Steelcase Inc (SCS) 2014 Q1 法說會逐字稿

Good day, everyone, and welcome to Steelcase's first quarter fiscal 2014 conference call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Mr. Raj Mehan, Director of Investor Relations.

Thank you, Ellie. 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; Terry Lenhardt, Vice President, Finance for the Americas, EMEA and Asia-Pacific. I apologize, Jim, Jim Keane has the President title now. Sorry about that.

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

Our discussion today may include references to non-GAAP financial measures and forward-looking statements. Reconciliations to the most comparable GAAP measures and the risks associated with the use of forward-looking statements are included in our earnings release and webcast slides. We're incorporating by reference into this conference call and the text of our Safe Harbor statement included in yesterday's release.

Following our prepared remarks, we will respond to questions from investors and analysts. Now I'll turn the call over to our Chief Executive Officer, Jim Hackett.

Thank you, Raj, and good morning, everyone. I do want to start the call by confirming that we are actually pleased with our first quarter performance even though the revenue was slightly below expectations. The reason, as you'll see when Dave Sylvester takes you through the numbers, the difference between hitting and missing our revenue estimate really is largely attributed to the timing of shipments. It's the difference between some orders shipping at the end of May or a few weeks later and it's usually because the customer facility wasn't ready for delivery. These sort of things have a way of correcting themselves quickly and the backlog for the start of Q2 is showing that. So while I do hate to see our streak, and this has been 12 consecutive quarters of year-over-year organic growth at the consolidated level, we are pleased that the Americas segment is continuing its run of consecutive quarterly growth.

It's also a matter of pride to call out an important detail from our results. Given that we saw improvement in adjusted operating income even without a rise on the top line, that was worth noting. And that's true in every segment. Even with the continuing economic challenges in Europe and the kind of sluggishness in Asia, our margins were better and our operating expenses were well-controlled. I think the nuance here is about the credibility that we hope we're earning with our economic performance.

Last quarter we told you about some planned reorganization in our EMEA, or European segment, primarily impacting the business in France. And I want to note that we're continuing to work through that process with the local Works Council. So we anticipate the process will lead to additional improvement in that specific segment.

Well, the rest of my comments today are on our strategy and how well I think it's working. I trust some of you on this call had the chance to experience our story at our industry trade show which is called NeoCon. And this was just held a few weeks ago in Chicago, and it's a credit to all of our product development and launch teams that we came home from Chicago with five product awards including four Gold Awards. We've received that top honor more than any other Company at the trade show.

But for me, it was obviously more than the awards that I'm so proud of. It was really a validation of our aggressive thesis about the future of work that we have been talking about on this call over the years, and what we needed to do to distinguish ourselves.

I think I can point to you that you can see this playing out in several ways. This was the year that technology became a full partner in the space. Our designers have found the tipping point, I think, in the relationship of architecture, furniture and technology, and the best word I can use to describe that relationship is that the design language is harmonious.

It wasn't just in the Steelcase showroom. We saw the same thing in the Nurture, or our healthcare space, where we also had the Steelcase education solutions products on display. And that's the value of a global product development and design function, that it touches all aspects of our business and it focuses so intently on this important design language. I can't emphasize how important that is in business today.

Some of the harmony I'm describing was obvious. The way the mediascape and other display technologies were fully integrated into the space. For some it might have been subtle like the innovation around acoustics and lighting that improve the experience of meeting with people who aren't in the same room.

To help others understand how much this has changed our world, I told this story in Chicago of a meeting I had a few years ago with one of the world's most famous architects. I was at his location. As we sat there in his great room I asked when he thought we would have the language of technology and spaces coming fully together. Like in his lifetime, did he imagine the differences in these languages looking more similar than they had been different.

You know what he said, he told me he really hated technology and he wished that it would just go away. We had quite a debate about whether that would happen. And literally, as I was leaving, I walked away from his table and they were wheeling in a mobile telepresence unit so he could meet with a client in Dubai. Of course, I turned around and went back to him and said, "See, it's not going away." And you can put the technology in a closet and you try and wheel it out when you need it, but it's better to have a space that allows for technology as an equal partner. Even more importantly, that it's harmoniously designed so that the user has a great experience.

Of course, technology was just one of the items. We continued to invest in new ideas during the last downturn. We promoted that when we would talk to you. And everywhere in the showroom at this NeoCon show you saw the results of those investments in that down time.

One of the important ones was a product called VIA, it has the three letters V-I-A. It has to deal with an architectural product portfolio that gives new life to what we call the vertical plane. Think of an office has the plane over your head, a plane that's vertical, and a plane under your feet. This is the vertical plane, the one that goes from floor to ceiling. And this is one of those obvious places where the architecture and technology come together to support the way people are working.

It was a Gold Award winner, along with this famous new chair that we've launched called Gesture. In fact, last quarter, I told you about this chair, Gesture, and I mentioned that it was the result of our research into how the use of technology devices is changing the way people sit. And that we've identified a number of new postures, frankly, because of mobile computing and tablets, or using two devices at once. And we have created a new seating experience to address this.

So the trade show, NeoCon, was the start of a series of customer events around the world with Gesture as a focal point, along with the new version, I think a surprise to the market, of a really strong selling chair today called the Think Chair and the new version just makes it better.

Other awards reflected the highest intersection of this language that I've been talking about. There was a product from our Coalesse brand called Lagunitas which is a bench system. Or in Nurture, a new lounge product called Regard. Both of these got rave reviews and Gold Awards. They're another example of how we use insight from our research into healthcare to develop innovative products.

I've been saying for a long time that innovation is one of the keys to the future success of Steelcase. But I'm most proud of demonstrating to you that we're now seeing some great examples of it, particularly this year's winning products at NeoCon. But I'm also going to do more than hint with you that there's a lot more projects in the pipeline.

With that, I wish you all a great summer, and I'm going to turn it over to Dave Sylvester, our Chief Financial Officer.

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 2014, and then we'll move to your questions.

As Jim mentioned, we are not too concerned with the consolidated organic revenue decline in the quarter, as our order patterns in the Americas were better than expected, resulting in a strong quarter-end backlog and customer visits and project activity remain high. In the Americas, we did achieve organic revenue growth again this quarter, albeit quite small, marking the 13th consecutive quarter of organic growth for this segment. And this was accomplished despite a tough prior year comparison which included $20 million of revenue from two particularly large projects in the energy sector mentioned on previous calls.

For EMEA, we experienced a 3% organic revenue decline in the first quarter following 3% organic revenue growth in the fourth quarter. While we remain concerned about the overall results in EMEA, the current quarter revenue decline was largely driven by Northern Europe which we think may strengthen in the back half of the year, and Spain, which faced a difficult year-over-year comparison associated with a large project in the prior year.

Lastly, revenue in the Other category declined by 8% in the first quarter compared to the prior year driven largely by softness in China. However, we expect year-over-year revenue growth in the second quarter from each of Asia-Pacific, PolyVision and Designtex.

Adjusted operating income in the quarter was $24.8 million, or 3.7% of sales, which was flat compared to last year. However, the comparison was impacted by a few factors worth mentioning. First, the Americas reduced cost of sales as a percentage of revenue by 200 basis points compared to the prior year due to year-over-year net pricing benefits and net savings associated with our manufacturing consolidation in North America. Much of this improvement was invested back in the business to sustain our momentum and support future growth, as operating expenses increased by $9.2 million, or 190 basis points, relative to sales.

Second, EMEA and the Other category improved their bottom line results compared to the prior year despite organic revenue declines. EMEA continues to benefit from its cost reduction measures implemented last year, and also deferred some of its growth investments to future quarters. Within the Other category, Asia-Pacific gross margins benefited from a favorable mix of business and the team was cautious about our ongoing investments given the lull in demand over the last several quarters.

Third, corporate costs were higher than the prior year due to higher earnings on deferred compensation and higher variable compensation costs due in part to resignation or forfeiture benefits in the prior year. Restructuring costs in the quarter were somewhat lower than our expectations, primarily due to timing of EMEA activities which were initiated during the quarter and could yield a few million dollars of annualized savings once the consultations with the Works Council are complete.

As it relates to the North America plant consolidations, we estimate year-over-year net benefits approximated $4 million in the first quarter.

Two quick comments on income taxes. In the first quarter, we recorded discrete benefits totaling $1.6 million, which had the effect of lowering our effective tax rate to 26% compared to the 35% estimate we provided during last quarter's call. And for the second quarter, we expect to record unfavorable tax adjustments of approximately $2 million, primarily related to expected changes in the statutory tax rate in the UK which could increase our effective tax rate to approximately 40% in the second quarter.

Moving to the balance sheet and cash flow, we used $39 million of cash from 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 $18 million during the first quarter, and largely related to the new products introduced at NeoCon. Capital expenditures are expected to approximate $80 million for the full fiscal year.

We returned approximately $44 million to shareholders in the first quarter, $12 million through the payment of a cash dividend of $0.10 per share, and $32 million through repurchasing a total of 2.4 million shares. A little over $2 million of the share repurchases were completed in the open market at an average price of $13.12 per share, while the balance represented shares forfeited by participants to cover tax withholding for equity awards which vested in March.

As it relates to order patterns, I will start with the Americas where our orders in the first quarter grew approximately 7% compared to the prior year. Current quarter orders included a large project order in the education vertical market which largely offset the impact of orders in the prior year from two particularly large projects in the energy sector.

Order patterns were strongest in May, growing nearly 20% over the prior year, including the large project in the education sector. And customer order backlog for the Americas ended the quarter up approximately 10% compared to the prior year. Across quote types, orders related to large projects and orders from our marketing programs aimed at smaller day-to-day business grew significantly, while orders from continuing agreements were flat compared to the prior year.

Vertical market order growth rates in the Americas were the strongest in information technology, education, financial services, healthcare, and manufacturing sectors, while energy and insurance services posted notable percentage declines against strong prior year comparisons. Also, we experienced a modest decline within the US federal government sector which marks the eighth consecutive quarter of year-over-year declines in this vertical market.

Switching to EMEA, order patterns in constant currency remained mixed, declining by approximately 5% in total compared to the prior year. We experienced order growth in the export markets of Eastern, Central and Southern parts of Europe, and the Middle East and Africa. Orders in Germany declined modestly while orders in Northern Europe, Iberia and France declined by a more significant percentage compared to the prior year. Customer order backlog for EMEA ended the quarter up approximately 7% compared to last year, however, through the first three weeks of the second quarter, orders are lagging prior year by a mid-single-digit percentage reflecting ongoing volatility across the region.

Within the Other category, order growth in Asia-Pacific was offset by declines at PolyVision and Designtex. We are continuing to monitor the Chinese market closely as order patterns have remained volatile and we expect challenges in Japan given the recent devaluation of the yen, and the fact that our business model there is largely dependent on imports. To summarize, our order patterns and quarter-end backlog in the Americas remained solid. And we continue to face a challenging environment in EMEA, plus we are keeping a close eye on a few markets in Asia-Pacific.

Turning to the second quarter, we expect to report revenue between $760 million and $785 million, including approximately $4 million of year-over-year favorable currency translation effects and $7 million from recent dealer acquisitions net of a divestiture. This compares to $745 million in the second quarter of fiscal 2013. After giving effect to these items, we estimate organic revenue growth in the second quarter will approximate 1% to 4% compared to the prior year.

Sequentially, the second-quarter revenue estimate represents organic growth of between 14% and 18%, which is much higher than typical seasonality due to the strength of orders in May and resulting customer order backlog going into the second quarter.

We expect the mix of project business in general across the Americas, EMEA and Asia-Pacific to remain higher than business from continuing agreements. This mix shift away from our historical experience of an even balance between project and continuing business is likely to continue for the near term, as we believe more companies are choosing to modernize their spaces toward a more open and collaborative footprint in support of mobility.

As it relates to our North America plant consolidations, we expect net year-over-year benefits in the second quarter of approximately $8 million. In addition, our second-quarter earnings estimate anticipates year-over-year improvements in price yield associated with pricing actions taken in prior years.

With respect to commodity costs, our earnings estimates contemplate modest commodity deflation, whether compared sequentially to the first quarter or versus the prior year. For operating expenses, we expect the costs associated with our new product introductions and other growth initiatives to increase our operating expenses compared to the first quarter.

Finally, our second quarter earnings estimate contemplates unfavorable discrete tax adjustments of approximately $2 million, or $0.02 per share, primarily related to expected changes in the statutory tax rate in the UK.

As a result of these factors, we expect to report second-quarter earnings within a range of $0.22 to $0.26 per share, including restructuring costs of approximately $0.01 per share. This compares to $0.23 per share in the second quarter of the prior year, which included restructuring costs of approximately $0.02 per share. From there, we will turn it over for questions.

(Operator Instructions) Our first question comes from Budd Bugatch of Raymond James. Please go ahead.

Hey, good morning, everybody. This is actually Chad Bolen filling in for Budd.

Hi, Chad.

Congratulations on a solid quarter and the outlook. Dave, I guess, just kind of trying to work my way through some of the moving parts, you had a very tough prior year comparison due the $20 million of project deliveries. You had the effect of the shipment timing issues in Q1, and even with that, organic growth was only down 1% in the first quarter and you're guiding to positive 1% to 4% in the second quarter.

Is there any way for you to help us on kind of what got pushed from first quarter into second quarter or how much that would have impacted it? And I guess what I'm just trying to get to is sort of what's the trajectory of the business? Is demand improving in 2Q versus 1Q, staying the same, getting worse, just kind of help me with understanding the pace of business?

Well, I would say generally the pace of business is largely as expected. Like what we said on last quarter's call, we expect to see industry growth in the US this year and we will continue to target growing faster than the industry.

We also talked last quarter about the number of projects that are in the pipeline are higher than a year ago, and the dollar value associated with those projects is averaging higher than it averaged a year ago.

So we feel pretty good and continue to feel pretty good about the full fiscal year, and really didn't see anything in the current quarter that was different than what we described 90 days ago.

The only thing that happened was that we had more orders come in with expected, or requested shipment dates that were in the second quarter versus late in the first quarter. And really, we don't have anything to attribute that to other than just simply timing.

It wasn't -- certainly wasn't the result of caution or anything like that from any of our customers because if there was caution, they wouldn't have placed the order. I think it had more to do with the timing of when their projects were going to be ready for installation. So it was kind of an abnormality, if anything.

And I'd like to maybe abstract the response up to a level just above this, which is just to remind you all that I've said this in previous meetings, that the nature of how spaces age and become ready for being renewed is in itself a cycle. Sometimes the real estate bubbles drive this kind of change. Sometimes -- which we think is this time -- is a big shift in technology and mobility and globalization of companies.

So I've observed with you that in my career, almost 20 years running the Company, I remember these kinds of periods where I can see that the corporations are at large finding themselves with spaces out-of-date. And that's where we are today.

The second thing is that as they think about it, they have some choices that they have to make inside of that. And generally what's happening is because of mobility, something we've talked to you about in the past, is you end up shrinking what we call the I spaces and make bigger commitments to we spaces. So there's a shift for collaboration, for telepresence, for these kinds of things. And Steelcase is really well-positioned for that in that we led kind of the our industry and our clients down a path of how can you shift the distribution between I and we and have a really harmonized space.

The third thing, and I only will leave this anecdotally because it's not material in any specific way, but it's just part of the trend that I build in my intuitive sense, what's going on. The large global accounts that we serve, a number of them in the last kind of three quarters have begun to make commitments about more wholesale changes to their facilities.

And this becomes a trend over time where you start to see a few of these, I said that this might happen, and Steelcase has to compete for that. A lot of times we're incumbents and you could hope we would win, but we have to compete for that and we're doing very well.

And so we, Dave and I, see summary information about how those kind of things are gathering steam. There may not be a specific order that's even placed yet, but it just bodes well in terms of kind of the commitment that we know we're going to realize over time. The way I represent that, it's part of my having you understand the nuance of why my confidence is really high in the Company right now, because of things like that.

That's great. Thanks for that color, Jim. Another question would be on EMEA. You managed to narrow the operating loss there despite the fact that organic sales were down in the quarter. Obviously, some pretty good cost discipline.

I guess fiscal second quarter is always seasonally difficult for that segment. Do you think you will be able to repeat that feat in the second quarter, narrowing the operating loss?

It's going to be a challenge, because the market is still pretty volatile from a top line perspective. But if we see any kind of top line growth, it would certainly be our objective to continue to narrow the operating loss in the second quarter.

And then you know what has traditionally happened in Europe is we would make a little bit of money in Q1, give most of it back if not all of it back in Q2. That was in good times and then make our year in Q3 and Q4. We're not in good times right now so we're -- we lose money in the first two quarters and then try to make it up in the balance, back half of the year.

Got you. Last one for me. The pace of buybacks was higher than I've seen in at least, I think it was something, maybe fiscal first car quarter of '09. Is that a signal for a more aggressive stance on repurchase to come or kind of what drove your thinking there?

Well, the stock price was low, to start with. At high 12s and low 13s, we continue to think that that's a very good buy. But we also had some activity that was taking place where we were seeing some of our Class B shareholders were moving some shares in the market shortly before our analyst call.

They're not insiders that were selling. But anyway, they were selling shares and had we been in -- had we not been in a blackout period, it's possible we would have talked to them about purchasing the block from them, and so what we chose to do was buy shares after the blackout ended, especially given how the stock price traded down so significantly after last quarter's call.

We still think about repurchases, though, largely as being opportunistic. If we continue to see volatility in the stock price, you'll continue to see us trying to pick off at the low end.

Well, thanks, guys, for answering my questions. Best of luck to you.

Thanks, Chad. Hey, before we move to the next call, I just want to make one point of clarification too. Raj pointed out that as I was going through the script I misread a number when I was talking about our North America plant consolidations and the level of benefit that we expect year-over-year in the second quarter. He noted that I referenced $8 million, and while I wish it would be $8 million, it's only expected to be $4 million.

Our next question comes from Matt McCall of BB&T Capital Markets. Please go ahead.

Thank you. Good morning, everybody.

Good morning, Matt.

Dave, you just actually led into my question. It sounded like you referenced a couple times well-controlled operating expenses and you also have given a little update on the expected benefit and you gave some outlook into your operating expenses, at least directionally. Could you just give us an update on where the net savings is expected to be, and offsetting that, what you expect your spending on an incremental basis in '14 to look like relative to '13? Not talking about the growth spending.

Yes, so it's going to be largely, as we said last quarter, we still believe that for fiscal '14, compared to fiscal '13, we will post year-over-year benefits associated with restructuring actions, which include the North America plant consolidations that we started a couple years ago, the PolyVision global technology restructuring that we initiated last fall, as well as some of the smaller actions in Europe that we started in the fourth quarter, and then also initiated discussions with the French Works Council in March.

We still think that all of that aggregates potentially in the magnitude of $20 million to $25 million year-over-year benefit.

And on the investments back in the business, we are still planning to invest in the neighborhood of $25 million to $30 million on a year-over-year basis. And, again, the reference on that number is really excluding variable compensation that you would consider part of our contribution margin on incremental volume, as well as impacts of acquisitions and divestitures and currency changes.

Okay.

So really the same as what we said last quarter.

Okay. So $25 million, $30 million excluding the normal contribution margin which includes the impact of [associated] costs?

Yes.

Okay. And I guess, moving to Europe, it sounds like you made some cost moves there. Is there anything else that can be done either from a cost side or a top line perspective, outside of just kind of -- I assume you're not just waiting out the cycle, but is there anything else that can be done to kind of shore up profitability this year?

Well, like I've said on previous calls and in one-on-ones, there are a lot of things that we could do that would quickly improve our profitability in Europe. Now, many of them would require discussions with local work council groups, et cetera. But what we're trying to do in Europe is continue to evolve our strategy at the same time.

So what we're not really interested in doing is cost reducing the old business model. Really what we're trying to do is redefine the strategy of Europe, and as necessary, and if possible, make some reductions or realignments of our cost structure to better support our strategy go-forward.

And unfortunately, that's harder work and requires more careful strategic or surgical kind of maneuvers versus just a traditional, okay, strategy is right, volume is down, so just pull back on spending across the board. We feel like that would be dangerous to our longer-term strategy.

So I know we're testing the patience of the investment community by choosing this longer term approach, but we feel strongly that it's the best approach to take right now.

Okay. And Jim Hackett, this might be for you. There's, I think, some debate out there about the outlook for new office space. Can you just provide, and maybe, Dave, if you want to take it, what you think the cyclical outlook looks like over the next 12 months?

Well, it's interesting that I have anecdotal information because I have -- one of my kids is an investor for a big insurance company in real estate transactions. In other words, he places early money, and I sit on the Board of an insurance company myself. So I know in our Boardroom and in my son's discussions that because of the low interest rate market, there's a lot of interest in real estate for people who can go long. And so I do think the American market is also very attractive broadly in terms of real estate for people like that.

Second thing is there's an urbanization trend, a lot of data showing people moving to cities. Now, that may be for the people that you guys follow that are dealing with residential kind of settings and apartment buildings and so on and so forth. But I think it bodes well for us because the nature of urban settings at large are being rethought because of the growth in the area I just talked about and the fact that people work there, and the traffic systems and what have you are being designed to enable flows. So let's just say at the most abstract level we've got a low interest rate environment and it's -- it makes real estate attractive.

Now, let's move to the question about the nature of work which follows these trends, as we know. The markets for rent start to realize excess capacity and then it causes people to move. That has been an historical wave that we would follow and that has helped our industry at various times. This trend, though, Matt, in this particular time is one that's more of a sea change because of the nature of the way mobile computing speaks to what you need to have in facilities where you're going to house people to work. It's just the infrastructure, the size of commitment that you need, the nature of wireless computing, the nature of global connections means that most of these spaces, as I'm sorry to repeat myself, are out of date.

So the real estate people are starting to understand this. Of course, they would be happy to build this for our clients, but what I'm seeing is more in the large accounts, that you heard me infer earlier, beginning to think about, we now have to think about updating our spaces in a very thoughtful way. So there's more design work out there for A&D firms, there's more long-term planning that's going on that I've seen because their global footprints have changed, the mix of their business is different than it was 15 years ago.

For example, think of the largest companies in the world in terms of emerging markets now as a percent of their sales. They're making way for that now in the way their corporate facilities speak to the diversity of their business. So I'm very bullish about this prospect that they've got to update things.

Now, I said I would hint a little bit earlier about what's to come. If you start thinking about the nature of sensing in spaces, what it can do for making spaces smarter, you now see why the world has to actually upgrade and change.

Now, to make a plug for Steelcase, the unique position that we're in because of this is because we made the shift to thinking about user-centered design and thinking about systems thinking, we think about the relationship of all these aspects in the products that we create for the customers and, therefore, we're somewhat of a profit for them. I say that loosely, with great humility, but they come here and say, hey, we need to understand how we might do that.

Well, Dave runs aviation for the Company. You ask him how busy are our airplanes, flying people around to come and see us. It's -- they are very busy. And these trips are about we're trying to figure out where to go and how to do that.

A second thing that puts us in great stead at this call, a year ago I couldn't tell you about this, I hinted it, is the VIA product, this floor to ceiling architecture that we've just launched cracks a code that has been elusive in our industry, which is to make it possible for you to have much better acoustic performance with movable partitions.

This is a huge deal, because what it allows these companies to do is now, as they replace, is to build architectural-grounded kind of products around the kind of technologies you hear me hinting about, around the nature of mobile kind of applications that we know they're shifting to, and we find ourselves in this great spot where now the products are starting to come together.

If you went through NeoCon, you'd see that seascape and mediascape, the language of those work really well with this new architecture and that's no accident. It took a long time, but our team did an extraordinary job, James Ludwig and Allan Smith, two people in product design and development; Robert Grooters, our head of engineering, these three people worked together now for about 10 years. And so I make the boost in our opportunity because of the forces of the way the market is moving and the way we've interpreted it and now these products are coming together. So I'm walking in and out of situations quite bullish.

Now, let me end with this, because I went on with the question, and say in the past the Company had to prove that it could earn profit when it saw these kinds of trends. And I think we've been great about predicting some of this.

What I'm really proud of now is the footprint that we have built. This industrial model, which took us a decade or more, Budd Bugatch would remark, he saw that it was going to take a decade, and it did, is largely behind us, with what we've got to continue to fix in Europe. And we know we can do this now because we've done it. So I hope you see it's the marriage of the trend, the marriage of the positioning of the product, and the marriage of the industrial system.

Now, you go, well, how well are you doing in the potential to earn profit? Well, just look at the Americas and you see that's what the Company can do. And so I'm certain that if you were traveling with me and seeing these kinds of things, you would be confirmed with the same kind of enthusiasm.

Okay. Thanks for that detail, Jim. Very helpful. Thank you.

Our next question comes from Todd Schwartzman of Sidoti & Company. Please go ahead.

Hi, good morning, gentlemen.

Hi, Todd.

First, regarding EMEA, the comment regarding second quarter orders down mid-single-digits, is that what you're guiding for the full quarter or what you're seeing at this very early juncture thus far?

What we're seeing thus far in the quarter. I just didn't want you guys to run away with the backlog being up over prior year by 7%. So I wanted to neutralize that a little bit with the first three weeks of order patterns that we were seeing.

That is on the full segment basis, correct?

Yes.

That's $3 million total. Okay. Great. In the Americas, regarding the timing issue, the requested later delivery. Roughly how many distinct clients made that request?

Boy, I wish I could tell you specifically that we have -- our forecast is comprised of client after client after client that adds up to the total with a requested shipping date, but it's not. It's at a much higher level than that. We just saw a higher level of what we call push-out than was typical.

We are studying that to determine whether there's a new trend around push-out that is associated with this higher level of project activity that's coming in, but it was just a little bit higher than we anticipated. Most of the May orders that you get are going to push out anyway. But April had a fairly high level of volume that was requested to ship in the second quarter which was a little surprising.

Was there any correlation whatsoever that you can see with respect to vertical markets or company size or even whether it represents, the products in question represent collaborative versus more traditional?

No. The only thing of unusual or significance to point out in the order patterns was the higher ed order that I did point out that came in in May and was a pretty big deal.

What we can see, is we can see the application of the individual spaces, which think of it as an inverse signal about the way the offices are changing in terms of sophistication.

Okay. And just in terms of demand, I guess in the Americas. Can you maybe qualitatively speak to -- maybe give us a little more color on customer visits, what the mood is like, what the dialogues have been like, vis-a-vis last quarter or last year?

Well, Terry, may want to add to this, but I would say that the customer visit data that we're looking at are still very strong and they're up over last year.

The conversations with customers that I have, and you know I'm not with every customer, and in fact, I'm only with a few each week, but every single conversation I have with a customer there is an acknowledgement by them that they either have too many owned private office cubicles, meaning by owned I mean that they're dedicated to an individual, so either they have too many of them, they're too big because they're not storing paper like they used to, the technology is miniaturized, et cetera, or they're underutilized largely because people are spending more time mobile and in collaborative type environments.

And so that is the common theme, that is -- that I discuss or hear about from every single customer, which directly supports Jim's thesis that he's had for several years actually around this whole modernization of the outdated model of private office cubicle.

The two indicators that we look at for mid- and longer term would be the number of customer visits and taking a look at mock-ups. The number of customer visits were up double-digit whether you look at sequentially from the fourth quarter or from the first quarter of last year.

If you look at mock-ups, we look at the total number of mock-ups that we do in a quarter for clients involved in a project opportunity. We also look at the total value, and we saw a good, solid growth year-over-year in both the total number of mock-ups and the average value of each mock-up.

That's great. In terms of non-residential construction, all you guys travel quite a bit. Anecdotally, what are you seeing in terms of cranes in the sky and what changes have you noticed in recent months, if any?

I would hesitate to say that I've seen any change significantly. The most -- the only thing I would comment is in the Tier 2 cities of China, it is remarkable the number of cranes you see. I've joked internally in the past that it is -- I've at times felt like I'm in Dubai during a sand storm when I'm in a Tier 2 city in China because you see so many cranes. You're not seeing a sand storm, you're seeing pollution which is unfortunate. But it's a similar kind of environment. There's this haze over the city and there's just cranes everywhere and you know these Tier 2 cities are like the size of Chicago, practically. That's the -- what we continue to see that's remarkable.

In the US or in Europe, I'm not traveling enough, and we're kind of looking at each other around the table and shrugging our shoulders, we're not traveling enough to feel comfortable commenting on any change in pattern.

Okay. Lastly, just a bit of a housekeeping. How many jets does Steelcase lease or own nowadays?

We have two that we own. As far as I remember, 20 years, have owned our aircraft.

Okay. Thank you very much.

They fly roughly 1,000 hours a year per airplane, and that's in the air time, with well over 90% being dedicated to customers.

Terrific. Thanks.

(Operator Instructions)

Our next question comes from David MacGregor of Longbow Research. Please go ahead.

Hi, this is Josh Borstein in for David MacGregor. Thanks for taking my questions.

Back to EMEA, you noted a lot of volatility there. Based on everything you're seeing right now, whether that's leading indicators, whether that's mock-ups, commercial real estate patterns, et cetera. You talked a little about what you're seeing here in 2Q, but as you look out, what do you see in Europe for the second half of the year?

Well, we continue to see Europe the way we've been describing it, really, for the last couple years and that's overall flattish. To put all of EMEA into one bucket would be inappropriate. What we've seen over the last couple of years, are seeing right now and expect to see go-forward is diversity across those markets.

For example, as I commented a few minutes ago, we're seeing nice growth in the export markets of Eastern, Central, Southern Europe, Middle East, Africa. And for the last several quarters, Germany has hung in quite nicely. And France has been okay, not great, but they've had a quarter here or there that's been pretty good, and then a quarter that's down here or there.

More recently, the UK has softened a bit, but we actually feel pretty good about the outlook in the back half of the year. And Spain is really bad, but at some point -- Spain doesn't go to zero. At some point, Spain has to level off if it's not already starting to level off.

So when you take all of that together, and take those individual pieces which, frankly, do move around quarter-to-quarter, what we've been seeing and actually expect to continue to see is more flattish overall results from EMEA.

Now that can mean we're down this quarter following being up last quarter. So we could be up one quarter, down another quarter. But roughly flattish is how we view EMEA.

Okay. And then you noted a pickup, or you expect to see a pickup in Northern Europe. Is that based on projects in the pipeline? Is it based on some kind of leading indicators you look at?

From what I'm told by the teams, it's largely projects in the pipeline.

Okay. And any sense -- you talk a lot about Steelcase outperforming the industry in the US. Do you have any sense whether you can achieve something similar in some of the European countries?

That would certainly be -- that's our strategy. We're probably a few years away from making that declaration across the continent. We do have spots within Europe where we are gaining share, but I'd rather not point those out country-by-country.

Okay. And then you had mentioned that the seasonal pattern in EMEA where you see operating losses in the first half and gains in the second half. What accounts for that seasonal pattern?

Well, the summer quarter, which is the months of June, July and August is significantly impacted by August. There is a vacation pattern across Western Europe that largely is centered around late July and into August. So you get a lot of shutdowns of manufacturing facilities, so our supply is disrupted, our manufacturing is disrupted, and also installation becomes challenging because of the vacation period. So that's the summer quarter.

And the first quarter tends to just be lower than the fourth quarter. We do -- in Europe, the way it used to be historically, I'm a little dated on this, so I could be wrong. But in Europe it used to be that getting orders placed by the end of the calendar year was very important for purposes of not losing your budget, so-to-speak. In the US, it tends to be more shipment based.

So if a company has a facilities budget that they want to use by a 12/31 year-end they've got to get it ordered and received, whereas in Europe, there's always been a discussion that as long as you get the order in and make the commitment by the end of the 12/31 year, that's okay.

And so our January and February in Europe is not as bad in Europe as it is in the US. So the fourth quarter is typically a fairly decent quarter for us in Europe and then it falls off in the months of March, April and May.

Okay. Thanks. And then just one follow-up on EMEA again. You had talked about the longer-term goal of getting up to high- to -- or mid- to high-single-digits in terms of operating margin and I appreciate taking the long-term view. Do you have any sense of in terms of the time frame when you think you may be able to achieve that, whether it's one year, two years, or longer than that?

Well, it's going to be dependent on volume and the execution of our strategy. So it's certainly not going to be in the next year or two, but we're not -- we're patient people and very focused on the long term, but we're not so patient that we're going to wait seven or eight years either.

Okay. Great. I appreciate it. Thank you and good luck.

I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Hackett for any closing remarks.

I just want to emphasize the confidence that we have in the future and wish everyone a wonderful summer. Thank you very much.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.