Steelcase Inc (SCS) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to Steelcase's first-quarter fiscal 2015 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 and Assistant Treasurer. Sir, you may begin.

Thank you, Nova. Good morning, everyone. Thank you for joining us for the recap of our first-quarter financial results.

Here with me today are Jim Keane, our President and Chief Executive Officer; Dave Sylvester, our Senior Vice President and Chief Financial Officer; Mark Mossing, Corporate Controller and Chief Accounting Officer; and Terry Lenhardt, Vice President, Finance, for the Americas, EMEA, and Asia-Pacific business.

Our first-quarter earnings release, which crossed the wires this morning, 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 are incorporating by reference into this conference call the text of our Safe Harbor statement included in today's release.

Following our prepared remarks, we will respond to questions from investors and analysts, and with that out of the way, I will turn the call over to our President and Chief Executive Officer, Jim Keane.

Thanks, Raj. Good morning. I will talk for a few minutes about our first quarter and some of the things going on in our business.

Overall, we expected a better quarter. Our Americas business missed our revenue expectations by $10 million to $15 million, but our 6% organic growth still appears to have outpaced the US furniture industry, which seems to have contracted in March and April. That industry contraction was also a surprise versus what we expected three months ago, but now we know the overall US economy had negative GDP growth in the first quarter of the calendar year, so perhaps this makes sense in hindsight.

We are feeling good about our win rates, our project pipelines, and backlog as we head into the second quarter.

Meanwhile, our EMEA business exceeded our expectations. It's very good news to see this business beginning to show some topline growth after a prolonged recession in the region.

The volume mix shift from the Americas to EMEA compared to our expectations caused our overall gross margins to be lower than our expectations. We also had some unfavorable gross margin factors in the Americas that were partially offset by good control of operating expenses globally.

Earlier today, we notified our employees of our need to reduce excess manufacturing capacity by closing or transferring one of our factories in France and shifting that production to our other factories, primarily to one in Spain. Although each project like this is evaluated on its own merits, it is consistent with our longer-term principle to do what we need to do to improve our competitiveness.

We previously announced the closure of a factory in Germany with production shifting to a new greenfield factory in the Czech Republic, and that factory will begin initial operations later this fiscal year. After we complete these projects by the end of fiscal 2016, we expect our EMEA factory footprint to be stable and our efforts will shift to process improvements. Each of these projects is uniquely challenging and I appreciate the extraordinary efforts of the people involved in helping us build the system that will better serve our customers in the future.

Earlier in the quarter, we announced our intention to close our factory in High Point, North Carolina. Production will be shifted to other factories in North America. After this move, we also expect our Americas factory footprint to be stable.

Now, about our annual industry trade show, NeoCon, held earlier this month in Chicago, I'm glad some of you were able to attend the show and see the energy in our showroom for yourselves. Our most recent research is focused on the relationship between employee engagement and workplace satisfaction. We identified privacy, or more specifically the ability for an employee to avoid interruptions, as a key factor in improving performance.

At NeoCon this year, we showed the result of our collaboration with Susan Cain, whose studies of introverts resulted in a best-selling book called Quiet. We worked with Susan to show how architecture, furniture, and technology could be combined to create new choices for introverts and anybody else who needs to get away to concentrate or rejuvenate.

We were delighted with the reaction by customers, specifiers, and end users who followed this story through the media.

For me, the other key theme at NeoCon was the strength of the complete Steelcase portfolio of brands across a variety of settings. Our award-winning products came from Designtex, Coalesse, and Worktools, in addition to the Editor's Choice Award for Susan Cain Quiet Spaces by Steelcase. Susan Lyons took over as the President of Designtex about a year ago, and this year we saw the full impact of her creativity and connection to the design community.

This year's NeoCon was also the public debut for Steelcase Health, which is the new identity for the former Nurture by Steelcase brand. With the changes in the healthcare industry and our new strategies for winning in this market, we believe it's a great opportunity to more strongly leverage the Steelcase brand.

So although we were hoping for a better first quarter, we are very pleased with the progress we are making across several fronts. Our brands are getting stronger and our message is relevant to customers and their employees. Our efforts to improve our EMEA performance are accelerating as we take actions to resize and redeploy our footprint.

Behind it all is a great team of people and leaders around the world working with the right strategy that will help us add value for shareholders, customers, and employees. Now I will turn it over to Dave Sylvester.

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, and then we will move to your questions.

As Jim mentioned, we have mixed feelings about our financial results in the first quarter. While earnings were below our estimated range and revenue was at the low end of our guidance, we did grow revenue by 8% organically and we do believe we gained market share in the US again this quarter. In addition, our adjusted operating income increased 8% compared to the prior year. Plus, we believe the macroeconomic environment in western Europe is beginning to improve and we initiated an additional project to safeguard our competitiveness in EMEA.

As it relates to revenue, in the Americas the 6% organic revenue growth this quarter marked the 17th consecutive quarter of organic growth for this segment, but we were expecting more. Soft order patterns early in the quarter, as well as customer requests to extend delivery dates, negatively impacted revenue in the first quarter compared to our expectations. We offset some of this revenue shortfall with higher-than-expected revenue from EMEA, which experienced 10% organic revenue growth in the first quarter due to strength of project business in the UK, plus four additional shipping days due to the timing of our quarterly reporting calendar and EMEA's fiscal year beginning on March 1 every year.

Revenue in the other category grew by 14% organically in the first quarter, relatively consistent with our expectations. As we said in the release, our operating leverage from the revenue growth in the quarter was negatively impacted by higher-than-expected cost of sales. The biggest factor included approximately $5 million related to an increase in warranty claims experience and related reserve adjustments, as well as general returns and allowances in the first 90 days following shipment of products.

We also experienced higher-than-expected freight, distribution, and overhead costs in the Americas, but these costs were largely offset by better-than-expected performance in EMEA, including lower overhead and better absorption of fixed costs, as well as lower disruption costs associated with our restructuring activities. We expect cost of sales in the Americas to improve over the next two quarters.

Adjusted operating income in the quarter was $26.7 million, or 3.7% of sales, which was a couple million dollars higher compared to last year. The comparison was impacted by a few factors worth mentioning. First, the Americas cost of sales included approximately $3 million of higher claims experience and related adjustments to warranty reserves, as well as higher freight, distribution, and overhead costs.

Second, disruption costs related to our restructuring activities in EMEA approximated $3 million.

Third, variable compensation in the quarter included approximately $2.5 million related to the gain from the sale of an idle manufacturing facility in the Americas. The actual gain was recorded outside of adjusted operating income as a restructuring benefit.

We did experience a favorable mix of business compared to the prior year and our continuous cost-reduction efforts are yielding some benefits as well, but these were relatively small in comparison to the aforementioned items.

Restructuring costs in the quarter were significantly lower than expected as the terms of the final agreement reached with works councils in Germany during the first quarter required affected staff to work through targeted exit dates in order to receive termination benefits, which was better than our forecast assumption.

During the first quarter, we also announced the actions to close a manufacturing facility in North Carolina. In connection with this project, we expect to incur approximately $8 million of restructuring costs and $2 million of disruption, and we estimate annualized savings will approximate $5 million when fully implemented in fiscal 2017.

With respect to the procedures initiated today regarding a project to transfer the activities of a manufacturing facility in France, I think the 8-K did a good job explaining what we can say at this point. So to reiterate, we have initiated efforts regarding the potential transfer of the operations of the facility to potential third parties. But if we're not able to successfully negotiate such a transfer, this project may result in the closure of the facility.

We expect to incur between $30 million and $50 million of net costs related to this project and we anticipate annualized savings of approximately $10 million when fully implemented. Timing of the net costs and savings are dependent on the pace of discussions with the works councils and potential third-party transferees of the facility.

Moving to the balance sheet and cash flow, we used $73 million of cash from operations during the first quarter, which included the seasonal payment of prior-year variable compensation, the funding of retirement plans, and growth in working capital. Proceeds from the sale of the idle manufacturing facility and proceeds from the repayment of a dealer loan totaled approximately $28 million in the quarter.

Capital expenditures totaled $16 million and were related to the new plant in the Czech Republic, manufacturing investments, and new product introductions. Capital expenditures are expected to approximate $90 million to $100 million for the full fiscal year as we complete the construction of the new facility in EMEA, continue to upgrade various manufacturing technologies, and invest in various customer-facing initiatives, including showrooms and e-business platforms.

We returned approximately $20 million to shareholders in the first quarter, $14 million through the payment of a cash dividend of $0.105 per share and $6 million through repurchasing 400,000 shares.

Turning to order patterns, I will start with the Americas, where our orders in the first quarter were relatively flat compared to the prior year. Our order patterns were strongest in April, growing 11% over the prior year, and weakest in May, declining by 9% compared to the prior year, which included a large project in the education sector.

Customer order backlog for the Americas ended the quarter up approximately 6% compared to the prior year. Through the first three weeks of June, orders have grown at a low single-digit percentage.

Across quote types, orders related to large projects grew approximately 7% in the first quarter, while orders from continuing agreements were relatively flat and orders from our marketing programs aimed at smaller day-to-day business declined.

With respect to vertical markets in the Americas, we experienced order growth in the technical professional, manufacturing, energy, information technology, and insurance services sectors, while healthcare, government, financial services, and education declined against the prior year.

Switching to EMEA, order patterns in constant currency grew by approximately 17% in total compared to the prior year, due to the additional days referenced earlier and strength in project business, including orders related to a large government project won in fiscal 2013, which we expect to begin shipping in the second half of this fiscal year. Adjusting for these items, EMEA orders in constant currency grew by a small single-digit percentage in the first quarter and growth was continued through the first three weeks of June.

We experienced order growth in all markets, except for the Middle East and Africa and the export markets of eastern, central, and southern parts of Europe as a group. Customer order backlog for EMEA ended the quarter up approximately 23% compared to the prior year, with more than half of the growth coming from the large government project won in fiscal 2013.

Within the other category, order growth at Designtex was offset by a decline in Asia-Pacific. PolyVision orders were relatively flat following extraordinary order strength from large project orders at the end of last year. Asia-Pacific order patterns reflected weakness early in the quarter, followed by strength in May, which has continued into the first three weeks of June.

To summarize, our order patterns in the Americas continue to be influenced by uneven project business, and as Jim stated, we feel good about our pipeline. Western Europe is beginning to show signs of improving from deep recessionary levels. Asia-Pacific may be emerging out of the demand lull we have been experiencing over the past two years. Designtex turnaround efforts seem to be gaining traction and PolyVision remains solid.

Turning to the second quarter, we expect to report organic revenue growth of 0% to 3% compared to the prior year, which included approximately $13 million from one particularly large project in the education sector in the Americas.

Sequentially, the second-quarter revenue estimate represents organic growth of between 6% and 9%, which is relatively consistent with typical seasonality. We expect sequential improvement in the Americas operating results, but some of the issues which negatively impacted first-quarter cost of sales are expected to persist through the second quarter.

For EMEA, we expect the adjusted operating loss will exceed $10 million in the second quarter, driven in part by an estimated $6 million of operating costs associated with changes in the EMEA manufacturing footprint, as well as seasonal impacts related to the month of August in western Europe.

As it relates to restructuring costs, our earnings estimate contemplates additional charges related to our previously announced actions in Germany. However, our estimate does not include any charges related to the project initiated today, as timing and the amount of any costs are dependent on the pace of discussions with the works councils and potential third-party transferees of the facility.

As a result of these factors, we expect to report second-quarter earnings within a range of $0.18 to $0.22 per share, including restructuring costs of approximately $0.04 per share, which translates to an adjusted earnings range of $0.22 to $0.26 per share.

From there, we will turn it over for questions.

(Operator Instructions). Budd Bugatch, Raymond James.

I guess the issue is -- the major issue I am worried about is the US growth, and so, if I am going to have a couple questions only, let's talk a little bit high level of the US. You pat yourself on the back, I guess, for gaining some share, but you do acknowledge that the growth has slowed down, and I'm just not only concerned about the second quarter, I am concerned about what your thoughts are for the balance of the year and perhaps even into 2015, so maybe you could give us a window into your thinking.

Thanks, Budd, this is Jim. The way you stated it is very accurate. I think the outlook we have for the coming quarter, we talked about we feel our pipeline is strong. We think our win rates are good. As I look out to the future, we feel good about the kinds of projects that are in the pipeline, the quality of the projects.

I would also say that at NeoCon this past month, the quality of the discussions we were having with customers was very high. We had probably a higher percentage of -- I can't quantify, but a higher percentage of customers with a view of projects that are on the books, being planned for this year and next year, was actually quite good.

So, I see a lot of good signs overall, and as you can tell, we were surprised ourselves. If you think about our projections from three months ago, we could feel momentum building. We were surprised that orders weren't as strong in March and May.

First, you wonder is there something going on in your own business, but as we have seen more data now about the industry and data about the US economy, including even this week's restatement of first-quarter calendar-year growth by the Commerce Department, we can maybe say, okay, there was something clearly going on in the economy. Maybe it was related to weather. Maybe it's related to other factors, something that caused interruption.

But it doesn't change my perspective on the future. I still believe that this coming quarter and the rest of the year has a lot of positive signs in the US.

And the BIFMA forecast for next year seems to be -- I guess aggressive is the right word to put it at, up 10% for orders and shipments. Is that your view as well?

I think we have previously stated we expect to see single-digit growth in the industry. BIFMA's forecast, I won't comment on it or try to quarrel with it. It is based on economic inputs, but we wouldn't expect to see dramatic growth in the industry.

We expect to see some growth, and as I mentioned earlier, in the first quarter it appears at least in the month of March and April that the industry declined slightly. I don't know if any of my colleagues want to add on.

I would just remind you, Budd, of what we said last quarter, that our view on the US industry for the current fiscal year for us is that we believe it will grow at a small single-digit percentage and we will target growing faster than that. That view hasn't changed. We have not been public about a view on the following year, but I think we all look at the double-digit growth from BIFMA a little skeptically.

Okay, and I was -- have a bunch of other questions, but I know we have limits. I was surprised by the warranty cost in cost of goods sold. I think it's $5 million for the Company and $3 million for the US, if I got what you said, Dave, properly. Tell me what is going on there and why that wasn't already reserved for and smoothed in your cost of goods sold calculations? What was the surprise?

Fair question. So you have it right. It was $5 million versus -- higher versus our expectations. And most of that was in the Americas. And year over year, it was higher by $3 million. So those are the data points.

On the $5 million versus our expectations, there were really a couple things going on. One is the first was about $2 million related to an adjustment to our reserve for general returns and allowances in the first 90 days of shipment. It was brought to Mark and my attention that we were not appropriately reserved for returns and allowances in the first 90 days. We don't necessarily consider those warranty, but it is covered -- supposed to be covered in our warranty reserve.

So we had to adjust reserves to get the first 90 days covered more properly, and that was a couple million, so clearly a nonrecurring item that should have been reserved in previous quarters, but it wasn't. We noticed it this quarter, so we fixed it. So that was the first $2 million.

The other $3 million versus expectations has to do with our claims experience. What we had been seeing over the last two quarters is that it had been improving, and so what we anticipated in our forecast is that it would continue to improve, and in fact, it jumped up a little bit. And when you look at the mechanics of how we provide our reserve or how we actually justify our full warranty reserve, we base the reserve off of our claims experience over the last four quarters, and with this increase in claims experience being different than our assumption that it would be flat or down, it provided or it necessitated us to increase our reserve in warranties more than we anticipated.

When we look across our specific products, there are some products that the claims experience is a tad higher than a year ago and there are others where it is better than a year ago. So it was really a difference versus expectations. We, again, thought that our claims experience was improving, and so we forecasted for it to continue to improve, and it actually jumped up a little bit and that hurt us, and then we had this 90-day issue.

So on the year-over-year difference of $3 million, $2 million of that is simply attributable to this putting the 90-day reserve on the books appropriately.

So, it's $3 million year over year and $5 million sequentially, is that what the (multiple speakers)

$5 million versus our expectations.

$5 million versus your expectations? $3 million year over year, and $2 million of that was the true-up and $1 million of it was a higher experience, then why does it persist into the next quarter?

Some of it will persist. I didn't comment specifically that warranty would persist. I commented that our cost of sales issues would persist, so I also referenced higher freight and distribution and overhead spend which we could comment on (multiple speakers)

So (multiple speakers) is the F&D?

What we have assumed in the warranty is that these higher claims experience will continue into the next quarter. We really don't know, but that's the current assumption.

Got you. Okay, thank you very much. I will let others speak.

Matt McCall, BB&T Capital Markets.

So continuing on that line of questioning, Dave, did you break out the pressure that you faced this quarter from freight, distribution, overhead that wasn't expected? What was that -- I know you said it was offset somewhat, but what was the total dollars?

It was offset by favorability in the EMEA segment, and in terms of millions of dollars, I think it was a few million dollars associated with freight and distribution, and then something less than a few million dollars on overhead.

Okay, and so, what -- I guess also continuing on that, one of Budd's earlier questions, what is the assumption? You said that you are going to continue to see some pressure next quarter. What's the assumption -- basically what I am trying to get at is what is going to end next quarter and then thus not be a source of pressure in the back half of your fiscal year? So what would be the (multiple speakers)

We don't expect another accounting adjustment to record a reserve like I mentioned before.

Right.

We don't expect warranty to get better or worse, so that means it's going to persist. On the freight, distribution, and overhead, we expect improvement in all those areas, but we don't expect them to get back to the back half of the year levels that we were experiencing last year in the second quarter.

Do you (multiple speakers) expect them to get back to that level by Q3?

It remains to be seen, but we definitely think we will see improvement in Q2 and we're anticipating improvement in Q3, but whether or not it gets back to that level, I would feel better seeing another 90 days of actuals before I commented on that.

And what is the pressure exactly? I don't think you mentioned it. What is it? Higher fuel costs? Is it --

No, we -- the fuel costs were higher, but we anticipated that.

What happened in the freight and distribution area was a little bit of inefficiency. We also -- there were some carrier capacity issues that forced us to move to higher spot rate carriers, which impacted our costs, and we also, the best we can tell, have a little bit of an unusual pattern going on where we are shipping lower dollar value per cube.

And I can't really give you a specific product by product. Our analysis doesn't go that deep. But an example would be if we ship more EMEA chairs than we do Leap chairs, we incur the same amount of freight and charge the same amount of freight, and so it ends up having a little bit of an impact.

It is also more miles per shipment, on average. So it's a combination of less dollars per cube and more miles per cube added up. And what was -- but you'd expected that has to do with mix, either our product mix or customer mix, and that's what we do believe happened.

What we are comforted by is that in the third month of the quarter, it seemed that those trends had reversed and were coming back to more normal experience rates, which is why we believe that that source of the pressure might be less, but it's too early for us to really say for sure.

And on the overhead, just to move to the last bucket, we had higher-than-expected utilities costs with the extended winter into March, and then our sale of the complex of the manufacturing facility here in Grand Rapids took a couple of months longer than we anticipated, so we carried some disruption costs a little bit longer, and we had higher maintenance in a couple of facilities.

And if you are not familiar, we had a rather significant tornado go through Athens, Alabama, near our facility. While our facility wasn't damaged at all, many of our employees suffered pretty significant damage, so we had some disruption and some higher costs than expected associated with that.

Okay, okay. And on the disruption front, I think you said you're going to -- you expect to lose about $10 million in EMEA in Q2. Of that, if I heard you correctly, $6 million is related to disruption tied to the restructuring and the plant closures. Is that $6 million -- if I heard that right, is that $6 million consistent with your thinking or is there some of the facility in France starting to show up there? And then, same kind of thought, what's the anticipation for the remainder of the year from a disruption perspective?

The first thing I would tell you is we had $3 million in Q1 and we're anticipating $6 million -- or I should say our estimate includes an assumption of $6 million in Q2.

We expect higher disruption, not necessarily from the activities in Germany, as we have reached negotiations with the works councils in Germany. They're working in a productive way. But we expect labor premiums and other inefficiencies associated with the start-up in the Czech Republic to continue. And we also anticipate some incremental disruption from the activities we announced today.

So our estimate includes $6 million. I hate to say that's a forecast, because it's more of a guess than anything else, and that's really why we disclosed the specificity around the number.

And the only other comment I would make is I didn't say that we expected a $10 million loss in the second quarter. I said we expected the adjusted operating loss will exceed $10 million.

Okay, and then the disruption for the remainder of the year, Dave, and do we assume that it ends this year?

Yes, that's a fair question. Unfortunately, I don't have as good of answers as I would like to give you because we just don't know yet.

What we did provide in the 8-K that we filed in connection with the earnings release was updated estimates on Durlangen, and for -- that's the German plant closure, and so we -- and for the opening of the plant in the Czech Republic. We estimated that incremental disruption for the, I guess, fiscal year to be at $7 million, and for the activities that we announced today, all we have provided is a wide range of total estimated costs, and the reason it is wide and the reason we haven't given specifics is we really just -- we don't know how that is going to play out.

So as soon as we know, we will provide an update, and if we have to do that mid-quarter with an 8-K, to the extent we have information, we will certainly provide it.

So you are referencing the $30 million to $50 million, which would include the restructuring costs that you strip out, but also disruption-related issues?

Disruption, move costs, consulting, et cetera.

Okay, all right, thank you.

Todd Schwartzman, Sidoti & Company.

Just one more on the product returns, claims side, did you talk about how isolated or whether it was isolated by SKU, by product category, by factory? Just what was the source here of the problem and how does that relate to quality?

As I said to Budd, it wasn't specifically driven by any one product or two products. In fact, we saw some claims experience increase with some product and decreases in other products.

So it's kind of within a couple of standard deviations of what you would expect to see over a long period of time?

Yes, I don't think it's that significantly different.

To the degree we had discrete product issues, those issues have been resolved. There isn't an open issue that has not been resolved, but we are seeing, broadly speaking, these claims histories and so on.

But again, like I said to Budd, for the last couple of quarters, it had been trending down, and unfortunately, this one for whatever reasons ticked up a little bit. Let's see another 90 days to see whether or not it's a trend or it's an anomaly.

Got you. And I didn't catch when you were breaking out the order patterns in the Americas by order type. If you could go over that again, I would appreciate it.

The project business grew at 7%, and continuing was relatively flat, and our marketing programs were down, for an average of roughly flat. So it's a good sign for us that the project business continues to grow, because we know when we win projects, we put in, most of the time, a continuing agreement along with that project business.

This is Terry Lenhardt. Just to add to that, when you think about just our core product sales, product orders, growth was about 2%. So the exact numbers Dave was giving you relate to a 2% average. Our overall was flat when you take in consideration a wholly-owned dealer and some services.

Good point.

So the marketing delta must have been pretty severe, then?

The marketing delta was down fairly significantly. But if you think about it, if you take 7% -- remember, it's like a 40/40/20 split. We have said we have had a higher mix of project business for the last several quarters. That persisted. But if you take 40 is at 7 -- 40% is at roughly flat and the balance is down, or to equate to 2%, like Terry is saying, then it was down, but not down dramatically.

Okay, that makes sense. The notion of customers requesting extended deliveries is something that you guys have spoken to on occasion in the past couple of years, probably at least once or twice, in my recollection, prior to today.

That's correct.

What reasons historically have you been given, and much more importantly, what reasons, if any, did the customers give you this time around in Q1?

We are not tracking it officially, so this is really anecdotal, but what I continue to hear is that customers are delaying their delivery dates because of installation timing.

So if it's new construction, it has either fallen a little behind. If it is a move, they may have rescheduled the move. If it is renovation, that might be falling behind. But it's not because of any uncertainty about the economy or anything like that. It just has -- it seems to have to do with installation schedules.

It probably has to do a bit with some of the weather-related delays created a bit of a backlog for installation, and we're hearing about labor shortages in some parts of the country, which is just slowing down installation times.

Todd, back to your question about marketing programs. Just to be clear, that marketing programs also includes sales to dealers for special showroom packages for product, and that was down a little bit versus last year. That just tends to go up and down depending on our launches.

And Todd, on this business that pushes out, we look at historical patterns and we make an estimate, because we have it every quarter. So we make an estimate in our revenue guidance of what the pushout will be. It just has -- I would say in three of the last six or seven quarters, or eight quarters, it has been higher than we expected, and the only thing we can attribute that to is our higher mix of project business, which tends to be more linked to new construction, installations, renovations, and moves.

And the dealers have their finger on the pulse of the customer, right? I mean, they've got a dialogue going and they are not kept in the dark as to reasons for changes, correct?

Yes.

Also on the guidance for the quarter, what tax rate -- just based on that non-GAAP $0.22, $0.26 number, what tax rate are you assuming?

We had 41.5% in the first quarter, and so, really, that is what we are assuming in the second quarter. We are not aware of any discrete items or tax law changes or anything like that, so it is implied -- by us booking 41.5% in the first quarter, it is implied that our second-quarter estimate is the same.

Okay, thanks a lot.

(Operator Instructions). Josh Borstein, Longbow Research.

Thanks for taking my questions. Just to reference a question that Matt had brought up on the freight issue, it sounded like there was -- at least a piece of it was a negative mix issue. I thought you had referenced earlier there was a more favorable mix on the quarter. Could you explain the differences between those two?

Good question. The favorable mix that I was referencing before had to do with vertical markets and customers, and the mix on the freight and delivery has to do with list price per cube.

Okay. And then, on the vertical markets and customers, what verticals shifted as more favorable?

I would have to go back to the details on that. I don't recall off the top of my head. It wasn't -- as I said in my comments, it was favorable mix versus prior year, but it wasn't so significant that it significantly offset the other items.

Okay, and could you just go (multiple speakers)

We will have Raj get back to you.

Okay, great. And could you just go over again how the quarter played out in the Americas in terms of what you saw in each of the months?

Yes, the orders in March were relatively flat, if I remember correctly. They were up significantly in April, and we did have a price increase in April, but we had a price increase in the prior year in the month of April as well, so we don't think there was too much of a significant impact from the price increase. There was certainly pull-forward this year, but we would have had pull-forward last year.

No different than we expected, in other words.

Yes. And then, May was down more significantly and -- but in the prior years when we booked that large educational vertical market order in the Americas, so if you were to adjust May for that, I think you'd get close to -- back to flat. Is that right, Terry?

Yes.

Okay, and then June, you had mentioned, was up low single digits, I believe?

Yes, through the first three weeks, so three weeks don't make a month or a quarter, so we're always a little hesitant to give you color on three weeks of patterns, but they are up year over year.

Okay. And just the number of customer visits and mockups, could you give us a little color on how that played out?

Yes, customer visits were down a bit in the quarter versus last year. March contributed to that with the bad weather at the end of the winter.

The other thing we would look at, though, are mockups, really looking at project activity. Number of mockups were up in double digit and the average price per mockup versus last year up again, as well.

Okay, thank you. And then just last, Asia-Pacific, it sounds like things are improving there, but more macroly, we have heard things may be slowing down. What are you seeing in your business over in Asia-Pacific?

As I said in my remarks, the order patterns started relatively weak and strengthened in May and have continued in June. And when we were there, Jim and I and Terry were there for one of our quarterly business reviews in May, the sentiment about the balance of the year is pretty good. It's not in every market, but it's still generally pretty good.

Great, I appreciate the color. Good luck. Thank you.

Josh, I can answer your vertical market question. We were just looking it up while we were talking, but really the better mix from a shipments perspective this quarter was we had higher mix of higher education and then a lower mix of financial services and government business.

Okay, great. I appreciate that, Raj. Thank you.

I am showing no further questions in the queue at this time. I would like to turn the call back to Jim Keane for closing remarks.

I would just like to thank everybody for your participation in today's call. Again, we are encouraged by the progress we're making all on a number of fronts, including the importance of us helping the EMEA business get back to profitability, improve its competitiveness. And so, there is a lot of work going on in EMEA, a lot of work going on in the Americas, and really work going on across Steelcase to make that happen.

So, thank you again for your participation today and look forward to speaking to you again in the future.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a wonderful day.