Steelcase Inc (SCS) 2005 Q1 法說會逐字稿

Good day and welcome to Steelcase's First Quarter Earning Conference Call.

As a reminder, today's conference call is being recorded.

For opening remarks and introductions I would like to turn the conference call over to Terry Lendhardt, Vice President Corporate Strategy and Investor Relations.

Thank you.

Good morning, everyone.

Thank you for joining us for the recap of our first quarter fiscal year 2005 results.

Here with me today is Jim Hackett, our President and Chief Executive Officer, and Jim Keane our Chief Financial Officer and Mark Mosden, Vice President and Corporate Controller.

Our first quarter earnings release dated June 22, 2004 crossed the wire early this morning.

That same release is accessible on the web site.

Reference will be made during this call to certain non-GAAP measures which are consistent with the way management views business results.

Jim Keane will provide the reconciliation of these measures to GAAP during the review of our results.

The conference call is being Webcast.

Presentation slides that accompany this webcast are available on steelcase.com.

A replay of this call will be also posted to the site later today.

In addition to our prepared remarks, we will take questions from investors and analysts.

At this time, we're incorporating by reference since this conference call and subsequent transcript, the text of our Safe Harbor statement as incorporated in this morning's release.

Certain statements made within the release and during this call constitute forward-looking statements.

There are risks associated with the use of this information for investment decision-making purposes.

For more details one these risks, please refer to this morning's release on From 8K, the company's Form 10K for the year ended February 27, 2004 and our other filings were with the Securities and Exchange Commission.

This webcast is copyright of production, Steelcase, Inc.

Any reproduction, publication or rebroadcast without the express written permission of Steelcase is prohibited.

Copyright 2004, Steelcase, Inc..

And with those formalities out of the way, I'll turn the call over to Jim Hackett.

Jim?

Terry, thank you.

Last week I arrived at our North American trade show, known as NeoCon, for our pre-show preparations.

This is a ritual of making sure that the place where we will host our guests looks world class.

And invariably things are still taking shape with many of our people hustling to make last-minute changes.

Disorganized chaos is something I've grown used to over the years.

But you know, this year was different.

I sensed the optimism of our people, the momentum we were experiencing in our order rates had translated to the folks who were now readying us for this important show.

I sense the confidence that our commitment to continue to spend our product development during the worse downturn in our industry's history was about to pay off.

Finally I could feel the enthusiasm from the top team that had gathered here, the hard work and dedication to our strategy was about to come of age.

Today, I can report that we just completed our first quarter over quarter sales growth in three years.

Needless to say, this shift is a signal that our phase of the economy is improving.

And we see a trend improvement in customer visits, quote activity and discussions with facility managers that confirm a renewal of activity in our industry.

Jim Keane, our Chief Financial Officer, will take you through the granularity of this quarter's performance.

Even though we do this for each of our quarterly calls, I ask you to pay close attention to the makeup of our order -- excuse me -- of our performance.

The reason is that I remain committed to an orderly and coordinated effort to improving our economics without disrupting our service commitment to customers.

There are a number of ins and outs with this quarter's summary.

I've also observed that I'm delighted with the discipline we've exhibited in the accuracy of out financial reporting and the fact that some of the improvements are because we took steps during the recession to conservatively handle surprises that might come up during that time.

Earlier I mentioned the North American trade show called NeoCon was held last week.

It was confirmation of our continued investment.

In the future.

A number of outstanding new products were introduced at NeoCon.

In the momentum continued from last year as for the second consecutive year, we received more awards than anyone in our industry.

Of the total total, 325 products entered in 26 separate categories by all the companies participating in the show, Steelcase was recognized with seven awards.

Including as I list these -- I want to emphasize that one of the powers of Steelcase, Inc. is the breadth of categories these products span.

Some of the products were the think chair.

This won an Editor's Choice award.

The Metropolitan's Topo, which is an alternative office system.

The Brayton won for the calm occasional tables.

Vecta had a product called the Rocky Seating collection.

Turnstone with PET lounge and design text with a category called the Viser collection.

All of these companies contributed to the seven awards.

You know, that was just a small portion of what you would have seen at the Steelcase and Steelcase design partnership showrooms in Chicago.

We also launched a comprehensive portfolio of [demountable] walls as well as a new full-raised floor, furthering our commitment to AFT.

We launched this revolutionary new chair that I talked about earlier called Think.

We called it a chair with a brain and a conscious that is extremely intuitive to use while taking sustainability well beyond anything done to date in the industry.

We furthered our commitment to high performing well designed mid-market products with a number of new Turnstone products that I mentioned above.

And we showcase complete health care solutions for on and off carpet areas.

Frankly this got as much applause as any single thing we did.

This work of designing the health care space was confirmation for our out standing sociological analysis of health care environments by IDO and Steelcase work space futures.

Other key initiatives that we stayed focused on included readying ourselves for growth opportunities that will present themselves during the recovery we now find ourselves in.

We do continue to streamline operations and are seeing improved productivity in several areas across the enterprise.

I'm noticing momentum in our factories.

Our balance sheet reflects considerable strength, impressive cash position.

Jim will tell you about further reduction of debt this past quarter.

We made adjustments to our strategy, but we never abandoned it.

And now it seems like more competitors are adopting AFT strategies in various forms.

This comment comes from my tour of competitive showrooms at NeoCon.

We strengthened our commitment to sustainability even further.

Staying true to our core value to protect the environment.

And you know, it's showing up in our products like the Think chair, this PET lounge, Pathways, our architectural walls, of course you know about our wood plant that won Leaf certification and on and on.

Candidly, commitment to sustainability has been something that we've done for a long time.

We're just continue what we think is a best practice.

We expect to realize the cumulative benefits, frankly now, of three years of hard work by all our employees.

Which was designed to create a nor agile, nimble business as the industry now recovers.

Today, I would also like to illuminate some details around the announcement by Bob Black that he's accepted an executive role at Sammons Enterprises.

Bob has been President of Steelcase International, and he's done a great job in the face of many initiatives happening in international.

Particularly the rationalization of Europe of the disparate operations took a great deal of Bob's attention.

Bob is a good friend, and a strong colleague.

And he had an excellent career at Steelcase.

And I hate to see him go.

I do understand, though, that the scope of this new opportunity was too good for him to turn down.

Additionally, Bob's commitment to the company's success allowed me to martial a coordinated succession plan which was considered in this transition.

We have an extremely strong management team at International and we'll be able to keep our focus as we manage through this important transition.

Now, I'd like to turn it over to Jim Keane, our Chief Financial Officer, for a detailed review of the business results in this quarter.

Jim?

Thank you, Jim.

Yesterday we reported a first quarter loss of $5.7 million, our 4 cents per share.

These results were better than the 9 cent to 14 cent loss we estimated in our March 29 press release.

I'm going to start by talking about revenue growth.

The first time in a long time we've been able to say those words.

Revenue was $598 million in the quarter.

A 7.6% increase in the prior year, and a 6.1% increase over the fourth quarter of fiscal 2004.

Sales growth was in line with our expectations.

Included in revenue this quarter were $16 million of sales related to ten dealers who are recently consolidated within our operations.

Two of these dealers, representing $13.4 million in first quarter sales, are included in the North America segment, and eight dealers, representing $2.5 million of first quarter sales, are included in the international segment for reporting purposes.

There was no impact on operating income from this consolidation.

The current quarter revenue also included about $11 million of favorable currency effects versus the same quarter in the prior year.

Now, back to growth.

Even if you adjust for those two items, by backing out the extra revenue from the newly consolidated dealers, and by backing out the currency effect, we still grew our top line by 3% over the first quarter of last year.

That makes it the first sales growth we've seen in 13 quarters.

And a good sign that better times are ahead.

On a sequential quarter basis, we grew revenue by 6.1% on a reported basis.

The dollar reversed its course and strengthened against the Euro between the fourth quarter and the first quarter.

So there was a negative $4 million effect on first quarter revenues.

So if you back out the dealers and the currency effect, we grew revenue by about 4% versus the fourth quarter of last year.

No matter how you look at it, we grew the business this quarter and we're very pleased to see these results.

Now we'll talk about profitability.

Our policy is to give you plenty of information about the factors affecting our profitability.

You can use the information as you wish.

We will not provide proforma earnings per share.

We expected to incur charges between $3 million and $6 million after tax related to restructuring activities.

The actual net after tax charge was $3.6 million or $5.1 million pre-tax.

These charges related to previously announced plant consolidation activity in our North America and international segments and a lease impairment charge related to one of our PolyVision facilities that is no longer in use.

Those items were partially offset by reductions of certain asset reserves upon the sale of the related assets in our international segment.

As always, there is a chart in the webcast slides that shows these restructuring charges broken out in cost of goods sold versus operating expenses within each segment.

So I won't go through all of the detail here.

Cost of goods sold was $71.4% of sales.

A slight improvement from 71.8% in the prior quarter.

We saw a significant 1.8 point improvement in North America cost of goods sold, driven by plant rationalization and productivity improvements.

More than offset higher discounting and higher steel prices.

International saw a modest improvement in cost of good sold.

SDP reported an increase in cost of goods sold because of product mix and inventory reserve adjustments.

Gross margins of 28% were up from 26.3% in the prior year quarter, primarily because of lower restructuring cost in the current quarter.

Excluding restructuring costs, operating expenses were $170.9 million compared to $156.9 million in the prior year.

The current year includes $3.5 million in unfavorable currency effects.

And $7 million related to the newly consolidated dealers.

If you back those out, you'll see the impact of continued cost controls and higher productivity.

Our reported operating loss of $5.1 million is about the same as the pre-tax restructuring charges we incurred in this quarter.

However, there were a number of items that positively impacted our operating loss this quarter.

And I will provide some additional information on some of those items.

Which individually are immaterial.

But which in aggregate represent a favorable impact of $8.4 million pre-tax, or $5.9 million after tax.

The impact is split about equally between cost of goods sold and operating expenses.

Some examples of these items include favorable property tax settlements, reduction of bad debt reserves related to specific customers, and a gain from a customer's prepayment of a large furniture lease.

The $8.4 million is also net of some items going the other way.

For example we saw a decrease in the cash surrender value of company-owned life insurance as a result of changes in the stock and bond market.

We have items like this every quarter.

Sometimes they increase profits.

Sometimes they decrease profits.

And usually they offset to some degree.

This time it seems there were a lot of them were going in the same direction. helping to increase profitability, but you you shouldn't count on that to happen on a regular basis.

So again, we don't provide proforma earnings as it relates to the items I described.

We simply provide you with information about what is behind the numbers so you can do your own analysis.

We mentioned last time we expect our long-term effective tax rate to be 37 or 38%.

But it can vary from year to year, especially in years with lower absolute profitability.

That's because the permanent tax differences have a greater affect on a percentage basis.

We've done some preliminary estimates for the year.

For the first quarter, we used an estimated 30% effective tax rate.

Since we reported a loss for the quarter, using a lower rate had the affect of reducing our reported tax benefit.

And therefore increased our net loss by $0.7 million.

We'll continue to evaluate that rate as the year proceeds.

One last point before I move on to the balance sheet.

We had a $1 million after-tax gain reported on the discontinued operations line on the income statement.

That represents the resolution during the quarter of matters related to Atwood which was sold last year.

Next I'll talk about the balance sheet and cash flow.

Although this is the first quarter which we included the sales gross margins and operating expenses for the dealers I mentioned earlier, I'll remind you we consolidated the balance sheet for most of these dealers at the end of the fourth quarter.

So there is no material sequential quarter change in the balance sheet as a result of that consolidation.

Our cash balance was $206 million at the end of the quarter.

A $56 million decrease from the fourth quarter, but in line with our expectations.

There were two main uses of cash in the quarter.

First, we had a significant use of cash related to changes in operating assets and liabilities.

Some of this related to increased working capital needs.

We also made a number of cash payments in the first quarter of each year that are large in total.

These include the contribution to employee retirement funds, long-term bonus payments, insurance fee payments and so forth.

You'll notice on the cash flow statement, that last year we had a similar use of cash for operating assets and liabilities related to these same kinds of payments.

The second use of cash was to pay off about $23 million in debt, including $15 million of Canadian debt in the first quarter.

The Canadian debt was established several years ago to help fund Steelcase financial leases in Canada.

As we've change strategies, we no longer needed this debt.

Since we had plenty of cash and this debt carried a relatively high interest rate, we paid it off.

The other $8 million of debt reduction related to normal scheduled net repayments across a number of facilities.

Cash declined relative to the fourth quarter, but at $206 million, it is up significantly from $92 million for the same quarter last year.

That's an increase in cash of $114 million in one year.

Capitol expenditures from $15 million in the quarter, compared to $30 in depreciation expense.

The difference represents a source of cash.

We continue to carefully monitor or capital expenditures.

Now I'll discuss the operating results for each of the segments, starting with North America.

In North America, sales were $328 million in the quarter.

Up 10.8% from the prior year.

And up 8.7% from the prior sequential quarter.

North America's operating loss was $6.4 million, including $4.6 million of pre-tax restructuring charges.

North America sales included $13.4 million related to newly consolidated dealers.

Without this Benefit, the revenue growth compared to the prior year was 6.2%.

North America order rates were up significantly in the first quarter.

There were three main reasons.

The first reason relates to normal seasonality in the North American market.

Stronger first quarter earners drive higher second quarter shipments.

We're seeing that affect again this year.

The second reason orders were up, is that we do feel the furniture industry is strengthening in North America as job growth continues.

We are seeing substantial increases in orders from our large global alliance customers.

These customers are traditionally a big part of our business and have been on the sidelines for the last three years.

We're seeing positive momentum beginning to build.

And that's very good news for us.

Finally, it is possible there is some positive effect on first quarter orders from the steel surcharge implemented by North America on April 26.

We enacted the surcharge in response to rapidly rising steel prices and customers have understand and accept the surcharge.

First quarter orders increased significantly before the effective date and decreased significantly for a few weeks afterwards.

We believe the increase and decrease offset each other in total.

However, it is possible that some orders that would ordinarily have been placed in the second quarter were pulled forward to the first quarter.

We don't think first quarter or second quarter shipments are affected by the pull forward.

Discounts and dealer incentives remain relatively high during the quarter and are indicative of intense competition in the marketplace.

As large projects and large customers return, we expect the industry to remain competitive.

North America gross margins were 22.7% compared to 21.0% in the prior year quarter.

And 18.2% in the fourth quarter.

Restructuring charges included in costs of goods sold were $3.6 million in the current quarter. $2.9 million in the prior year quarter.

And $11.7 million in the fourth quarter.

Gross margins without restructuring charges improved 1.8 points over the prior year quarter.

The improvement is the result of plant rationalization and productivity improvements that more than offset higher discounting and higher steel prices.

North America operating expenses were $80.9 million in the quarter compared to $81.6 million in the prior year quarter.

Current quarter operating expenses include $5 million related to the consolidation of the two dealers I mentioned earlier.

Restructuring charges included in operating expenses were $1 million in the current quarter.

And $2.4 million in the prior year quarter.

Prior year operating expenses were lower because of the one-week shut down in Backwater.

And that was about a $3 to $4 million effect.

Improvement in operating expenses is significantly greater if you choose to adjust for these factors.

SDP sales were $70 million in the quarter.

A 5% increase compared to the prior year.

And an 8.5% increase over the fourth quarter.

SDP gross margins of 37.5% were down from 38% in the prior year.

But up from 37% in the fourth quarter of fiscal 2004.

The decrease from the prior year quarter was due to product mix and inventory reserve adjustments as mentioned earlier.

SDP operating expenses were $23 million.

SDP reported a $3.4 million operating profit in the quarter versus $2.9 million in the prior year.

This is the fifth consecutive quarter SDP has been profitable.

International sales were $134 million in the quarter.

This represents a 3% increase compared with the prior year.

Current quarter revenues included $11 million of currency translation benefits.

And $2.5 million of revenue related to the eight newly consolidated dealers relative to the prior year quarter.

Without these benefits, international saw a 7% year on year sales decline.

It is clear to us many of the major European markets are not yet showing the same signs of economic growth that we are seeing in the U.S.

France and Germany are both important markets for us and they remain weak.

Despite the lower sales volume, international improved their operating losses this quarter both as compared to last year and last quarter..

International gross margins were 30.5% compared to 23.9% in the prior year quarter and 24.3% in the fourth quarter.

The improvement in gross margins over the prior year quarter was primarily due to lower restructuring costs.

The current quarter includes a net restructuring gain of $0.8 million, whereas the prior year quarter includes structuring costs of $7.3 million.

And the fourth quarter includes restructuring costs of $6.6 million

International operating expenses were $42.7 million or 31.8% of net sales.

Including $3.5 million in unfavorable currency effects, and $2.3 million for the consolidation of the eight dealers mentioned earlier.

This compares to operating expenses of $36.2 million, or 27.9% of net sales in the prior year quarter.

Now I'll review our outlook.

Throughout the first quarter, we saw strengthening order patterns in North America and SDP.

The order spike that preceded the steel surcharge was followed for several weeks by of course timing reduction in orders from the previous run rate.

That created some volatility that makes it difficult to really gauge demand.

NeoCon was just last week, and that can also cause order rates to fluctuate before, during and after the show.

So orders are tough to call.

But all the other positive signs are there in North America.

Job growth continues.

Architects and designers are busy.

Dealers in many important markets are very busy.

And some of our largest customers are placing large product orders again.

We're expecting North America to drive our short-term growth.

Unfortunately, as I mentioned earlier, we're not seeing similar signs in key European markets.

Since International is 20 to 25% of Steelcase, that has an effect on our overall growth.

For the second quarter, we're expecting Steelcase, Inc. revenues to be up 5 to 8% from the second quarter of the prior year, including about $15 million of revenue from the newly consolidated dealers, and about a $7 million impact from the steel surcharge.

We expect second quarter revenue will be up 7 to 10% versus the first quarter, including the $7 million increase and the surcharge.

We expect to incur restructuring charges of $3 to $7 million after tax in the second quarter.

Because of those charges, we expect reported earnings per share will be between break even and a loss of 5 cents per share.

We expect our revenues will be sufficient to at least break even before restructuring charges.

So the outlook for the second quarter is about the same as what we outlined last time.

We are neither affirming or updating a full year estimate, but we intend to continue to provide a quarterly business outlook.

If you are comparing the results of our first quarter to the estimate of the second quarter, you should consider those items I mentioned earlier, which favorably impacted the first quarter loss by about $8.4 million pre-tax.

If you adjust for those for those items you'll see the impact of the higher volume on operating results.

If summary, we believe we're going to see the second straight quarter of year over year growth, and revenue will be above our break even point before restructuring costs.

Now I'll turn it over for questions.

Thank you, ladies and gentlemen.

The floor is now open for questions.

If you have a question or comment, please press the numbers 1 followed by 4 on your touch tone phone at this time.

Pressing one for a second time will remove you from the queue if your question should be answered.

Lastly we do ask while posing your question that you please pick up your handset if listening on speakerphone for optimum sound quality.

Please hold while we poll for questions.

Our first question is coming from Susan McClary of UBS Securities.

Good morning.

Good morning.

Can you talk a little bit about the foreign markets or your international markets.

What are you seeing in terms of competition there?

Is it increasing or decreasing or any change?

International markets vary quite a bit, first of all, as you move from country to country.

In general, the competitive structure is more fragmented in many of these international markets than what we see in the U.S.

So the top few players probably represent a smaller market share.

So you start with that in the competitive situation is different.

We would say like in the U.S. market, however, international markets have gone through similar sorts of declines.

And we've seen continued competition in those markets.

There's been, as we said before, discount pressure in the international market as there is in the U.S.

Beyond that, though, I don't have anything specific to report about any changes in competitive activity in the last three months, six months.

It very much as it has been.

So it is kind of just a continuation of what you've been seeing.

As you come out of this, do you expect to see the similar kind of trends we've now been seeing in North America as things improve there?

Well, what we saw on the way into the downturn, is that North America orders and shipments fell first.

Then it was a couple quarters later we saw a similar kind of trend beginning to develop in international.

And conventional wisdom has been that if international lags on the way into the downtrend then they also lag during the recovery.

I would certainly hope to see that happen.

However, I'd also have to say as we look at some of the key markets in Europe, we're not seeing the same kinds of signs in economic growth we were seeing in North America back in the fourth quarter of last year that would signal some sort of recovery is imminent.

So right now those markets are even contrast.

The contrast that we're seeing in North America is what we're seeing in International.

Certainly we're expecting a recovery to occur at some point.

But it is probably not imminent.

I would just comment at large on the meta-level trends in Europe.

The productivity in Europe has not achieved the gains that we've seen in the United States and North America.

Probably at half the rate.

Part of that is due to the embedded social system for adjusting your costs and all industries kind of deal with this.

And it puts the European markets -- I think there is a fair amount a of work that's likely to happen in the growth of the United States and China and India right now.

And I predict there will be a fair amount of Euro activity around trying to make them more competitive and make the markets more dynamic.

I'm optimistic that these are still great segments for us and have the potential to be very profitable and good return on investment.

But there are some underlying issues there that have stagnated the economy.

Okay.

So do you expect to change your model in any way?

Do you expect to focus maybe more on Asia as opposed to Europe as things improve?

Well, a lot of the charges that Jim highlighted on quarter on quarter and looking back last year are because we have rationalized operations in Europe.

Again, typical in lots of companies, because of nationalism, you might have more redundant cost structures in the country than you really need.

We've begun to address that.

And factory rationalization is going along quite well is some to minimal disruption to customers is something I'm concerned about.

If we move too quickly we upset some of our equilibrium.

On the other hand you described the Asian markets as high GDP and growing.

And they do take a lot of our attention.

But I don't see a replacement of interest in Europe for growth in Asia.

I think we can do both.

Okay.

One quick housekeeping question, did you repurchase any shares during the quarter?

No, we did not repurchase shares during the quarter.

Our next question comes from Chris Hussey from Goldman Sachs.

Please state your question, sir.

Hey guys.

A couple of questions if we could.

Hi, Chris.

How are you?

Good.

First, on the -- a question on your guidance or on the outlook.

Revenue growth at 5 to 8%.

And that includes the $15 million with dealers and the steel surcharge of $7 million.

Right?

That's right.

Right.

One of the challenges is, in the second quarter of last year, you guys still owned Atwood.

And I think the numbers you guys are talking about are off of days excluding Atwood.

Yes, that's correct.

Could you give us what that base is then?

Because we don't know.

Yeah, I'll get that.

Okay.

We'll look that up.

That would be helpful.

The second question, then, in International, did you consolidate two more dealers than you expected or --

Yeah, Chris, there were two dealers.

One in Germany and one in Italy that we took control of.

Small, but added to the six that we had previously announced.

Is that indicative of the 7% decline in like to like revenue?

Was that the result of just sort of a deteriorating environment or was it just sort of an accounting thing that these guys were on the cusp and you decided to be conservative?

It didn't have anything to do with the decline in international revenue.

The situation is specific to dealers which are very small and immaterial.

So we're not seeing any acceleration of dealer problems in Europe?

No.

I wouldn't read that into this consolidation.

Chris, this is Jim.

We've mentioned this before in calls.

Distribution in Europe has done surprisingly well.

In the recession.

They tend to be under capitalized versus domestic dealers here in the United States and so I feel really good about the conservative sweep these guys have done looking at credit worthiness of all of them.

That's terrific.

On the international side, stay in that for one second.

I remember last year's August quarter being particularly difficult in international.

I think U.K. went through some sort of sudden shock or something in the office furniture industry.

So I'm sort of presupposing that this August quarter is an easy cop.

Do you still expect to have this sort of 7% decline we saw in the first quarter or the August quarter internationally?

Or is it such an easy comp that maybe that will be a little too onerous

I don't want to provide any outlook for international for that quarter other than just to repeat what we were saying, which is that we're seeing a lot -- we had a 7% year over year sales decline.

We see many of these markets aren't showing the signs of growth we see in the U.S.

There is typically a little bit of seasonality in the international market.

Look back last year and the year before to pick up on.

You may see normal seasonality.

I would say nothing related -- the stuff we saw last year in the U.K. was unusual.

It wasn't something that was specific to that quarter.

There were things related to specific dealer situations we had to deal with.

We have no reason to believe we had that ahead of us this year.

Jim, maybe you could give us some context to these awards at NeoCon.

I remember last year you guys had a terrific NeoCOn as well.

How have last year's products which won an award contributed to revenue over the last 12 months?

So to get a context for sort of understanding how the awards translate into revenue.

I would say to you it is hard to make a direct correlation immediately.

So I'm trying to factor down, you know, how fast you would see this flowing through.

And here's the reason.

Jim has explained the dynamics in the industry in the past.

New products, you know, generally get seeded in our distribution with a lot of enthusiasm.

And they have a slow ramp-up time.

And they can sustain sales for a long time as they start to hit their peak.

So all the new products that we launch do contribute eventually over time.

I would say to you, the way to think about that, last year's investments in new products, we were just doing a product market analysis.

I would say two things to you about last year's product introductions.

Generally all of them are doing quite well.

And the margins are improving at a faster rate than we had planned.

But for some of the plant consolidations that hadn't been anticipated when the products were first coming out.

For example in our panel business.

But it is a way of me confirming to you that they are on plan, on target.

I think, in addition, though, Chris, as I'm trying to stress, the other reason that this is important is, you know, there was a lot of turmoil in the business, taking out that many people.

Dealing with as much change as we had to deal with.

And to get a product to market is a big thing.

And so from a relative standpoint, that's where I'm able to sit back and say we were pretty good.

At getting that done.

So, Jim, is there anything you want to ask, answer from a quantitative basis that --

Well, we have the answer to the Atwood question.

Chris, you had asked about the prior year Q2 sales number without Atwood.

It was $612 million.

The other thing, Chris, that I'm looking here on the board is, our universal storage platform was a big winner last year.

And I took off this year -- doing the head of sales expectation at this point.

Took off a little slower.

And doing quite well right now.

Terrific.

So, maybe one of the messages to take then is like, last year's NeoCon drive might have more of an impact on this coming 12 months revenue than they did in the last 12 months.

That's absolutely true.

The curve -- the low point of the curve last year, and it is starting to grow.

The cumulative effect of these investments do make a big deal.

I want to share with you that later, in future calls, we're going to talk about some of the future improvements we've made in reducing complexity in the business.

And if there is any single catalyst for that action it's the fact that we've got new ideas that we want to make room for without adding complexity in our operations.

So to support your point, we have the curve of growth that we get to enjoy after products come out.

And I'm suggesting to you, there's a latent effect that helps us simplify some of the complexity that has caused our costs to be a little out of line.

So later I look forward to reporting to you on improvements in that area as well because of the new product work we've been doing.

And I apologize.

You had Atwood excluded from last year's results already.

I was off by a quarter, sorry.

Thanks, guys, so much.

Thanks.

Thank you.

Our last question is coming from Bud Bugach from Raymond James.

Please state your question.

Hi, guys.

Actually, this is Chris Hornsbury, pinch hitting for Bud.

He's on the road right now.

Quick question for you.

Regarding the steel cost increases and the temporary surcharge you put in place on April 26.

I saw that impacted the gross margins by $2.5 million in additional costs, is that correct?

In Q1.

In Q1.

And you're expecting $7 million in additional revenues as a result of the surcharge in Q2, correct?

Yes, that is correct.

I'm just trying to get a feel for what your kind of outlook is for the margins, taking into account the steel cost and the surcharge and the fact we've seen steel charges back off a little bit over the past couple of months.

Well, let me put a few more things into that basket.

I think that, first of all, we will see the steel surcharge come through the revenue line in the second quarter and the quarters that follow.

We didn't have that in the first quarter.

So we had that steel cost and didn't have any of the revenue benefits.

So clearly that will help.

We will also continue to see more benefits from the restructuring activities we've taken in the past.

And some of that is because of the disruption that causes when you go through some of this plant restructuring.

There is a disruption that hurts your labor productivity.

We've been able to see in plants that have not gone through that disruption or where the disruption was a year or two ago, improvements in labor productivity.

We expect to continue see that as this year unfolds.

So for those factors and others, we continue to expect to make progress against our long term goal.

The 35% gross margin that we set at three years out.

And we would like to just continue marching toward that goal.

Okay.

And do the surcharge pretty much recover most of those cost increases that you've seen?

Yeah.

Right now we would estimate it is pretty good match between the revenues from the surcharge that we expect to get in the second quarter and the cost we expect to see in the second quarter.

Obviously in the first quarter, the costs we incurred was just part of our operating loss.

Chris, you implied, too, I think you were suggesting, as the cost of steel drops, there is some potential upside.

We do have kind of an implicit contract with our customers that at some index level, that comes off.

Okay, so if steel falls down to a certain level, you said that surcharge will then come off the price of the products.

It is a level and a sustained point in the level.

For a couple of weeks or a couple of months or something like that.

Okay.

One more question for you.

You mentioned backlog had increased.

Could you give what the level of backlog was for the quarter and when you can expect to see that backlog shift, especially since you're seeing more of the larger contract jobs out there that tend to, I assume, have longer lead times.

We don't share the backlog data itself, but backlog was up, particularly in North America.

And part of that, again, is that we had this surge of orders that came in prior to the steel surcharge effective date.

That helped build up the inventory of orders.

And backlog is very strong.

But I also want to remind you that could have something to do with it.

Okay.

And actually, one more quick question if we could.

What is your past utilization like?

What is it like for the first quarter.

We don't have a specific statistic.

We track on that internally.

We ask our own folks to do sort of qualitative estimates of that.

We still say we're running with significant excess capacity.

We might be running at 50, 60% of theoretical capacity.

Once you consider things like second shifts, third shifts, weekend hours, lots of things we can do if we needed to.

And we can't wait -- we're looking forward to that sort of challenge again.

Thanks a lot, guys.

Thank you, Chris.

There appears to be no further questions in the queue.

Do you have any closing comments you'd like to finish with?

No, Jen, we're through.

Thanks very much.

Thank you, everybody.

Thanks, ladies and gentlemen.

This does conclude today's teleconference.

You may disconnect your phone lines at this time and have a great day.

Thank you for your participation.