Steelcase Inc (SCS) 2019 Q1 法說會逐字稿

Good day, everyone, and welcome to Steelcase's First Quarter Fiscal 2019 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. Mike O'Meara, Director of Investor Relations, Financial Planning and Analysis.

Thank you, Bruce.

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; and Dave Sylvester, our Senior Vice President and Chief Financial Officer.

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.

A replay of this webcast will be posted to ir.steelcase.com 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 details regarding the risks associated with the use of forward-looking statements are included in our earnings release, and we are incorporating by reference into this conference call the text of our safe harbor statement included in the release.

Following our prepared remarks, we will respond to questions from investors and analysts.

I will now turn the call over to our President and Chief Executive Officer Jim Keane.

Thanks, Mike, and good morning, everyone.

We're reporting today on our first quarter results that were in line with the revenue and EPS estimates we outlined in March.

We expected our sales momentum to continue and it did with order rates growing by 6% in the Americas and 7% in EMEA.

I'll begin with a few comments about EMEA and then talk about our business in the Americas and all the news we announced in the first part of June.

Our operating results in EMEA improved by almost $7 million over the prior year.

Top line revenue grew nicely, and operational performance was strong.

As we said in the past, we are targeting the level of operating expenses in EMEA to stay relatively flat so as we plan to grow revenue and continue to drive gross margin improvement through cost reductions and other initiatives, we expect to be able to continue to improve profitability.

EMEA revenue levels had been relatively flat for a long time, but that's beginning to change.

Our orders in Western Europe have been growing consistently.

Our win rates have improved.

The major markets of France and Germany are doing well economically and have political stability.

And all of this is leading to a healthy project pipeline.

We're also doing better at launching many of our new products on a global sale.

So we're getting these products into the EMEA market more quickly than in the past.

And the link in Munich has been open long enough now that we can begin to connect customer business a few months ago with recent wins in orders.

In the Americas, new products are just part of the story.

Some of you were at NeoCon last week and you saw how the elements of our strategy are coming together.

You saw our investment in new products, you saw the integration of new partner products into our offering and you saw the validation from the design community that we're on the right track, as we received 6 product awards and 2 showroom awards.

From a product perspective, the biggest buzz in our showroom was around Mackinac, a new furniture solution with a cantilevered work surface that makes it easy to shift from one work mode to another.

It's a great example of our innovation around workplace performance, materials and advanced engineering, and it represents our commitment to a faster product development process to bring our innovation to market.

And in fact, Mackinac won a Best of NeoCon award for innovation.

Our new SILQ chair was another Best of NeoCon innovation award winner and we're now taking orders on that chair in the Americas and Asia-Pacific, with EMEA to follow.

I mentioned 6% order growth in the Americas, which is a nice improvement over 2% order growth in Q4 and a 6% decline in Q3.

In the first quarter, we saw orders for our legacy panel solutions decline by less than 5%, while the go-forward portfolio grew about 8%.

We continue to see growing demand for furniture to support informal, collaborative and social spaces in the workplace.

Customers and A&D firms initially sourced solutions from a broad number of residential furniture suppliers, but have been disappointed in the quality, cost and reliability of these products, plus the specification and ordering process is very complex and costly for design firms and our dealers.

In Chicago, we showed new products from Steelcase, Coalesse and Turnstone designed to address this trend, and we also showcased products from some new and existing partners.

These partnerships allow our dealers to specify, order and receive product just as they do with Steelcase products.

We can leverage our scale to negotiate volume discounts and priority lead times.

Where appropriate, we can test products [to] business standards and help our partners improve their products to meet commercial furniture expectations.

And in some cases, we can help our partners reach markets in other parts of the world where their products may meet local demand.

The planned partnership with West Elm we announced in June is a good example.

The West Elm design team has a strong sense of how emerging trends will be embraced by their target customer, and we bring the engineering, product platforms, operations and logistics to develop and support those products for commercial use.

The plan is for our viewers to sell the West Elm workspace products as well as other products in the West Elm retail line.

We also announced a new partnership with Extremis, a Belgian company that specializes in outdoor furniture, which is a nice complement to our Coalesse outdoor offering.

We've developed a new online portal for our dealers to see at a glance all of the partner products we can provide through our network.

As we bring on additional partners in the future, we can quickly add them to this platform, which leverages our scale to drive efficiencies for our dealers and customers.

Our list of early June announcements also included a definitive agreement to acquire Smith System, a leading maker of furniture for the preK-12 market.

Our educational business has historically been aimed at higher education, but we've seen growing demand from high school and even middle schools as local bonds help to fund needed improvements in the U.S. educational infrastructure.

Still, we knew this was a very different market and we'd need new capabilities if we were to compete successfully.

The Smith System acquisition will bring a team of people who know this market and have deep relationships with key decision-makers across the country.

We expect to keep the business largely separate from the rest of Steelcase, helping them where needed.

For example, our operations team can help expand their capacity to support rapid growth.

We can also activate our dealers, starting with dealers, who, like us, have focused primarily on higher education, but see the opportunity to expand.

The business is highly seasonal and we can more easily fund the working capital demands during the busy summer months.

We believe some Smith System products will be applicable to our higher education and corporate customers and some Steelcase products could be rescaled to meet K-12 needs.

So the growth synergies are significant, but we expect cost reduction synergies are limited since Smith System's EBITDA margins are already quite strong and the company is very well run.

We believe the acquisition will be modestly accretive this year as purchase accounting negates a portion of the second quarter profitability with more significant EPS accretion thereafter.

We expect to return our cost of capital within the first 2 to 3 years, with terrific opportunities for significant value creation as we begin to capture the growth synergies I described.

The AMQ acquisition completed in December is on plan.

To date, we've been realizing the revenue growth we expected.

We've seen the Steelcase dealer network respond enthusiastically to this expansion of our portfolio.

Many of the initial value-creation initiatives we identified are in progress as we're finding opportunities for synergy in areas such as logistics, warehousing and supplier networks.

We also recently announced that we've expanded our relationship with Microsoft, include developing mounts and stands to be offered for the next-generation Surface Hub to be unveiled in May.

This collaboration follows our earlier work, leading to Creative Spaces and Workplace Advisor Subscription.

We have a lot of reasons to be happy with the start of the year.

Our win rates are improving, fueled by new products and by customers who are eager to use space as a means of attracting and retaining talent.

Macroeconomic factors such as CEO confidence and corporate profits continue to be supportive of expanding investments as can be seen in recent capital spending analyses.

On the other hand, our gross margins are not where we want them to be.

This is not an operational issue.

Our plants and overall operations have been very efficient and have been delivering on their annual cost reduction goals.

The gross margin shortfall is really related to pricing, business mix and inflation.

I said before, we would adjust pricing as needed to remain competitive and as we've done that, our win rates have improved.

Of course, as those wins begin to shift, we're seeing an impact in gross margin, offset somewhat by the positive effects of better fixed overhead absorption in our plants.

We also see a shift in our business from very profitable, fully depreciated legacy products to new products with lower initial margins.

This is normal, and we fully expect these new products will continue to become more profitable and reach target profitability as volume builds.

And of course, these new products are another factor helping us to improve our win rates.

What isn't normal is the sudden and significant increases we're seeing in the cost of steel and some other commodities, including freight.

We don't expect to have to pay much for the tariffs announced so far since our Americas supply chain largely buys from U.S. suppliers.

We were pleased to learn last night the commerce department granted PolyVision's request for an exclusion from the Japanese steel tariff.

We were one of only 42 exemptions granted in this first wave.

Now the new Canadian retaliatory tariffs will have some effect, but it should be relatively small as a direct cost on our total company profitability.

The larger impact relates to how the tariffs have been a trigger for inflation.

Just to give you a sense of the impact.

The cost of cold-rolled steel in the U.S. has risen over 20% since January 1. And because the price is rising in the U.S., it's causing increases in other parts of the world as well.

It's a global marketplace after all.

We're forecasting this increase in steel prices will add about $5 million to our cost of goods sold in the second quarter.

That's just steel.

Fuel and freight costs are rising for reasons unrelated to tariffs, but fuel, for example, is up over 10% since the beginning of the year.

Moving forward, we expect to see a more significant impact from increased freight cost as the capacity shortage is forcing us to pay more to procure some loads.

If we consider all the commodities we purchase, the impact of inflation has reduced our gross margins in Q1 and appears likely to have a greater effect on Q2.

Our sourcing and operations are doing what they can to minimize the inflation impact on our costs.

And at the same time, we announced the second price increase this calendar year, which took effect globally for orders received beginning this week.

Over time, these price increases should help to offset the inflation we've seen so far.

In the short run, price increases don't benefit orders already in-house and they don't affect recently won projects.

Some ongoing customer agreements restrict how often we can increase prices.

So we moved as quickly as possible, but we could still feel the impact on gross margins for a while.

While commodity forces suggest moderating inflation in the second half of the year, we expect this will depend on whether global trade pressures can be resolved.

We will continue to monitor the situation closely and take actions to protect our profitability as needed.

I want to finish my remarks with one additional observation.

For the last several years, you've heard us talk about restructuring initiatives necessary first in the U.S. and then in Europe.

And we have no major initiatives like that today.

The need to shift and resize our manufacturing footprint is behind us.

More recently, we've talked about the need to address gaps in our product portfolio.

And the investments we made in product development, in acquisitions like AMQ have largely filled those gaps.

Now this is a competitive and pretty innovative industry.

So we'll face new competitive challenges, but I really feel this is a new day for Steelcase.

We aren't spending much time trying to fix things anymore, that's behind us.

Our customers can feel that shift as our solutions become more relevant to what they need as they improve the work experience for their people to support their own innovation and growth.

We will continue to deal quickly with the short-term issues we face like rising commodity prices, but the bigger picture is how quickly we've already dealt with the fundamental long-term change in customer demand and in helping to lead the thinking in how the modern workplace will evolve.

I really do think it's a new day.

Thank you for your interest in our company.

I'll turn it over to Dave for a deeper look at our results.

Thank you, Jim.

I will cover our first quarter financial results first, noting where results differed from our expectations and highlighting year-over-year and sequential quarter comparisons, and then I will talk about our balance sheet and cash flow before getting into our order patterns and outlook for the second quarter of fiscal 2019.

We were pleased to report revenue of $754 million and earnings of $0.14 per share in the quarter, both of which were in line with the estimates we provided in March.

Before I get into the detailed results, I want to share a few highlights, some of which Jim just referenced.

First, the order growth of 6% in the Americas and 7% in EMEA during the first quarter was better than we expected, contributing to strong ending backlogs in both regions.

Additionally, through the first 3 weeks of June, we saw strong order growth across our business, especially last week in advance of the price adjustment, which took effect earlier this week.

Second, EMEA reported a $7 million improvement in its operating results compared to the prior year, which was approximately 2x better than the level of improvement we were projecting.

Our team delivered 8% organic revenue growth and a 250 basis point improvement in gross margin, both of which were better than expected and operating expenses were also lower than we estimated, benefiting from some delayed spending.

Third, we added new ancillary partners and expanded our relationship with Microsoft during the quarter, and earlier this month we announced our intentions to partner with West Elm and acquire Smith System, all of which are expected to further strengthen our growth potential.

And lastly, in response to quickly rising steel prices and other commodity costs, we implemented an additional list price adjustment on June 18, which represented our second increase in 4 months.

The benefits from the price adjustments will take a few quarters to show up as we work through the book of project business we won at earlier price levels.

And it will also take some time for us to negotiate price increases across our continuing agreements, some of which have limitations regarding the timing and frequency of adjustments.

Marketing programs are impacted immediately, so we will benefit -- we will get the benefits of pricing on that business right away, but remember, these programs represent less than 15% of revenue.

As it relates to our first quarter results, relative to our expectations, revenue and earnings in total were consistent with our estimates.

However, we did see some variability across some of the other income statement lines in our segments.

Regarding the income statement, favorable other income net, driven by strong JV income, helped to offset a small shortfall in operating income, which included lower-than-expected gross margins offset in part by some delayed spending.

Gross margins included better-than-expected results in EMEA, more than offset by shortfalls in the Americas and Asia-Pacific.

In the Americas, the effects of higher commodity costs and unfavorable shifts in business mix were more severe than we anticipated.

And in Asia, higher inventory reserves and lower revenue negatively impacted our gross margin in the quarter.

Across the segments, the better-than-expected performance from EMEA and lower corporate costs compared to our estimates helped to offset shortfalls in the Americas and Asia-Pacific, which is included in the Other category.

For the Americas, the story is all about our gross margin and the need to realize the benefits from recent pricing actions to cover the inflationary pressures we're experiencing.

And we're on it.

And in Asia, our shortfall was more about timing in a unique situation.

First, we had several project installation delays in the region, which pushed the related revenue into the second quarter.

And second, our order patterns and revenue in the quarter were negatively impacted by orders from a large customer, which were canceled mid-quarter and replaced in June.

This was a unique situation as we had built much of the related product and had already begun installation when we agreed with the customer to exchange the product for a more premium solution.

In connection with this agreement, we recorded an inventory reserve of approximately $800,000 to reduce the returned product to its estimated net realizable value.

Switching to year-over-year comparisons, it's worth noting that our prior year results have been restated to reflect the adoption of a new accounting standard in the first quarter, which required retrospective presentation.

The restatement was not material and did not change net income, but it had the effect of reclassifying certain postretirement benefit costs and credits from operating income to other income net.

We have included a table in the earnings release which summarizes the reclassification effects by quarter.

Compared to the restated prior year, operating income decreased by $12 million in the first quarter due to declines in the Americas and Asia-Pacific, offset in part by the improvement in EMEA and lower corporate costs.

As I mentioned previously, the $7 million improvement in EMEA was driven by the strong organic revenue growth, solid improvement in gross margin and favorable operating expenses, which were slightly lower than the prior year in constant currency.

And we continue to feel good about the momentum we're seeing in the business aided by the investments made in EMEA over the past few years.

In the Americas, the decline in operating income was driven by lower gross margin due to higher commodity costs, lower pricing and unfavorable shifts in business mix.

Our pricing in the Americas reflects increased discounting on large projects to defend against competitive pricing tactics, including projects won in the second half of fiscal 2018.

In the back half of last year, we also increased dealer incentives and discounting related to marketing programs to capture a higher share of day-to-day business in our channel.

And our gross margin in the first quarter continued to reflect some of this year-over-year impact.

And for Asia-Pacific, the reduced profitability compares to a record level of operating income in the prior year, and the decline was driven by lower revenue, lower gross margins due to the negative effects of changes in foreign currencies and the inventory reserve I just mentioned, and higher operating expenses as we continue to invest for the longer term.

Sequentially, first quarter operating income was lower compared to the fourth quarter due to seasonally lower revenue and lower gross margins, which were driven by many of the same factors that impacted the year-over-year comparisons.

The reduction in operating expenses was largely the result of the severance costs and impairment charge we recorded in the fourth quarter.

Moving to the balance sheet and cash flow.

Cash used in operating activities reflected our seasonal trends but was significantly higher than the prior year due to increased working capital and timing of customer deposits as well as collection of VAT recoveries in the prior year.

Working capital growth in the first quarter was higher than the prior year in part due to an unusually low accounts receivable balance and favorable DSO at the end of fiscal 2018, which I mentioned on last quarter's call.

We also experienced a higher mix of business from direct-sale customers in the current quarter, which have longer payment terms and have the effect of increasing accounts receivable at the end of the period.

Inventory levels are increasing to support the growth in our order patterns in the Americas and EMEA, plus we experienced some project installation delays in Asia-Pacific at the end of the quarter.

Additionally, stock levels of raw materials and finished goods are growing in support of new products, some of which are leveraging longer distance supply chains and/or being sourced as finished goods.

Timing of customer deposits, which decreased in the current quarter compared to an increase in the prior year, drove an additional $17 million swing in the comparison of cash used in operations.

Capital expenditures totaled $16 million in the first quarter and we expect fiscal 2019 to fall within a range of $80 million to $90 million, driven by our intention to sustain a high level of product development, strengthen our industrial capabilities, enhance our information technology systems and invest in our customer-facing facilities.

Investing activities also included $9 million of COLI proceeds associated with individual policy terminations in the first quarter.

We returned approximately $16 million to shareholders in the first quarter through the payment of a cash dividend of $0.135 per share, and yesterday the Board of directors approved the same level of dividend to be paid in July.

The share repurchases during the quarter were associated with the vesting of equity awards in satisfaction of participant tax obligations.

Turning to order patterns.

I will start with the Americas segment where our orders in the first quarter increased 6% compared to the prior year.

Recall that our fourth quarter orders included an acceleration of orders in advance of our February price adjustment, which we believe pulled forward up to $20 million of orders in the fourth quarter.

Adjusted for this pull-forward effect, as well as the acquisition of AMQ and a dealer divestiture, we estimate first quarter orders grew by approximately 8%.

Customer order backlog at the end of quarter was approximately 14% higher compared to the prior year.

Orders from our largest customers showed significant improvement in the quarter, growing by a double-digit percentage compared to the prior year, which reflected nearly a 20% decline compared to the previous year.

Across quote types, orders from project business and our marketing programs drove the growth in the quarter, while continuing business declined by a low single-digit percentage due to the estimated pull-forward effects of the February price adjustment.

Turning to vertical markets in the Americas.

We saw order growth in 5 of the 10 vertical markets we track.

And for the sectors that declined in the quarter, it's worth noting that a few faced strong prior year comparisons, while others have been up and down over the past 5 quarters.

Insurance services is the only sector that has posted year-over-year order declines for 5 consecutive quarters, but we've seen increased activity in this sector more recently, suggesting it may be poised for improvement.

Overall, we feel very good about the first quarter order patterns in the Americas as well as our win rates, which have remained strong and have included some larger opportunities, which we won with some of our newest products.

And we are seeing improvement in our pipeline of project opportunities projected to ship over the balance of the fiscal year, which is consistent with the general optimism we are feeling from our dealers about their outlook for the balance of the year.

For EMEA, the 7% order growth in the quarter included broad-based double-digit growth across Western Europe, offset in part by a single-digit percentage decline in the rest of EMEA as a group.

EMEA also had a price increase in February, which we believe resulted in an acceleration of orders, so first quarter order growth would have otherwise be an even stronger than the 7% we recorded.

Customer order backlog in EMEA ended the quarter up approximately 15% compared to the prior year.

For the Other category, orders in total declined by 6%, driven by a decline in Asia-Pacific compared to the prior year, which grew by 35% compared to the first quarter of fiscal 2017.

I talked earlier about some customer orders which were canceled in April and replaced in June, which accounted for much of the order decline in the quarter.

While a few smaller markets in the region are experiencing some softness, we remain confident about our prospects to drive order growth for the full year in Asia-Pacific.

Turning to the second quarter of fiscal 2019, we expect to report revenue in the range of $865 million to $890 million, which includes approximately $4 million of estimated favorable currency translation effects and the acquisitions of AMQ and Smith System net of divestitures.

The projected revenue range translates to expected organic growth of 6% to 9% compared to the prior year.

We anticipate completing the acquisition of Smith System at the end of June and consolidating their July and August results in our second quarter.

In the Form 8-K we filed on June 8, we highlighted the seasonality of this business, stating that approximately 2/3 of their revenue was recorded in the summer months of June, July and August.

Our revenue estimates for the second quarter reflect this seasonality.

From an earnings perspective, we expect modest accretion from the anticipated acquisition due to the initial effects of purchase accounting related to stepping up inventory and recording an intangible asset related to backlog, which will significantly reduce operating income, plus we anticipate funding a portion of the acquisition with a draw on our credit facility, which will generate some interest expense.

Over the balance of our fiscal year, we estimate revenue will follow typical seasonal patterns and the related earnings will be substantially reduced by amortization expense related to other intangible assets we expect to record in our accounting for the acquisition.

For fiscal 2020, we expect accretion of earnings to become more meaningful as we more fully implement our value-creation plan.

Taking into consideration the projected revenue growth and the effects of the anticipated acquisition of Smith System, we expect to report diluted earnings per share between $0.28 to $0.33 for second quarter of fiscal 2019.

The estimates also include the net property gain mentioned in the release, plus many of the same factors which negatively impacted the year-over-year comparisons of gross margin in the Americas and Asia-Pacific in the first quarter of fiscal 2019 are expected to impact second quarter gross margin comparisons.

Compared to the first quarter, we expect sequential improvement in our Americas gross margin in the second quarter due to the estimated fixed cost absorption benefits related to the higher revenue.

However, we expect the improvements to be dampened somewhat by a higher mix of project business.

From there, we'll turn it over for questions.

(Operator Instructions) And our first question comes from the line of Budd Bugatch from Raymond James.

On the guidance, it's nice to some increased flows.

On West Elm, you've announced the partnership, I'm not sure all the details are complete.

We visited that at NeoCon.

Looks like there is -- it's going to take some time to get that integrated.

Can you give us any idea as to what the time frame for seeing some of the West Elm improvement looks like?

Yes.

The first step is to finalize the agreement, and we're still working on the details of that.

So we believe we're past all of the major issues.

So we're moving through the technical part of that agreement.

As we finish the agreement, we will be able to engage more completely.

The -- already, the design teams are meeting, the engineering teams are meeting, and we're beginning the process of identifying the first parts of the operative part of that.

There is already existing products in the West Elm line that can be offered to our dealers as part of that.

So we'll begin to be able to see the early stages of that happen in Q2 and then I think the second half of the year is when we'll see more impact from West Elm.

Okay.

And obviously, the biggest question in, I think, most investors' mind relates to inflation and the impact.

I think, Jim, you said $5 million of increased raw material cost in the second quarter.

I take it that's a net number.

Can you kind of give us a feel for how that will play out in the other 2 quarters of the year?

And I know we're going to see some net impact of the June 18 price adjustment to list prices, but maybe you can give us an idea of how it will flow.

Yes.

I'll let Dave go through that.

The $5 million that Jim was referencing was steel and related component parts that have steel components.

And so aggregate inflation in Q2 versus the prior year would be higher than that, probably not over $10 million, but certainly in an upper single-digit million range.

And we do expect pricing benefits to start kicking in.

As I described, we're getting some already from the February price adjustment.

We should get a little bit from the June adjustment potentially as it starts to work through marketing orders and shipments late in the second quarter.

The net number would likely reduce, maybe it's coincidently back to around about a similar number like $5 million, but we're going to feel the pressures on our gross margins for at least Q2 and into Q3.

And hopefully by then, we'll have enough traction in updating our continuing agreements from both the February and June adjustment as well as some benefits from marketing programs as well as taking into consideration the most recent inflation in our project pricing that we're using on a day-to-day basis.

Hopefully by Q3 and into Q4, we'll be back to more of a normalized pattern where we're recovering the lion's share of inflation, if not all of it.

So just to make it sure I'm clear.

So excluding the benefit of the increased absorption, you think a net of maybe $10 million impact in Q2, maybe 3/4 of that in Q3 and by the end of Q4, maybe -- maybe back to whole or not back to whole.

I wasn't quite clear on what was said.

I think Q4 is -- it's not unreasonable to assume that we could be back to whole by that point.

There is a lot of work that has to happen between now and then.

A lot of customers have to accept price adjustments in their continuing agreements.

But I don't think that's an unreasonable estimate to project.

I think in Q3, we will feel less of a net impact than in Q2, and I think the net impact in Q2 will be somewhere in the mid-single-digit million range with inflation -- pure inflation being closer to, let's say, $10 million, but not quite at that level and pricing offsetting a portion of that.

So pricing may (inaudible) maybe $5 million, so the net is a $5 million drag to gross margin in Q2?

Plus or minus, yes.

And absorption is separate from that, right?

The fixed cost absorption benefits would be on top of that.

And a big outlier in that is, the gross number is the part that's hard to predict because if you look at some of the external steel inflation forecast, for example, that are probably a few months old now, they were projecting a moderation of the rate of increase in steel prices and maybe even a small retreat from the peak.

But as trade continues to become an issue and gets more complicated every week, those forecasts, I think, are probably -- I don't think the forecasters have as much visibility as anybody would like.

And so that's the question none of us know, is what's really going to happen with the cost of steel and aluminum and fuel as we look out to the second half of the year.

So we're going to have to just watch that carefully and stay really agile.

Your next question comes from the line of Reuben Garner from Seaport Global.

It's actually Matt on for Reuben this morning.

So let me start with -- Jim, you made a comment, you said that when you were talking about gross margin and the price cost pressure, you said you would take actions to protect your profitability when needed.

I'm curious, maybe what that meant?

What is there more you can do since like you're kind of in a little bit of a wait-and-see mode here?

Is there more you can do as you move forward?

I mean, it appears to me that it is needed.

I'm just wondering what more you can do while there is a delay?

And how difficult it is to implement some of these additional measures?

Well, first of all, I'm really happy with how quickly we moved.

We were able to move from identifying the need for the second pricing increase to executing it faster than we've ever done before, which is really all the credit for that goes to our IT teams and the people who manage our pricing mechanics.

So I was really pleased with that.

And it's been a long time, if ever, that we've done 2 price increases back to back as quickly as we did.

So I don't want to leave the impression that I think we've been moving more slowly than we should have otherwise.

I also mentioned that our operations people are doing what they can to find ways to offset some of this through procurement and other tactics, and we'll continue to take steps to do that.

This is a really dynamic situation.

So they have already done some of that, but we will continue to work towards that.

Pricing is more than just price lists and discounts.

It's also how you think about the way pricing can affect your mix.

So that's an area that we're always working on, but I think there's opportunities to do more there, and then there is opportunities to find efficiencies across our business, both in operational fixed costs and in nonoperational fixed costs and we already have fitness initiatives underway in the company to find ways to be more efficient.

So that's not a direct -- you can't directly say that we're doing that because of the price increases, we're doing it anyway.

But the need for those is even more apparent as you see the gross margin pressure that comes from inflation.

So these may be a few examples of things we're working on.

I just didn't want to constrain this to being just a matter of inflation comes along and we raise prices and that's all we can do.

We have other levers we can pull and are pulling.

Got it.

Okay.

Dave, you referenced some pull forward from the February increase, and I think you quantified some of the puts and takes around orders.

And I thought you referenced some pull forward from this most recent increase.

I didn't hear any quantification there.

Was there any benefit in the quarter ahead of your second price increase?

We don't think so, Matt, I mean -- because we just put the second price increase effect -- into effect on Monday, June 18.

So we would have had to have seen orders pulled forward in advance of May 25, which was the end of our first quarter, and that would be a bit unusual.

The pull forward I was referencing is we've seen very strong order growth globally through the first 3 weeks, especially last week in advance of Monday's price adjustment.

And we won't really know -- we won't be able to estimate how much of that was pulled forward until we see really the next 2 to 4 weeks.

Okay.

Got it.

And apologies, Michael, I'll sneak in one more.

You referenced 2 things, I just want to see if you could quantify.

You talked about lower corporate costs, I mean, I can quantify that from the release, but what was behind the lower corporate cost?

Was it in any way, I assume not, but you also referenced, Dave, some delayed spending in EMEA in the quarter?

Can you kind of put some more meat behind those 2 items?

Well, in EMEA, the delayed spending was not, I would say, several million dollars, but a few million dollars.

We've been talking in EMEA about our objective to hold operating expenses relatively flat in constant currency.

They declined.

That's better than expected.

So I think maybe there was, let's say, up to a couple of million of delayed spending, but probably not more than that.

And on the corporate costs, we'll include in the Q this afternoon when we file it or tomorrow, I guess, when we actually file the 10-Q, a brief discussion about how COLI income was higher than expected in the quarter and therefore, it benefited the corporate costs.

And our next question comes from the line of Kathryn Thompson from Thompson Research.

This is Steven Ramsey on for Kathryn.

Last quarter call, you talked some about your expectations for fiscal year '19 just with the industry growth in North America and Europe being in that low- to mid-single-digit range and that you intended and hoped to outpace that growth.

I guess, what you've seen so far, do you think the industry expectation is still fair?

And then more importantly, for your company expectations, based on Q1, outlook for Q2, are you sort of on pace or even ahead of that expectation?

So this is Jim.

So I'll take a shot at this and I'll really talk about this in terms of order growth rather than revenues.

And here it depends on what time period you look at, are you looking at 1 month or 3 months or 6 month as you look backwards in time?

What we see when we look at the industry numbers is a strengthening in order growth in the month of April, for example, which is really substantially different than what we've been seeing in the months prior to that.

So that gives us all hope and confidence that the industry is strengthening.

And it ought to be because what we hear and what we've been saying on these calls is that business confidence is -- CEO confidence is up, it seems like capital expenditures are up.

We talked with the A&D community who is usually ahead of us in knowing about projects.

They're super busy.

I just had a chance to speak with a lot of design principles at NeoCon.

Everybody is talking about how busy they are in markets all around the country.

So I think there is a lot of factors out there that seem to support the idea that our industry should have pretty good growth and then it's encouraging to see April be as strong as it was.

In terms of our growth, if we look at our orders in the most recent period, we are at least on track, if not slightly beating the industry in the last few months.

And I think that's related to the improvement in win rates.

It has to do with all the new products we've launched, adjustments we made to pricing and improved customer experiences in places like the link in Europe, building stronger customer relationships in all markets around the world.

So I do feel some positive momentum, and I do feel like we're beginning to at least keep pace, if not gain a bit on the industry overall.

One last trend in there is that within our industry, we have the large public companies and then we've got lot of mid-sized and smaller companies and we've noted that in recent months, it seems like the large public companies have done more than just held their position, but have actually strengthened a bit versus the industry, and we're one of those.

So it kind of depends who you compare us to, the industry broadly speaking or our direct public peers.

So there is a few different pieces of that and it may be even a little foggy after I get done, but that's the best I can do based on the data I have.

Great.

And then you've been talking for some time about the project pipeline building up and it seems kind of that we're seeing it all here at once with the jump in orders and organic sales growth for Q2.

Is that surprising to see the rates for growth kind of jump up like that or what do you think is finally pushing customers over the edge?

Yes.

It might feel like that as you're looking at it kind of quarter by quarter, but from my seat, it feels more like a steady continual building of momentum.

So if I compare it to other years, where maybe I can point to a particular project that was very large and created a disproportionate effect on our orders and shipments, it's the -- [the pig goes] through the pipeline and we'll end up talking about those things on the call.

I don't feel like that right now.

I don't feel like there is a particular project that's causing this and I don't feel like it's a sudden rise because we've been seeing the pipeline building all along.

So I characterize this more as a steady, gradual building of momentum.

I think that's right, and we've been talking about that across our new products and across vertical markets and different sizes of orders, et cetera for the last couple of quarters.

Maybe the difference this quarter was that our legacy products and applications declined by less of a rate than they had been declining, in part because large company actually grew by a low double-digit percentage in their order patterns.

So that might be the only thing that's relatively different than what we've been experiencing in the last few quarters.

But otherwise, new products growing nicely, vertical market diversity is pretty solid.

We're not seeing our orders driven by just a few large projects or anything like that.

And just to be -- put some numbers back on that, again, I will go back to the remarks, but in Q3 of last year, our Americas orders declined 6%.

In Q4, they grew 2% and here in Q1, they grew 6%.

So if you kind of picture that curve, you go, okay, that is a steady improvement from decline to small growth to more significant growth.

Excellent.

And last question.

Continuing orders have kind of been a struggling trend line for you guys.

Is there some color you can add on, if there is improving momentum on the continuing order side?

Well, I continue to think that our continuing orders are impacted by our large -- larger customers, and its impact had historically been driven by some of our legacy furniture applications -- products and furniture applications.

So what we've said in the past is as customers continue to migrate toward our newer solutions and we win projects and put continuing agreements in place, as they drive reconfigurations in their organizations, we should see continuing agreements or continuing business begin to improve along with it, but we still have a fair amount of installed base linked to legacy applications largely at large customers and they are not buying products like they used to in support of those legacy applications there.

They seem to be more waiting and shifting toward newer projects for newer installations or newer applications.

So I don't know that we're going to see a quick rebound in continuing agreements.

I was pleased this quarter to see that it only declined by a few percent and actually, I can attribute all of that decline to the pull-forward effect of the February price adjustment.

So on an adjusted basis, it actually grew modestly supported by the growth that we saw across our large customer base.

And the next question comes from the line of Greg Burns from Sidoti & Company.

When we look at all the partnerships you've signed in aggregate, how much revenue is coming through those channels?

And what type of growth in revenue or bookings are you seeing?

The revenue so far is really relatively small and I'd say immaterial to our results, but that's because we're moving super-fast.

So if you were to go back even 6 months ago or 9 months ago and look at the number of partnerships we had versus what we have today, a lot of them are brand-new.

West Elm, as I talked about, is something we unveiled to our dealers and our customers and the design community, had great support, but we haven't even really finalized the agreement.

That will be done in the next few weeks.

So we're really giving you a picture and giving our customers a picture of the capabilities that we're building so that they can shift their decision making.

And I expect the revenue to start become more material as this year continues and into next year.

And there is a part of your second question, maybe I didn't notice so -- or did I?

No?

Okay.

Okay.

And then you've talked about the revenue seasonality from Smith System, but in terms of their profitability cadence throughout the year, do they lose money in 3 out of 4 quarters and make all of their profit in 1 quarter?

How should we think about the profitability of that business on a quarterly basis?

Well, as I said, I think for the balance of the fiscal year, the back half of the fiscal year Q3 and Q4, I kind of was alluding to closer to a breakeven expectation, given the amortization of intangible assets that we expect to record in connection with the acquisition.

But they for sure make most of their money in the summer quarter with 2/3 of their volume pumping through that part of the business.

Whether or not they lose money on a quarterly basis will be dependent on the level of investment that we make to support the value-creation plan, the growth behind the value-creation plan that we see in front of us, but I don't currently foresee that and if they did, it would be in the rounding.

They've done -- from what we've seen in the due diligence, they've done a terrific job in managing their cost structure in the slower months outside of the summer and you would expect that...

Okay.

And then one last one, you talked -- I guess, have a generally positive outlook for demand environment, seems like, but also at the same time, you're talking about competitive pricing pressures over the last couple of quarters, which seems to be counterintuitive if the demand environment is improving or generally strong.

So when we look forward, do you expect that pricing pressure to alleviate itself as the kind of the pipeline that you're seeing gets converted?

I wish we knew.

Yes, and it's -- I don't have any basis to be able to say exactly what's going to happen in pricing.

And it's kind of dangerous ground anyway to look to the future.

But I will maybe recharacterize a little bit about -- or clarify how we describe the pricing pressures we're feeling today.

I think pricing pressure, first of all, is a reality in our business all the time.

And I think over the last couple of years, we've seen a gradual increase in pricing pressure.

We've said before that we adjust our pricing as we see fit and few quarters ago, we could feel that the pricing was moving downmarket faster than we were adjusting.

And so we adjusted our prices.

And so what we're feeling now is the impact of the adjustments we made.

And that means that our pricing -- the impact of those adjustments are affecting us today, but it doesn't necessarily mean that pricing pressures have been increasing in the broader industry in the last few quarters.

It could simply be that we responded to the pricing pressures that we're already building.

So maybe that helps, but I'll stop short of trying to predict what happens next.

And the next question comes from the line of Bill Dezellem from Tieton Capital.

I would like to circle back to Asia.

You referenced the one customer that created some trouble.

And -- are we understanding correctly from your commentary that they started the installation, and you did not say this so I'm just trying to speculate that they decided that they didn't like what they saw and that's what led them to go back, do a reevaluation and move to more premium product.

So that's the first part of that question.

And then secondarily, if you remove that one customer and that unique situation, would you give your overall view of what's happening in Asia and your strength or weakness that you're seeing there?

Sure.

So on the one customer, I won't go through all of the different things that went into the decision together to replace the orders.

I'll just share that it's a very good customer of ours globally and they wanted to upgrade to a premium solution.

They've -- they had approved.

We had worked on the initial product, and they had approved it, but as we got to -- in the middle of installation, they made a decision that they wanted to upgrade it to a more premium solution and so we worked together with them to come up with a -- an agreement that worked for both of us and are moving forward.

On the general overall result, as I commented, the order decline in Asia was largely driven by this cancellation that happened in April and the replacement orders unfortunately didn't come in, in the first quarter.

They came in, in June.

So we had a little bit of a timing issue there.

And now you go, "Well, Asia is only flat, orders were only flat," but remember last year in the first quarter, orders grew by 35%.

So we are seeing some softness in a few of our smaller markets.

But overall, we feel -- continue to feel quite good about the region and our ability to grow orders for the full year in Asia-Pacific.

I'll just build on the first part, again.

So Dave described it very actively.

I just want to add that we do this from time to time with customers.

We want people to be happy with what they bought.

And as they go through the buying process, sometimes things like this happen and you end up in this trade-off between short-term economic impacts versus long-term customer relationship.

We've been around for 106 years because we -- generally, we'll make the decision in favor of the long-term customer relationship, and we want customers and their employees to be happy.

And in this case, we understood why they wanted to make change.

We think it's going to be a great solution for them.

There were no quality problems on our side.

This was simply an accommodation we made.

And I'm glad we made that choice.

Even though it was material enough in this case that shows up in the overall Asia results, but in the long run, I think it's the right way to run the business.

(Operator Instructions) And at this time, I'm showing no further questions.

I'd like to turn the call back over to Jim Keane for any closing remarks.

Thanks.

So again, we're pleased with the steady building of momentum in both the Americas and EMEA.

I'm particularly proud of the way Steelcase employees responded to the challenge we gave them, that we wanted to work on improving the speed and agility of our business and that shows up in lots of different ways in today's discussion.

It's the fact that we are able to do very quick back to back pricing increases, a technical challenge for IT folks and the people who manage the details of how we manage pricing, but also of our sales organization who have to move very quickly to help customers understand why these price increases are needed.

Also proud of the fact that we showed up on the commerce department's first list of exclusions for the steel tariffs.

That happened because our legal team and others made sure we were there at the front of the line.

In the days -- in the first days of that window for exclusion request opened, we were there with our request.

And we were able to win approval last night.

It also shows up in these partnerships we're talking about them and although the revenue is still to come, the fact that we are able to build so many partnerships so quickly, announcing to our dealers and announcing to customers even as we're working on the final details of the contract, I think shows a shift in our culture towards speed and agility.

The speed at which we're able to identify, negotiate and close these acquisitions is another piece of evidence like that and new products like Mackinac, which we didn't talk about as much on this call, but that product broadened in scope and the products we showed at NeoCon was significantly broadening of the range from where we were even 6 months ago.

So whether it's product development or it's the folks in legal, IT, sales across the entire company, I feel that Steelcase people are really moving with speed and agility to respond to the challenges in our industry.

And here, as we work into Q2, we're looking forward to activating these partnerships like West Elm and welcoming Smith System to our family.

Thank you, again, for joining the call this morning, and thank you for your interest in Steelcase.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude your program, and you may all disconnect.

Everyone, have a great day.