Steelcase Inc (SCS) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to Steelcase's second-quarter fiscal 2011 conference call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would like to turn the conference call over to Mr. Raj Mehan, Director of Investor Relations.

Thank you. Good morning, everyone. Thanks for joining us for the recap of our second-quarter fiscal year 2011 financial results. Here with us 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 of North American Finance.

As a reminder, our website, ir.steelcase.com, contains detailed webcast slides related to year-over-year and sequential comparisons that members of the investment community may find useful in interpreting our results.

Our second-quarter earnings release, which crossed the wires yesterday, is accessible on our website also. This conference call is being webcast and a replay of this call will also be posted to the site later today. [At] the conclusion of our prepared remarks, we will 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 are incorporating by reference, into this conference call and subsequent transcripts, 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 present in [making] purposes.

For more details on these risks, please refer to yesterday's release and Form 8-K, the Company's 10-K for the year ended February 26, 2010, and our other filings with the Securities and Exchange Commission. This webcast is a copyrighted production of Steelcase, Inc.

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

Well, good morning. It's a pleasure to speak with you about a quarter that exceeded our own expectations, both from a revenue and profit perspective. Steelcase has demonstrated organic growth in back-to-back quarters, and we feel optimistic about the third quarter as well, because we have a significant order backlog that will be shipping this fall.

You know, as I talk with other CEOs, there seems to be a consistent core belief that offers insight into this recent growth. Although they're quite tentative about the near and mid-term, they tell me that their companies have accepted the likelihood that we've moved beyond the depth of the worst recession in modern times. I mean, this recession in terms of the current hurricane season was a Category 5 and it was a direct hit. But as we've witnessed, with some effects of the stimulus and some excellent navigation by corporations as they manage the cash situation and cost reduction, companies are now starting to release monies for important projects.

And there's an optimistic corollary to this. We can only imagine what might emerge if we can get the Congress, President, and the nation's business leaders to share a common vision of success. It seems we waste a lot of valuable time trying to get the RPM of our economic engine at the right speed; but I'll leave further discussion about that to the pundits and speak to our business.

We're in the midst of investing in our core business to continue building our version of the globally integrated enterprise. This concept is to link tightly our operating entities through our own insights in the space and the emerging technologies that enable better collaboration. The approach not only includes the new products in the development pipeline but changes to our facilities here in Michigan.

We are releasing money right now for important new projects and moving forward on the plans we announced last year to bring our office team together on a single campus. We'll start knocking down walls for renovation next week in our headquarters, and we're confident that this will be more than just a physical change, but a way to inspire innovation, collaboration, and new ways of working for our people all over the world.

Frankly, it feels good to discuss investments in our future and much more so when it's in a direction that continues to make Steelcase a market leader globally. It's still the number one reaction when executives from other companies come to Steelcase. Here's what they say to me -- "Jim, I had no idea you were providing such a broad collection of cool and new things from the office to the classroom to the medical suite all around the world. I just don't expect that from Steelcase."

And we've been working hard on the challenge of getting people to realize how much the Company has changed. The news in our quarterly results speak to much of what we've been saying.

Now I want to call out a few highlights in our performance that we're particularly pleased about. Again, one is PolyVision. Because of the school construction cycle, the second quarter is usually PolyVision's best, but this year, they were especially strong. During the past few years, we've talked to Steelcase about the need to shrink some parts of our business so we can invest in growth elsewhere. And PolyVision is a great example of that shrink, to grow.

They have successfully exited the low margin or the lower margin's static whiteboard business to refocus on the classroom with tech-rich products like Eno. PolyVision and our Coalesse brand fall into the other category in our financial reporting, and both of them helped this segment make a significant contribution to operating income. Dave will have more to say about that in a moment.

I would also like to shine a light on the improvement in our International segment this quarter. We saw a 15% increase in revenue on an organic basis, with good news coming from several parts of Europe, the Middle East, and then as well as our Asia-Pac region. We shipped some major projects in Asia during the second quarter and we have several active research projects in the region. Our insights about the Asian market are showing up in new products that have already started to launch this fall.

Now within our core business, we're pleased with the growing interest in revenue generated by this new cool product called Mediascape. It's being expanded to host now videoconferencing capabilities, along with the capabilities of displaying Web-based material right at the table where people are meeting. You know, the need for collaboration and the ability to connect with tech quickly and easily is resonating with many of our customers. Again, this is all over the world.

We believe Mediascape will be an iconic product for Steelcase, and it's exciting to see it going into spaces that will be iconic in their own right, like the GE network of Innovation Centers around the world. And we're very excited about a broad portfolio of Steelcase and Coalesse products inside the new D School, or Design School, at Stanford.

Before I turn it over to Dave, let me sum up my thoughts this way. We are pleased with the quarter, and we believe it clearly reflects our decision to stay invested in our growth initiatives and new products during the downturn. We have expectations for an equally strong third quarter as well.

And now, Dave Sylvester, CFO at Steelcase, will report to you in more detail.

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

Again, as Jim mentioned, we are pleased with the results of the second quarter. Revenue and earnings exceeded our expectations, and order patterns throughout the quarter were stronger than anticipated, which supports a strong outlook for the third quarter as well.

Consolidated revenue of $600 million was higher than the estimate we provided last quarter, primarily due to strong North America orders throughout the quarter and strength from Coalesse, PolyVision and IDEO in the other category. While international orders were also stronger than expected in the quarter, many orders are scheduled for shipment in Q3, and some projects were delayed by customers near the end of the summer, which resulted in revenue being only slightly better than our expectations.

In total, we realized organic revenue growth of 8% compared to the prior year; 4% in North America; 15% in the International segment; and 13% in the Other category.

The improvement in reported operating income compared to last year was somewhat masked by how the Company now records variable life COLI income. In the prior year, variable life COLI income was reported as an operating item, and therefore, it had the effect of reducing our operating loss by $9.8 million; whereas in the current year, we now record variable life COLI income as a non-operating item.

The $12.9 million improvement in adjusted operating income, which excludes the variable life COLI impact as well as restructuring costs, was largely driven by operating leverage from the organic revenue growth in the quarter. Benefits from previous restructuring activities were essentially offset by the product-specific warranty chart referenced in the release.

This warranty charge, along with slightly higher operating expenses, also had a negative effect on the sequential operating leverage, most notably in the North America segment. However, at the consolidated level, this negative effect was offset by stronger-than-expected sequential operating leverage in both the International segment and the Other category. The biggest contributors to this better-than-expected operating leverage included strong seasonality and improved overall results at PolyVision; benefits from restructuring activities in Asia-Pacific; and continued operational improvements within the Coalesse Group.

I also want to comment briefly on variable compensation expense linked to our EVA-based incentive programs, as there is a small nuance that resulted in a favorable impact on our sequential operating leverage in the second quarter, and therefore, is relatively important for you to understand as you complete your detailed modeling.

We recorded $3 million of EVA-based variable compensation expense in the second quarter, which was somewhat lower than we would have otherwise recorded at the first quarter EVA results, and at or above the threshold for accruing bonuses. More specifically, because first quarter results were below threshold and no variable compensation expense was recorded, year-to-date results in the second quarter were first reduced by the first quarter shortfall, which had the effect of lowering variable compensation expense in the second quarter by approximately $2 million. This nuance not only helps to explain our sequential operating leverage in the second quarter, but should also be taken into consideration as you think about our third-quarter outlook.

Below the operating income line, we benefited from the recovery of a reserve recorded against an unconsolidated joint venture, and we also recorded miscellaneous discreet items within income tax expense, which had the effect of increasing our effective tax rate beyond what we would normally expect, or in the mid-30s range.

We finished the quarter with higher cash and COLI balances and slightly lower debt compared to the first quarter. You will note that we classified our senior notes as current on our balance sheet, given their August 2011 maturity date. We intend to refinance these notes at or prior to maturity, and we continue to evaluate the best timing for refinancing, taking into consideration a number of factors, including market dynamics, the additional interest costs associated with refinancing in advance of the August maturity date, and our current debt ratings and outlooks.

Based on discussions with our advisors and our current assessment of the debt capital markets, we are confident in our ability to refinance these notes at or prior to maturity. However, if the debt markets were to dramatically turn prior to our refinancing, we believe, in the worst case, our cash and COLI balances plus our existing credit facilities are sufficient to manage the maturity of the existing notes and provide adequate liquidity ahead of a later refinancing.

Just two other brief comments on our balance sheet before I move to orders. First, you likely noted the use of cash associated with notes receivable in the quarter. It is largely due to increased borrowings by dealers under asset-based lending arrangements put in place in prior years. We still have a small number of dealers who haven't yet moved to outside banking relationships for working capital financing.

Second, when we file our 10-Q in a couple of weeks, you will note that we lowered our self insurance reserves for Workers' Compensation and product liability during the quarter, due to favorable trends and past experience. In addition, we increased our general reserve for warranty claims beyond the product-specific reserve mentioned previously.

The increase in our general warranty reserve was linked to implementation of new software supporting our claims management processes and the ability to more deeply understand our historical experience as a foundation for estimating future claims. These changes in estimated reserves for Workers' Compensation, product liability, and general warranty did not affect our second quarter results, as they substantially offset each other and were recorded within cost of sales in the North America segment and Other category.

As it relates to orders, I will start with North America, where we experienced broad-based year-over-year order growth in the second quarter of approximately 17%. Following modest order growth rates in April and May, orders grew at double-digit rates throughout the second quarter and resulted in an ending backlog that was approximately 10% higher compared to one year ago. Day-to-day business continued to grow nicely compared to prior year, but project orders also grew at double-digit rates throughout the quarter.

Within our product categories, second-quarter orders were up across the board, but were particularly strong in seating, wood, and details, our Ergonomic Work Tools business. Seating growth included significant orders from US federal government clients, but was otherwise broad-based and included strength across our live seating portfolio, which includes Think, Leap, and EMEA.

In wood, orders grew for the first time in 10 quarters, in part due to one of the large iconic projects Jim mentioned earlier in his talk. Across vertical markets, growth rates were relatively consistent, with most verticals growing at rates in the high single digits to mid-teens. State and local government orders were particularly strong, as this segment benefited from a few large projects and helped to bolster total government orders, as federal government grew modestly in the second quarter after several quarters of strength.

For customer visits, we experienced a year-over-year percentage increase in the mid-teens, following a high single-digit decline in the first quarter. Comparisons to prior year continue to be up against a high level of A&D visits during the downturn, which were targeted towards sharing our research and insights underlying our new products.

Regarding domestic pricing, large project activity remains highly competitive, especially in the federal government sector. However, we believe the impact of our ongoing efforts to move customers to more current price lists has had a modestly positive impact again this quarter. In addition, we recently announced a price adjustment in North America, which will take effect late in the third quarter and includes increases as well as some decreases in list prices. We do not expect any significant benefit in the near-term, as it typically takes a few quarters to implement price adjustments across our customer base.

International orders in constant currency increased nearly 20% in the quarter compared to the prior year. Within Western European markets, which grew in total by approximately 15%, Germany and Spain were up significantly, while France, the UK, and Benelux grew by single-digit growth percentages. The strength in Germany and Spain was driven by deeply discounted large project wins, which are expected to pressure our gross margins in the third quarter.

Elsewhere, we experienced very strong order growth in Asia and Latin America, which, along with the strength in Germany and Spain, contributed to an international backlog which is significantly higher than the prior year. Order comparisons in the Coalesse Group were negatively impacted by the comparison to a large project in the prior year, as well as declines in the Designtex wallcovering business. As a result, total orders in the second quarter declined by approximately 6% compared to the prior year.

Finally, as it relates to PolyVision, this business enjoyed its best performance in recent memory. It's important to remember, however, that historically, the second quarter has had a strong seasonal component and has been their strongest period, as schools typically take advantage of summer vacations to renovate classrooms and install new technology products like Eno.

Regarding our outlook for the third quarter of fiscal 2011, we expect to report revenue between $625 million and $650 million. This compares to $616 million in the third quarter of fiscal 2010, which included $21 million from dealers that had since been deconsolidated. In addition, currency assumptions included in our estimate will have a negative effect on the year-over-year comparison by approximately $19 million.

After giving effect to the deconsolidations and currency translation effects, we estimate organic revenue growth in the third quarter will approximate 8% to 13% compared to the prior year. Sequentially, the third quarter revenue estimate translates to organic growth of approximately 4% to 8%.

With respect to commodity costs, after a modest sequential increase in the second quarter, we are not expecting any significant sequential change in the third quarter. Compared to the prior year, commodity costs were modestly higher in the second quarter and we expect similar results in the third quarter.

As a result of these factors, we expect to report third quarter net income within a range of $0.07 to $0.11 per share, including restructuring costs of approximately $5 million to $6 million pretax or $0.03 per share after tax. The estimated restructuring costs in the third quarter primarily relate to the re-organization of European manufacturing operations announced in the first quarter.

Lastly, I want to reiterate that our sequential operating leverage in the second quarter within the International segment and Other category reflected restructuring benefits in Asia and strong seasonality at PolyVision; and thus, we would expect sequential operating leverage in those areas to moderate in the third quarter. In addition, as you review our third quarter outlook, keep in mind the nuance I explained regarding second quarter variable compensation expense, as it also affects the sequential contribution margins implied in our earnings estimate.

From there, we will turn it over for questions.

(Operator Instructions). Budd Bugatch, Raymond James.

First of all, congratulations on the quarter; a very nice quarter and nice to see. And also, thank you very much for the disclosures. I thought they were well-presented and a lot of detail and a lot of meat. So, appreciate that.

Would you, Dave, just -- I guess, the sequential operating margin was an area where we were kind of confused. And I just want to make sure I understand that the moving parts of that are the variable compensation and the lack of leverage from several operations in Asia -- is that the way to think about that?

Well, let's talk about Q1 to Q2 and let's go by segment. I'll start in total.

You know, at the consolidated level, the overall operating leverage was in that area that we've talked about in the past, around 30%. That's for the currency changes between Q1 and Q2. So at the consolidated level, it seems fairly reasonable.

It was low in North America for -- primarily, because of the product warranty charge that we took in the quarter. Operating expenses were also a little bit higher than the first quarter, but if you were to set those two things aside, you'd see operating leverage that, again, looks reasonable in that 30% range that we've talked about in the past.

In the Other category and in the International segment, though, adjusted for the currency changes, the operating leverage was very good -- I think in the 40% to 50% range or something like that. And that is really driven by a couple of different things, as I mentioned in the scripted remarks.

First, Asia Pacific is continuing to benefit from some restructuring benefits that we've talked about, merging not only the manufacturing operations of Steelcase and Ultra, but also beginning to merge the front end of the business, and the sales organizations and brands in the region. So we saw some nice benefits there and they had a good quarter of shipments as well.

And in the Other category, Coalesse continues to benefit from operational improvements from the restructuring activities we implemented in prior years. And PolyVision blew the doors off, frankly. They had just a great quarter, which is -- it's always their strongest quarter, but it was remarkably strong. And it was led by Eno, for sure; it was also led by surfaces business being strong, but it's also benefiting from the strategy of getting out of the lower margin static whiteboard businesses and right-sizing their infrastructure. So just a great quarter.

So as you think about sequential leverage go forward from Q2 to Q3, you have to take all of those factors into consideration.

The only other thing is this -- is the bonus nuance. You know, it's not an accounting abnormality or anything like that; it's just we were not at threshold to accrue bonuses in the first quarter. And we were in the second quarter, but because we were below threshold in the first quarter, we had to first reduce the second quarter results by that -- by being below the threshold in the first quarter. So that had the effect of lowering bonus that you would otherwise expect if you were just looking at Q2 on its own.

Now we knew that was going to happen and that was factored into our guidance, but it's important that you understand that as you look forward to Q3, because variable compensation expense relative to our standalone Q3 results will be higher simply because of we don't have that nuance any more.

So will you have a catch-up of bonus expense in Q3 on a year-to-date basis? Is that what will cause that additional impact?

No, it will be more normalized, so really it's Q2 had a negative -- it had a positive effect because of Q1 being below threshold.

(multiple speakers) Got you. Okay, I think I understand.

(multiple speakers) It was lower than expected; Q3 will be normal.

Okay. Just two other quick questions. One, did you give overall backlog? I know you talked about North America and I think a segment or two, but how does overall backlog look or did I just miss that?

Well, we didn't give it in absolute dollars but we did comment that North America was up approximately 10% year-over-year. Sequentially, it's up more than that. And we said the international backlog was up significantly and did not quantify that percentage specifically.

And what about overall corporate? You want to put a percentage on that?

No, I don't. It gets a little tricky when you get into the Other category, primarily because of backlog within the IDEO business and PolyVision tracks their backlog a little differently. So, we stop short at the [Inc.] level.

I see. That makes -- I understand that. Okay. And finally, I don't think you've commented specifically about Nurture or did I miss that as well? I know you said something about bioscience being strong, but what about Nurture? How's that doing and what are we seeing in the results on that?

I'll let Terry comment on that maybe and expand it around the whole group of growth verticals.

Looking at growth, our verticals reported growth in the second quarter. We tracked six or seven verticals and every one except for one actually grew in the last -- that one was flat, so we had good strong orders across all the verticals. Healthcare was high single-digit growth, so a little less than the average but still growing strong, high single digits, and it's against a strong prior-year comparison.

Okay. Well, congratulations again, and good luck going third quarter and beyond.

Matthew McCall, BB&T Capital Markets.

(multiple speakers) We had a little feedback from your phone. You want to try again?

Yes, this is actually [Steven Keller] with Mirage Capital. A couple of things -- congratulations on the good quarter, Jim.

Two months ago, in the Wall Street Journal, there was an article written about how companies are really taking their business online to help drive more revenue for their shareholders and more profits, and increase the stock price. Can you tell us and provide some color today, how is Steelcase working with a lot of those really good authorized online retailers to help them sell more online, which will eventually help your bottom-line?

Now, you know, the first thing is, I want you to think about the Web as a capability that, as the name implies, is throughout our business; so the Web, not only is it a front-end affect, it helps us in the supply chain and it helps us in CRM or customer relationship kind of structures. So that capability is broadly adopted in our business.

The second thing is, we have a website and a store.com Steelcase website that has been growing very steadily. It's kind of a de minimus as a percentage of our sales, but it's doing quite well. And we've learned a great deal through that action to consider even new ideas that will help us grow in that capability as well.

The second thing I would say is that the one great thing that's implied in the article and maybe your comment, is there's a universality to the notion and the use of it. So, in other parts of the world, this is attractive beyond just North America. So, the Company has a commitment to use that capability in the best way it can.

Can you give us a goal for what you would like to achieve in the next couple of years on how much revenue you'd like to come from online e-commerce and how you plan to get there?

No, I don't think that answer would make a lot of sense right now because -- there's two reasons. First of all, in our business, which is made to order and responds really well to that, where customers get a lot of choice, the Web has a big impact in helping them configure what they want. So, picture a large account that has a standards program of buying Steelcase, and they're able to use an intra-site inside their own company to forward POs to us.

Now, that's a form of Web kind of transactions. But I think you're going down a path where you're saying just kind of the broad marketplace. And that's why the data is a little -- would be a little confusing, because I think you've got to think of it as a capability that's going to be woven throughout our business. And it could help large companies in the way they transect with us today through our normal business model, as well as customers or consumer-like behavior where they want to buy off the Web with no relationship with us, just want to have access.

But I can leave you with a really important impression is that, we're spending a lot of time thinking about that and are in that space right now in a number of different ways.

And with your authorized online retailers, do they own their own inventory? Or is it basically drop-shipped from your manufacturing facilities? When an order is placed, like through one of your -- like Crate & Barrel or something, are they owning [billings then]?

Well, think of the business model design as we can optimize a platform that we have for moving product in this made-to-order structure to all of our customers. Because we have rapid distribution centers that can cross-dock product and get it to our customers. And the challenge in Web design in our business is getting the scale of the product right or the packaging that the rapid delivery systems like to use.

So, all that's stuff that we've been engineering and working on and have some expertise in, frankly. It's not fledgling here; it's something that we spend a lot of time on.

Are you guys involved in any type of social or mobile commerce, as that seems to be very important nowadays?

Well, I -- you know, it sounds like maybe what we ought to do, if we could, is you could have an offline discussion with our guys, if you have a big interest in what I would call new media, new ways of approaching the market. Because there's a lot that Steelcase is doing in this area that maybe isn't pertinent to today's call.

Okay, yes. Who handles that department? Who's responsible for those (multiple speakers) --?

If you want to work through Terry Lenhardt, we can --

Or Raj Mehan, Investor Relations, is probably the fastest way to contact us.

Matt McCall, BB&T Capital Markets.

This is actually [Jack Stemick] filling in for Matt. I just had a couple of quick follow-up questions. I think on the call you had said that overall government shipments have kind of slowed down during the quarter. Is that something you expect to pick back up in the back half? Or is that something that -- is that kind of a trend you think is going to continue through the year?

If you look at government between state and local and federal government, the orders for state and local were -- they were the strongest vertical we had in the quarter; a few strong projects in local governments. But federal government moderated a bit against some really strong comparisons, but they still had high single-digit growth, so we expect growth to continue.

Okay. On -- looking ahead into the next quarter, what is the euro exchange rate you guys are assuming?

1.27. Again, we usually use the -- or typically use the closing rate on the last day of our quarter, which was the end of August, like the 27th or 28th.

Okay. And with your organic growth expectations for the next quarter, is it -- are you expecting trends to continue where the US is going to be kind of low single digits and International and Other will continue in high double digits? Or are you expecting any improvement from North America?

Well, I think, without getting into specifics, I think it's fair to assume that the growth in North America would be stronger than the second quarter, given the strength of orders that we experienced and the increased backlog that we have going into the quarter. But I'll stay away from specifics.

Okay. That's it for me. Thanks.

Todd Schwartzman, Sidoti and Company.

I wanted to echo Budd's sentiments. Thank you for the detailed presentation, both written and verbal. It was very helpful and it actually answered most of my questions. But just a couple of things on the corporate side, the large project business. Could you -- it sounds as though the quarter ended at least as strong, if not stronger, than it began. Can you speak to the steadiness of the project orders, both in North America and the rest of the world?

I'll let Terry start with North America.

Sure. Within North America, quarter growth was consistent throughout the quarter. We had double digit growth in each of the months of the quarter and project business was consistent across there.

If you look at orders across our major product categories, we had growth across all of our major categories, led by seating and wood. And seating was across all types of business, day-to-day and project. Wood really was driven by project business, but we also had strength in our other categories as well.

When you think about across geographies, we managed North America by six different regions. And each one of those regions had order growth starting at solid single-digit order growth throughout the country. And if you break out between large and small customers or midsize customers, we saw pretty good growth in all of those segments as well.

And Todd, activity outside of North America, generally followed similar patterns. It tends to be a little bit more lumpy, especially as you get into Asia, as we're more project-driven to begin with and have less day-to-day business; but it was fairly consistent throughout the quarter.

And based on customer visits and other conversations, what you know to be in the pipeline, how has visibility changed over the past several quarters, if it has at all? On the project side?

Well, I'll comment a little and see if Jim wants to jump in as well. It seems like it gets a little better and then it goes back in the clouds a little bit. And I think it's following the overall sentiment on the general economy. The economy has a few positive signs and it feels like it gets a little clearer, and then the economy goes through a couple of weeks of bad data and we're back in the clouds a bit. So, it feels like it's trying to fight its way out to improve our visibility, but it's still pretty fuzzy as you get out six-plus months.

I don't have a lot to add to that except to connect to some of my opening comments. And that is, it's one reason why I don't think we're going to have a double dip recession. Because I believe the CEOs have expressed that they kind of see the forward path as it is -- it's a low-growth economic environment, tough situation; many of them got their businesses in shape, and therefore -- and this gets to your point-- they decide to go ahead with projects that they need in order to keep their businesses competitive.

For us, I think, in our industry bodes well because I believe that some of these things you have to kind of think beyond a year or two years worth of affect. There may be a division or a consolidation or an acquisition. And so our projects get endorsement because they see through the next couple fiscal years that could be slower growth, and they need to get them started.

Now with that said, is there's still a dampening effect. I mean, if there was any incentive at all, I think to those on the fence about that coming from investment credits or what-have-you, I could see it having even a more positive effect.

Terrific. Thank you, gentlemen.

Mark Rupe, Longbow Research.

Hey, guys, great quarter as well. On the commentary on the order patterns exceeding -- or being stronger than you expected during the period -- and maybe you addressed this; I apologize if you had -- but was there anything in particular -- was it project maybe coming back with the order growth that may have led to some of that? Or was it some other things?

I would say what surprised us were two things -- project activity surprised us and how strong it was. And then how broad based the strength was surprised us -- positively surprised us. Though just the strength was -- it just wasn't linked to a vertical or a geography or a region, or product categories. It was stronger than expected everywhere.

Perfect, okay. And then as project does come back, is there any mix implications on the margins?

Well, it will put a little pressure on the margins, of course, but I wouldn't expect anything dramatic. I did reference in the International segment that we did have a couple of large project wins that were more deeply discounted than maybe typical, but I use the word pressure versus kind of a significant impact.

Sure. Okay. And the price adjustment that you mentioned about fourth quarter North America, should we expect some sort of a positive -- I know you said pros and -- or positive and decline; but is there a net takeaway on what we should expect there?

I think the adjustment affects every customer differently depending on the types of products they buy. It's -- I'd look at it as a modest increase. It's our first one in about 28 months.

Great, okay. And then just lastly on PolyVision, I know you cited some product things and, obviously, the walk away from part of that business. Was there anything else from a distribution or increased sales force that was a factor in some of that stronger than typical growth?

Well, not really.

Perfect. Great job, guys. Thanks.

(Operator Instructions). And I'm showing no further questions in queue. And I'd like to turn the call over to CEO, Jim Hackett, for closing remarks.

Well, thank you for all your positive comments. The team here has worked really hard on building disclosure of our performance and I appreciate the endorsement that that's been helpful.

As we've said, opportunities still exist for growth in our business, even in this slow growth environment. We're hopeful that in North America and some of Western Europe, the governments are able to clear up some of the barriers to trade economic staleness, if you will. And we look forward to reporting great results in the future. Thank you for your attention today.

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