Steelcase Inc (SCS) 2013 Q1 法說會逐字稿

Good day, everyone and welcome to Steelcase's first-quarter fiscal 2013 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. Please go ahead.

Thank you, Stephanie. Good morning, everyone. Thank you for joining us for the recap of our first-quarter 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 of Finance for the Americas and EMEA segment.

Our first-quarter earnings release, which crossed the wires yesterday, is accessible on our website. This conference call is being webcast and presentation slides that accompany this webcast are available on IR.Steelcase.com and a replay of this call will also be posted to this site later today.

In addition to our prepared remarks, we'll respond to questions from investors and analysts. Our discussion today will also include references to non-GAAP financial measures and 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 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 release and Form 8-K, the Company's 10-K for the year ended February 24, 2012 and our other filings with the Securities and Exchange Commission. This webcast is a copyrighted production of Steelcase Inc.

Before I turn it over to our CEO, I just wanted to mention that Steelcase will be hosting an Analyst Day on Tuesday, October 2 with a full day's agenda at our global headquarters in Grand Rapids. You will get the opportunity to meet with a wide array of business leaders and see our strategies in action. These strategies and our solutions address the forces of change businesses across the globe are facing. As well, we will be revealing some new products that we are particularly excited about. We encourage all members of our audience to save that date on their calendars and we will be sending out official save-the-date notices in the coming weeks.

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

Thanks, Raj and good morning to everyone. We are reporting today on another strong quarter for Steelcase and one that was in line with our expectations overall. As you have seen in our earnings release, we performed extremely well in the Americas segment and we fell short in the European segment and our Other category. The volatility in demand in Europe is not surprising given the upheaval in the economy there. But there were also some timing factors at play that Dave will discuss in a few moments.

And I wasn't pleased with the performance in the Other category. That is the segment that holds Asia, PolyVision and Designtex. And again, Dave will describe in more detail that there were several factors that impacted these results that were just in the first quarter and we expect improved results in the second quarter.

And from a growth perspective, this was our ninth consecutive quarter of organic revenue growth on an Inc. or enterprise basis and in the Americas segment, we have seen seven straight quarters of double-digit growth. There is definitely growth from the direction set by our strategies and the operating income margin in the Americas illustrates the power of our transformed business model and what we would say is a diverse revenue base.

Now our first-quarter call always comes on the heels of our tradeshow in Chicago called NeoCon, so it tends to be a focus of my comments. And this year, I thought the highlights of the show for our Company aligned especially well with the aspects of the strategies that I just mentioned. Let me point out three of those connections. First is the response to a key vertical market for us in the Education segment. Our education solutions team, which has just gotten started a few years ago, had a dedicated space at NeoCon this year, which is indicative of the ideas growing and the products now dedicated to this segment.

Our research into what we are calling active learning translated this year into a new product portfolio called Verb. It's a table-based system that supports a variety of teaching and learning styles and it pairs very well with that very successful Node chair that we introduced earlier. This product, Verb, won a Best of NeoCon award and it was one of five earned this year by our brands. Now this was initially targeted for the higher education market, but we think it can appeal and extend to high schools and certain corporate environments as well.

Next is a connection that links the impact of technology to the future workplace. We're getting a rhythm as being great spokespersons for this. If you were at NeoCon, you would have seen the competitive effort to catch up to our media.scape product and I would have to say I am flattered by the emulation, but we are already moving forward to the next iteration in this category.

We showed concepts and prototypes about the next generation of what we call living on video. And note that this is more of a casual connection to one's technology in one's future. This is where our teams excel in getting that nuance just right.

Now third, the endorsement of an intense emphasis on innovation. Let me point out that the Coalesse brand won a Best of NeoCon silver award in its category. It is the Editor's Choice award and the special innovation award all for just this one product called the Free Stand table. This is a product supporting the mobile worker, a table that folds and is portable and offers a simple, yet elegant solution for people to work comfortably anywhere.

And let me point out again that, because the nature of work blurs work and life, you would -- if you didn't know our business, you would see that products from the commercial market don't really cut it in home settings or residential settings. And residential products used in commercial interiors look misplace. So Coalesse is the brand that we chose to interpret the fusion of work and life, which is the bridge between commercial and residential. And it is going extremely well as again we see a lot of emulation coming from our competitors.

We are also formally launching the Coalesse brand in Europe this year given the global need for a productline that speaks to the same question. Now it is true that we have a lot of uncertainty in Europe and we want to point out that that really never tempers our enthusiasm because it has been our philosophy to continue to invest in our long-term growth strategies during a downturn. We see opportunity for Coalesse in this niche and we will be well-positioned when that rebound happens there.

Now before I turn it back to Dave, let me say a little more about this view of Europe. And like everyone, we continue to watch the situation very closely. You will recall that we have limited activity in most of the countries that are in trouble in the headlines and we believe that some of the shifts taking place in the market provide a clarifying opportunity for our brands and their missions. This is a time to actually make up and take space.

Companies can't afford to take a great deal of risk on suppliers that haven't demonstrated that they are here for the long haul or they are doing business in a limited way. We have a full complement of product, services and global applications that should allow us entrance to areas where we have the highest preference already.

As you can imagine, I am not satisfied with the results in Europe, but I have to say we have a great team there and our people are outstanding. Let me give you an example. Spain is one of those countries that is struggling with the sovereign debt crisis. Our leader in Spain has been with us for more than a decade, is an extraordinary leader. And he made terrific decisions in the downturn in Spain to make that business perform. We have got people like this all over Europe.

Several quarters ago, I mentioned that we also made an overall leadership transition in the EMEA or European business. That is behind us. The new leadership team is in place and is beginning to implement several initiatives targeting operating margins, as well as strategic growth. North America has led the way in improving the fitness of our business model and the European team is building on what we have learned over here as we apply it to their situation.

So in summary, it is a solid quarter overall with excellent results, really extraordinary results in the Americas when you look at us versus BIFMA. And an excellent customer feedback from the NeoCon reaction to our products that we launched there. It is a year where we are celebrating our 100th anniversary, so it has been a good year for Steelcase and this is a good quarter.

I am sure many of you will be taking time off during the upcoming holiday and summer months, so let me wish you a great vacation and now let's turn it over to Dave Sylvester, our Chief Financial Officer, who will give you more detail. Dave?

Thank you, Jim. I will start with a few high-level comments about the first-quarter results and balance sheet, provide some additional color commentary around our order patterns and outlook for the second quarter of fiscal 2013 and then we will move to your questions.

Before I get into the details, let me highlight a few of the key takeaways for the first quarter. First, customers remain receptive to our portfolio of insight-led solutions that address the forces of change impacting work, which we have talked about for several years. And this is continuing to contribute to our marketshare gains and overall strength in the Americas.

Second, the mix of business from some of the Americas' largest corporate customers, as well as the mix of project business across EMEA and Asia-Pacific was relatively high and impacted gross margins. And this higher mix of more heavily discounted business is expected to continue into the second quarter.

Third, the North America plant consolidation moves generated net savings in the first quarter as expected and we estimate these net benefits will increase in the second quarter and over the balance of the fiscal year.

Fourth, uncertainty in the global economy continues to take its toll on specific parts of our business such as PolyVision and EMEA. PolyVision remains in recession as their domestic revenue remains significantly impacted by funding cuts imposed by state and local governments, as well as competitive pricing pressures. EMEA, on the other hand, remains in a mixed state, not entirely in recession, but not consistently growing either.

Now for the details. Overall, results were in line with our expectations and strength in the Americas offset the weakness we experienced elsewhere in our business. For the Americas, revenue, gross margin and operating expenses were all better than expected and resulted in an adjusted operating income margin of 8.9%, or a 200 basis point improvement compared to last year.

We continue to gain marketshare in the US based on our analysis of monthly data reported by BIFMA and we expect the strength of the Americas segment to continue in the second quarter, likely surpassing the 10% adjusted operating income mark for the quarter.

As it relates to EMEA, our overall business remains in a mixed state. We anticipated an organic sales decline in EMEA for the first quarter following growth in the fourth quarter, but the decline was larger than expected as our order patterns during the quarter reflected a higher mix of project business expected to ship in the second quarter and softer day-to-day business in a couple of countries, plus a few project shipments were delayed by customers at the end of the quarter.

Accordingly, the 4% order growth we experienced in the quarter largely helped to grow quarter-end backlog, which is up approximately 14% compared to the prior year. Our earnings estimate for the second quarter contemplates year-over-year revenue growth and a smaller adjusted operating loss for EMEA, whether measured sequentially or compared to the prior year.

You will recall that the second quarter in EMEA is seasonally the weakest quarter of the year. So we grew revenue in the fourth quarter; it declined in the first quarter and we expect it to grow again in the second quarter. As I said, our business remains in a mixed state. Therefore, we continue to push on longer-term business model enhancements, as well as short-term contingency plans across EMEA.

Within the Other category, each of the three businesses, Asia-Pacific, PolyVision and Designtex, underperformed our expectations in the first quarter, albeit to different degrees and for different reasons. For Asia-Pacific, we experienced a double-digit percentage increase in revenue again this quarter in line with our expectations, but the mix of large project business and spending on growth strategies were both higher than expected, resulting in an operating loss for the quarter after several quarters of breakeven or profitable results.

For PolyVision, we carefully watched the order growth in December and January as it appeared to be an early sign that the recession was nearing the bottom. But we experienced the double-digit percentage decrease in orders and revenue again this quarter resulting in a larger-than-expected operating loss.

Designtex's results were closer to our forecast, but nevertheless contributed to the overall shortfall in the Other category relative to our expectations. We expect sequential improvement in all of these businesses in the second quarter resulting in positive operating results for the category as a whole.

Compared to the prior year, adjusted operating income at the consolidated level was relatively flat. Benefits associated with the 6% organic revenue growth in the quarter, including improved price yield compared to the prior year, were largely offset by increased spending on sales, product development and other initiatives in the Americas and Asia-Pacific, higher commodity costs globally of approximately $6 million and a higher mix of large project business, which was somewhat offset I guess by a lower mix of federal government business in the US.

Sequentially, first-quarter revenue declined by $15 million or approximately 2% on an organic basis while adjusted operating income increased sequentially by $1.4 million. Beyond the negative effects of lower volume, the sequential comparison was favorably impacted by lower spending on product development and other initiatives in the first quarter, lower charges related to inventory and warranty reserves and net savings in the first quarter compared to net costs in the fourth quarter related to our North America plant consolidations.

Restructuring costs in the quarter were in line with our expectations. Regarding the timing of remaining restructuring costs and related benefits applicable to the North America consolidation plans, we continue to estimate total restructuring costs will approximate $40 million and we expect the remaining restructuring costs of approximately $8 million to be incurred over the balance of fiscal 2013. We continue to estimate annualized savings of approximately $30 million to $35 million once these actions are completed and local supply chains have been established.

As we discussed on last quarter's call, we have intentionally slowed down the production moves given the high level of demand we have been experiencing. The consequence, however, is that we are incurring higher levels of redundant costs as we start up operations in Mexico, prepare other receiving plants for production moves and cautiously move our assembly lines.

During the first quarter, benefits realized of approximately $5 million were reduced by approximately $4 million of additional freight costs linked to existing supply chains, startup costs in Mexico and redundant manufacturing processes during the product transition periods. We expect the benefits to improve and the redundant costs to reduce increasing the net year-over-year savings to approximately $2 million to $3 million in the second quarter and improving from there through the end of fiscal 2013 and into early fiscal 2014.

Moving to the balance sheet and cash flow, consistent with our historical seasonal patterns, we used $40 million of cash in our operations during the first quarter, which included the payment of prior-year variable compensation, the funding of retirement plans and growth in working capital.

Capital expenditures totaled $10 million, but we also sold the corporate aircraft, which was replaced last fall receiving proceeds of nearly $14 million. For fiscal 2013, we continue to expect capital expenditures to approximate $75 million to $85 million. We returned approximately $21 million to shareholders in the first quarter, $9.3 million through repurchasing a total of 1.1 million shares and $11.6 million from the payment of a cash dividend of $0.09 per share. The repurchases during the quarter were made pursuant to a stock repurchase agreement, which expires in September.

As it relates to order patterns, I will start with the Americas where we experienced year-over-year order growth in the first quarter of approximately 9% or approximately 11% adjusted for the estimated pull-forward effect from a May 2011 price adjustment. Customer order backlog for the Americas ended the quarter up approximately 11% compared to the prior year and continues to include a higher mix of project business. In particular, two large projects, which we have referenced on prior calls, positively impacted the first-quarter order growth rate and the quarter-end backlog growth rate by a few hundred basis points.

Order growth rates in the Americas were the strongest across our marketing programs, which are primarily targeted toward small to midsized companies, but are also available for add-on business with existing accounts. Project business grew at a high single digit percentage while the order growth rate from day-to-day or continuing business approximated a mid-single digit adjusted for the prior-year pull-forward effect previously mentioned.

Vertical market order growth rates in the Americas were the strongest in the energy, insurance, state and local government and information technology sectors. Federal government, financial services and education were the only tracked vertical markets to post a year-over-year decline. Our business is now well-diversified across several vertical markets as demonstrated by the fact that our overall orders still grew at a strong rate despite declines in certain markets like federal government and financial services.

Within our product categories and brands, order growth rates in the Americas were fairly broad-based with notable strength in Details, Technology, Architectural Solutions and Furniture. And across our geographic regions, first-quarter orders were fairly broad-based with only a few markets posting year-over-year declines.

Switching to EMEA, order patterns in constant currency continued to reflect a mixed bag, but grew at approximately 4% in total compared to the prior year. We experienced order growth in Germany, Spain and in the export markets of eastern, central and southern parts of Europe, Middle East and Africa as a group. Orders in France and northern Europe declined by a mid-single-digit percentage rate compared to the prior year.

As I stated earlier, customer order backlog for EMEA was up 14% at the end of the quarter compared to the prior year as orders during the first quarter included a relatively high mix of project business expected to ship in the second quarter.

Within the Other category, Asia-Pacific grew orders by a double-digit percentage rate in the first quarter and reflected a higher mix of more heavily discounted project business. At PolyVision, we expect improved results in the second quarter due to the seasonal nature of their business, but we are not yet able to confirm that the worst of the state and local government cutbacks is entirely behind us.

Lastly, Designtex grew orders in the quarter compared to last year after a soft fourth quarter and they are expecting solid results in the second quarter.

Turning to our second-quarter outlook, after taking into consideration the strength of our backlog in the Americas and EMEA, we expect to report revenue between $715 million and $740 million. This compares to $701 million in the second quarter of fiscal 2012, which included $5 million of revenue from the small PolyVision divestiture completed at the end of the second quarter of last year.

Currency assumptions included in our revenue estimate represent a $17 million negative effect on the year-over-year comparison and a $6 million negative effect on the sequential quarter comparison. After giving effect to these items, we estimate organic revenue growth in the second quarter will approximate 5% to 9% in total compared to the prior year and include organic growth across the Americas, EMEA and the Other category.

Sequentially, the second-quarter revenue estimate translates to a seasonal organic growth rate of approximately between 7% and 11%, which is a little bit better than normal seasonality. We expect the mix of business from some of our largest corporate customers in the Americas, as well as project business in general across EMEA and Asia-Pacific to remain relatively high and thus continue to negatively impact our gross margin and operating income percentage in the second quarter.

And we expect to continue investing in sales, product development and other initiatives likely at somewhat of a higher level compared to the first quarter. As it relates to our North America plant consolidations, we expect savings to improve and startup and other related costs to reduce compared to the first quarter.

In addition, our second-quarter earnings estimate anticipates year-over-year improvements in price yield associated with pricing actions taken in prior years, as well as initial yield from our recent price adjustment in April.

With respect to commodity costs, our earnings estimate contemplates modest inflation whether compared sequentially to the first quarter or versus the prior year.

Finally, our second-quarter earnings estimate contemplates an effective tax rate of approximately 37% as we expect to record a couple of small discrete tax items. As a result of these factors, we expect to report second-quarter earnings within a range of $0.16 to $0.20 per share, including net restructuring costs of approximately $0.02 per share associated with the manufacturing consolidations in North America.

From there, we will turn it over for questions.

(Operator Instructions). Chad Bolen, Raymond James.

Hey, good morning, everyone. Congratulations on a very solid quarter and outlook.

Thank you, Chad.

And thanks for all the details in your review of the quarter in your commentary. I guess a couple things. Dave, you talked about the order growth in the Americas. 9%, obviously, very good. Can you parse for us at all orders in the US versus the other geographies?

I don't want to get into that much detail. I would just comment that it was actually 11% adjusted for last year's pull-forward effect from the May price increase. So it was actually double-digit when adjusted for that.

I think Latin America was pretty strong and Canada includes one of the large projects that we have referenced on previous calls. So orders up there were pretty good, but they did not -- I wouldn't suggest that the map of those two geographies were so much that they drove the overall rate to 11%. The Americas -- or the US was still pretty good.

We do know, Chad, that, as I said in my comments, that we have outperformed the industry.

Absolutely, absolutely. Okay. And Dave, you talked about expectations for I think organic year-over-year growth in EMEA. Just to clarify, do you expect EMEA to be up year-over-year after the currency headwind as well or are we just thinking positive on an organic basis?

Yes, you are trying to pin me down on what the organic growth rate would be and I am going to stay away from that one, Chad. Sorry. So we gave you the currency number. I don't want to tell you anything other than that.

Got you. I understand. And you did call out in your comments and in the slides that Spain and Germany were some of the larger declines in the quarter. Spain not all that surprising, Germany maybe a bit. I guess obviously there were some timing issues that affected the EMEA results. Could you give us a little color around what geographies that impacted specifically and does that change any of the dynamics in terms of which countries performed better or worse, etc.?

Well, I mean I don't really have much more to add than what we have said in the slides and what I said a few minutes ago. What is interesting is that the revenue in the quarter was down most significantly in Germany and Spain, but Germany and Spain at the same time posted order growth in the quarter.

Yes. Okay.

So I think it certainly remains pretty mixed.

And just kind of a bigger picture question, I mean the macro obviously has a lot of uncertainty. Maybe anybody's guess right now. I think BIFMA seems to have a fairly optimistic view for the industry for calendar '13. Not asking you to endorse or not endorse that forecast, but maybe, Jim, could you share with us a little bit about how you are thinking about next year for the industry based on the activity that you're seeing in your business, maybe what you are hearing from customers and any color around your thoughts on that?

Sure. I would probably summarize it in two or three key features as you look out. One is an area that I have described in the past, which is, at the end of the last decade, you had a number of our customers who had spent that decade building their presence in developing countries. And think of that translating into facility investments that they were making. And as those emerging markets didn't generate profit for them, that tended to crimp the investments in the developed markets because they had to fund it from somewhere.

That effort paid off in those developing markets. Those businesses generally are making profit funding themselves and so they have returned back to their developed areas and said it is time to modernize those facilities. So I think that explains some of the demand, which is not correlated frankly to some of the real estate numbers we normally see, but more correlated to cash positions and this dynamic that I am talking about.

There is a small nuance in that in that as they invested in the developing countries, they adopted more recent technology and that further levered the perspective that the developed business areas weren't as far along. So it is the old notion that they didn't have to build land lines in the developing countries; they used mobile technologies. And when they built mobile technologies, they had a much different kind of layout.

Because Steelcase, as the second point, for more than a decade had been advancing the perspective of what happens when teams come together and teams and mobility have proximity to them, I think we continue to see the nature of spaces needing to respond to that kind of adjustment. They have to kind of deconstruct parts of it that were too fixed because, at any given time, the population in these buildings are changing because of the mobility. Sometimes they are not there; sometimes they are there. That would be the second part.

The third part though is more of a question of what is the tipping point at which the corporations are now concerned about the economic prospects because of the debt situation. I still, from the networks I am in, believe that most -- virtually all the business people see the way out of the debt problems is through GDP growth, not more austerity in the sense of -- I don't want to get into a political argument -- but in terms of the real core return to GDP growth, we have got to have investment. So I think that bodes well for our business.

So I have been saying to as many people that ask that the last decade was a unique period in our lifetime, the industrial change, the way that the investments were shifting like I am talking about. This decade is about paying for some of that and building innovation and growth engines. So that bodes well for people needing to change spaces in our industry.

Okay, well, thanks, guys, so much for answering my questions. Congratulations again and good luck to you on the remainder of the year.

Matt McCall, BB&T Capital Markets.

Good morning, guys. This is actually Jack filling in for Matt today. So last quarter, Dave, you had kind of walked us through an earnings bridge that takes into account some of the different items you guys have outlined. And I was just wondering if maybe we could get an update on that. So the numbers I have from the last call as far as a reversal on inflation, you have said maybe $20 million on the year, most of that coming in the back half. It sounds like you have a little bit of inflation baked into your Q2 forecast and then kind of $10 million to $15 million on the year from restructuring.

And it sounds like, as things accelerate, that still might be okay. And then is the $20 million from growth investment still a good number on the year or have there been any changes with any of those going on with changes directly to them or maybe an impact from what is going on in EMEA?

I think the bridge that we talked about last time is largely still valid. The couple of new pieces of information are related to how much the mix has shifted on us across the business toward more heavily discounted projects. It is not just in the Americas that we have been talking about for a few quarters. We now are seeing it significantly in EMEA and significantly in Asia as well. And so that can dampen the contribution margin as you would expect on the revenue growth.

But from a manufacturing savings perspective, I said last quarter I felt very confident in you all modeling something in the tune of at least $1 million, $2 million, $3 million, $4 million across the four quarters of net savings, but I wasn't quite convinced you could go as high as $2 million, $4 million, $6 million, $8 million. So I sized it between $10 million and $20 million and that is still where we think that is going to come in. And pricing is a very, very difficult one to project because it changes so quickly and can also be impacted by the mix of business, the number of projects that are out there, etc.

But we do expect year-over-year benefits from our pricing actions because we had 18 months of year-over-year costs where we were not -- weren't able to put pricing actions in place fast enough. So I think you guys kind of came up with a $20 million number, but is it in that range? I think it has the possibility to be in that range for the full fiscal year.

And then on the incremental spending, we are not seeing anything at this point that would suggest that $20 million or a little bit higher is a bad number high or low. So I would still keep modeling that. Oh, yes and then the last piece of the bridge is the lower interest expense and that is certainly playing out because our debt levels are significantly lower.

Okay. As far as EMEA goes, just on the margin performance there, is that -- is all you need is volume or are there kind of actions you can take to improve margins there?

Well, volume is the biggest driver right now. It's volume and mix. Right now, volume is down and the mix of projects is higher, so it is a bit of a double effect on our gross margin percentage. What we are doing in the meantime is, of course, continuing to pursue cost reductions that we pursue every year and we continue to look at our footprint, but we are not prepared to announce anything now or in the near term about anything more aggressive than just normal cost reduction.

And again, the big driver of that is our business remains in a mixed state. It is one quarter is up, the next quarter is down, the next quarter is up. We are not convinced that we are falling off a cliff.

Okay. And then it sounds like you guys have had some solid order growth and then with kind of the project mix that you have seen, maybe you could comment a little bit on the pipeline and just your comfort level that these projects will be released because it sounds like you had a few that were delayed late in this quarter.

Yes, those were delayed installations, not delayed orders. The orders that were placed, the product was manufactured and the site was not entirely ready, so they will ship in the second quarter. I will see if Terry wants to comment on the pipeline overall and maybe mention whether or not we have experienced any project order delays or any cancellations of significance.

I will answer your second question first. We have not seen project delays related to -- any [economy-related] project delays on orders. As far as visibility, in Europe, a lot of project activity remains. Our visibility is not as far out right now as we can get it in the Americas, but while day-to-day business is a little weaker, project activity remains strong.

In the Americas, our visibility is out a little bit further. Our visibility for second and third quarter, project activity remains very good. And as you get further out, obviously, you get into the fourth quarter, there is still -- customers haven't made decisions on certain projects, but the funnels remain strong.

Okay, great. Thanks for taking my questions.

Josh Borstein, Longbow Research.

This is Josh in for David MacGregor. Thanks for taking my questions. You had mentioned previously some impact to the operating margin from your accelerated investment on new project introductions. And I was wondering if you can just discuss a little in terms of dollars and cents or percentage the impact on operating margin from those accelerated product developments.

Well, the best I think datapoint to point you toward is in our webcast slides, Josh. We provide a year-over-year reconciliation of operating expenses. And in that waterfall chart, we give you a view of what kind of incremental investment we have made relative to the prior year. And I would tell you more than half of that incremental investment, which I think is just under $10 million year-over-year, so excluding changes in currency, excluding acquisition or divestiture effects on OpEx, the net increase is roughly $10 million or a little under $10 million. The majority of that is going to be related to our product development and growth initiatives that we have been pushing on over the last three quarters.

Okay, thanks. That's helpful. And then with respect to PolyVision, you said you expected improved results. What that quarter-over-quarter or year-over-year?

It should be both because it is the seasonally -- sorry -- it is sequential because it is the seasonally strongest quarter for us in the summer given that schools are closed and we can do installations. So we were simply guiding that we expected their performance to improve relative to the first quarter. We didn't (inaudible) on year-over-year.

Okay. And then just again sticking with PolyVision, when in your estimation does that business become profitable? And I realize it is a seasonal business, but what is driving profit besides an increase in orders? Is it price or are there some structural issues maybe that can be addressed.

In a way, the answer to that lies in some of the work we are doing going forward, which I think that I am really confident that the team that is on top of that have been -- have an outstanding track record of turning around situations, which aren't where they need to be. But my hint to you would be the place where we are getting the most value has to do with its application, of course, in learning settings. You heard my comments that Education group is really three years into its life and gaining a lot of steam. And so I think the platform of that Education group is the form and force for PolyVision's success.

The second thing I would say about it is that it had a lot to do with the media.scape evolution because we have learned so much working with vertical planes and how the Web is used in spaces. You just have to kind of trust me that the science of that is not just straightforward. It is a difficult question. And our design -- our insights in design only are getting better because of that.

Thank you for taking my questions.

(Operator Instructions). Todd Schwartzman, Sidoti & Company.

Hi, good morning, guys. Just hoping you could speak a little more about product development and innovation. Specifically in wondering about the lifecycle from conceptualization to the marketplace. At any point in time, how much of what you have got in the works in the pipeline is specifically designed or targeted for the following year's launch and how far out do you generally look with respect to whatever you have got in the pipeline at any particular time?

Todd, in a way, this is Jim, if I am restating it, are you looking for what kind of the -- how long does it take for the baby to go through its development and is ready to go or are you asking the question what is the hit rate on when you do kind of imagine things and get them to market?

It is really the former, Jim. For example, are you reaping benefits with media.scape now based on initial efforts on your part that you put in place in 2008, 2009 or so on?

Yes, most definitely. So let's call that the gestation period. That is the word I was looking for.

Right, exactly.

Yes, the gestation in this industry on the outside could be three years in development. If something is taking longer than that, then I get really nervous. The pressure to go faster is extraordinary and I kind of put a goal that is different, which is to be ahead. In other words, to be ahead of the market is as important as being fast. And I know they seem like the same thing, but they are not. And Steelcase is starting to find itself humbly in a position we are ahead of the market in some categories and we gain margin advantage and all the things that you want that translate as you just asked.

I know from just studying this last night there is over a dozen ideas just in the pipeline that Dave and I track. There is more than a dozen things going on in the Company. There is a dozen at the highest level that we watch and they do fit into -- all of them fit in our three-year plan.

Now some of those, Todd, are relatively big revenue generators or product lifecycle management for new categories. Some of them are more niche, but Jim is right. There is a pretty extensive list.

Great. That's helpful. On the orders, North American orders in the education vertical, if I heard you correctly, I think you said they had declined in the quarter. If that is the case, maybe you could quantify that. Was it single digits, low single digits? And also what were the shipments to education or higher education? Up, down or flat?

Terry, do you want to take it, if you know right off the top of your head, or otherwise I can look it up?

The orders were down in the single digits, mid to upper single digits. It is a little chunky as far as the vertical orders once you get into specific verticals. They are getting into the busier part of the season, so we should be seeing an uptick in the overall orders as we go into the summer.

Did you ship more to that vertical versus a year ago in the quarter?

Yes, shipments were up and orders were down.

Okay. The growth in shipments also single digits, low single digits?

Higher single digit.

Okay. Okay, great, thanks. Also, on the revenue guidance of $715 million to $740 million, how much of that is, if you could quantify what you have anticipated as far as the push-out within EMEA, what should have shipped, how much of that $715 million to $740 million in your estimation should have shipped in Q1?

A few million.

A few million?

Less than $5 million.

Okay, great. Thank you very much.

I am showing no further questions at this time. I will now turn the call back over to management for closing remarks.

This is Jim Hackett thanking everyone again and wishing everyone a relaxing and fun summer. Thanks for your involvement and attention to Steelcase. We look forward to reporting great results in the future.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and have a wonderful day.