colleges and universities and then it applies in businesses and it applies around the world. So I suspect that maybe your instinct is, is there something in the state budget world that's going to cause problems or school systems at-large struggling? The interesting tension in this is that the design of those spaces have to evolve in order to keep up with what we're learning about the way people can learn in the future. So we're very optimistic about the potential staying rich.

Operator

[Operator Instructions] And next in line is Todd Schwartzman with Sidoti & Company.

Todd A. Schwartzman - Sidoti & Company, LLC

Regarding the North American restructuring benefits, when do you hit full stride, realize that full $30 million, $35 million on a full-year fiscal year basis? Is that an F '14 event?

James P. Hackett

I think at the earliest, it would be at the end of the third quarter of next year, so at 12 months from now. I think we -- our current plans are to be completely finished with the moves by 12 months from today. But I would imagine that we will still have some disruption in the system, so I wouldn't expect it to be fully realizing the $30 million to $35 million until probably the end of next fiscal year. But we should get some pretty sizable benefits throughout the course of next year.

Todd A. Schwartzman - Sidoti & Company, LLC

Great. And just circling back to commodities for a moment, exclusive of any offset by pricing benefit, when do you start to see the year-over-year inflation subside? Is that second quarter of next year or third quarter?

David C. Sylvester

Second quarter.

Todd A. Schwartzman - Sidoti & Company, LLC

Okay. And regarding the new investments, the product development that you've talked so much about, can you give us a sense of how that -- what the mix is geographically, specifically if there is any portion of that, that is dedicated, that's going to be EMEA specific or to -- sold just into the European countries in particular?

James P. Hackett

One of the things that, Todd, that happened to the -- you guys have to help me, when we announced Sandstone [ph].

Unknown Executive

January.

James P. Hackett

January. Last January, we had an organizational change, which basically knitted together the Steelcase brand between North America and Europe. So we do segment reporting geographically as you see today. But in terms of the way the investments are made now, they are managed by shared teams. So think of that in a way that gives us the leverage of these platforms that can work around the world. And if you have one market that's having the better forecast in terms of growth potential, you might say that about the Americas right now, it's not going to be a negative because Europe is taking advantage of the shared platforms.

Todd A. Schwartzman - Sidoti & Company, LLC

That makes sense. And just looking at the sequential inventory build, maybe can you speak a little bit to how much of that is new product related, if any? How much is just normal seasonal factors or if there's anything else going on?

James P. Hackett

I would say the factor that you didn't mention that is going on is related to the production moves. So we are building a little bit ahead of -- with some of the component parts and some of the finished goods as we're in the midst of many product moves that are going on. But there's also a -- we had nice growth. There is a seasonal factor associated with our quarter ending on the last Friday in November, the Friday after Thanksgiving. So you can imagine there's a lot of product that's produced that doesn't necessarily leave our property until Saturday or Sunday or the following week. So you tend to see a seasonal build from that perspective.

Todd A. Schwartzman - Sidoti & Company, LLC

But the move does represent a significant chunk of that?

James P. Hackett

It's a sizable piece.

Operator

And next in line we have Jeff Matthews with RAM Partners.

Jeffrey Matthews - RAM Partners, L.P.

I'm just curious as you prepare for the new calendar year and what you're seeing out there in the way of interest, new designs, visits to the company and how it feels at this point this year versus a year ago? And along that line, I'm interested in the fact that you highlighted the potential of the U.S. as one of your stronger areas and that's where manufacturing has been coming back, and I wonder if you see that in your customer base?

James P. Hackett

Well, let me give a cursory overview, and maybe, Dave, you can build on is that I hope you can catch in my comments, my opening comments that I believe the company has strong momentum now in its abilities to do the kind of fundamental research and convert those into insights and into product services and applications in a way that increases our likelihood of success. So when Budd Bugatch asked me, are those investments you're going to create the kind of returns and how can I know that before you guys spend it. I want you to see it as a practice that we're getting much better at it. And I want to stop there in terms of boasting about it because as the CEO, I have to make sure that we don't get comfortable that at any given time and it's not going to be a bigger challenge. But I will assure you that the competency in the company is one of its better levels right now and able to do that. And the second part of your question had to deal with the Central region. And I'd make an observation to you that this is -- to this group of analysts, you have to do the fact searching on this. But I've heard in meetings, I've been into breakeven in the car industry went from something like 18 million vehicles a year to 12 million, maybe 18 million is a little high, but there's a substantial improvement in the automotive industry's ability to produce profits based on their restructuring. And that has fueled a renewal, I believe, in the region that is the Midwest. So there's a lot of other great things that have come because communities are trying to build future. I said this, this week in another meeting, that I think given how difficult the last 10 years have been, it's hard to see the progress that is actually going on in industrial side. I don't want to -- I don't want that to come off like a political comment about anybody in office or not in office. It's more of what did the organization do during this last decade to improve their fitness. And you can find that in American companies, they're in a lot better shape than I think the media is reflecting.

Jeffrey Matthews - RAM Partners, L.P.

Sure. And just to follow up on that, Dave, I think you talked about it from a Steelcase point of view, I'm also curious from a customer base point of view. My sense is that their optimism -- and again, I'm wondering what your conversations are like this year versus a year ago as you look into the new calendar year. Do you see anything differently? Are they -- more optimism, less optimism, more tightness, less tightness budget-wise? More ability to -- I'm hearing that people are more willing to spend and I'm wondering if that's kind of what you're seeing?

David C. Sylvester

Yes. No, I understand. Back to what Jim said in his scripted remarks, he made a reference to customer visits that were up 30%. We set a record in the quarter, so that gives you some sense of a potentially growing confidence among business leaders to spend back. But I also go back to and reiterate the points we've made on previous calls. That we've been -- this industry has been dramatically affected by 2 significant recessions in the last decade, while at the same time significant forces that affect how work is getting done today are -- have been going on, maybe at an exponential pace right now. And so I think our company has believed that companies would be making investments even though the economy was uncertain because of the fact that they had not modernized their spaces in so long. And a lot of cash does sit on balance sheet. But to address your question specifically, I'm not in customer visit discussions every day, but once a week or every other week, I'm with customers. And those types of conversations are probably half are the same and half are slightly better or more optimistic about where they think the overall economy is going.

Jeffrey Matthews - RAM Partners, L.P.

I get it. Okay. And if I could just follow up with one more on China, there's a lot of discussion about costs rising over there and also excess capacity in the real estate area, commercial real estate area and I wonder what you see that way?

James P. Hackett

You said costs going up in China, is that what you were...

Jeffrey Matthews - RAM Partners, L.P.

Yes, yes, yes.

David C. Sylvester

So one bit of data on labor is it did go up year-over-year but the government has paused this minimum labor wage increase that they were edicting, so I don't know if you followed that. But secondly, not just in our industry, lots of companies are studying the cost of transportation, and those costs have gone up over the last decade in a way that you have to calculate proximity. But I would -- as you're studying this industry, I would say, you got to keep in mind that the cycle times for our market matter as much as how low they can buy something there. And so we're not made the stock kind of industry here and therefore, need the proximity of delivery for serving global customers. So much of what you're seeing out of our Asia performance is Chinese factories producing for the Chinese market. So as we have inflation, we also will take price increases.

Operator

At this time, I would like to turn it over to CEO, James Hackett, for any closing remarks.

James P. Hackett

I think it's a simple one and that's to wish everyone a wonderful holiday, and to treasure the time with your families and best to everyone.

Operator

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

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