Steelcase's (SCS) CEO Jim Keane on Q1 2015 Results - Earnings Call Transcript

| About: Steelcase Inc. (SCS)

Steelcase, Inc. (NYSE:SCS)

Q1 2015 Earnings Conference Call

June 26, 2014 11:00 ET

Executives

Raj Mehan - Director, IR & Assistant Treasurer

Jim Keane - President & CEO

Dave Sylvester - SVP & CFO

Terry Lenhardt - VP, Finance for the Americas, EMEA and Asia-Pacific Business

Analysts

Budd Bugatch - Raymond James & Associates

Matt McCall - BB&T Capital Markets

Todd Schwartzman - Sidoti & Company

Josh Borstein - Longbow Research

Operator

Good day everyone and welcome to Steelcase’s First Quarter Fiscal 2015 conference call. (Operator Instructions). 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.

Raj Mehan

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 this 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 yesterday’s release. Following our prepared remarks, we’ll 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.

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 U.S. 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 U.S. economy had negative GDP growth in the first quarter of the calendar year so perhaps this makes sense in hindsight. We’re feeling good about our win rates, our project pipelines and backlog as we head into second quarter.

Meanwhile our EMEA business exceeded our expectations. It's very good news to see this business beginning to show some top line growth after our 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 have 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 our 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 extra-ordinary 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 tradeshow 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 has focused on the relationship between employee engagement and workplace satisfaction. We identified privacy but 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 bestselling 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 follow the 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 for her creativity and connection to the design community. This year’s NeoCon was also the public debut for Steelcase Health which is a 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’re 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.

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 gain market share in the U.S. 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 earlier in the quarter as well as customer request 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 cost 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 cost.

Second, disruption cost 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 cost 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 8K 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 cost 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 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 their 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 and 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 expect 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 continued 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 maybe 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 remained 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 cost 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 cost 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 cost 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.

Question-and-Answer Session

Operator

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

Budd Bugatch - Raymond James & Associates

I guess the issue is -- the major issue I am worried about is the U.S. growth, and so, if I am going to have a couple questions only, let's talk a little bit high level of the U.S. 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.

Jim Keane

The way you stated 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 kind of projects that are in the pipeline, the quality of the projects and I would also say that at NeoCon this past month the quality of the discussions we’re having with customers is very high. We had probably a higher percentage of -- I can’t quantify, but high percentage of customers with [real] [ph] projects that are on the books that’s 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. At first you wonder is there something going on in your own business but as you have seen more data now about the industry and data about the U.S. economy including even this week’s restatement of first quarter calendar year growth by the Commerce Department. We can maybe say okay there is something really going on in the economy, maybe it's related to weather, maybe it's related to other factors something that caused the 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 U.S.

Budd Bugatch - Raymond James & Associates

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?

Jim Keane

Well I think we have previously slated, 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's 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 that at least in the months of March and April that the industry declined slightly, I don't know if any of my colleagues want to add-on.

Dave Sylvester

No I would just remind you Budd, what we said last quarter that our view on the U.S. 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 it 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.

Budd Bugatch - Raymond James & Associates

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 U.S., 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?

Dave Sylvester

Fair question. So you have it right it was $5 million 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 and the 5 million versus our expectations, there are really a couple of 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 on 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 appropriately and that was a couple of million. So clearly kind of a non-recurring 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, 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's better than a year ago.

So it was a really 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 is simply attributable to this putting the 90 day reserve on the books appropriately.

Budd Bugatch - Raymond James & Associates

So, it's $3 million year over year and $5 million sequentially, is that what the --

Dave Sylvester

$5 million versus our expectations.

Budd Bugatch - Raymond James & Associates

$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?

Dave Sylvester

Well, some of it will persist; I didn’t comment specifically that 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 --

Budd Bugatch - Raymond James & Associates

So what [inaudible] is the F&D?

Dave Sylvester

Yes, 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.

Operator

Our next question comes from the line of Matt McCall of BB&T Capital Markets. Your line is open.

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?

Dave Sylvester

It was offset by a favorability in the EMEA segment; 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.

Matt McCall - BB&T Capital Markets

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 incremental --

Dave Sylvester

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

Matt McCall - BB&T Capital Markets

Do you expect them to get back to that level by Q3?

Dave Sylvester

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 to seeing another 90 days of actuals before I commented on that.

Matt McCall - BB&T Capital Markets

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

Dave Sylvester

No, the fuel costs were higher but we anticipated that what happened in the freight and distribution area -- well a little bit of inefficiency. Also there is 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’re shipping lower dollar value per cube. And I can’t really give you 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.

Jim Keane

It's 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 would expected that that’s has to do mix either a product mix or customer mix and that’s what we do believe happened, what we’re comforted by is that in the third month of the quarter it seemed that those trends had reversed and we’re coming back to more normal experience rates which is why we believe that source of the pressure might be less, but it's too early for us to really say for sure.

Dave Sylvester

And on the overhead just to move to the last bucket, we had higher than expected utilities cost with extended winter in the 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 cost a little bit longer and we had higher maintenance in a couple of facilities and if you’re 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 and so we had some disruption and some higher costs than expected associated with that.

Matt McCall - BB&T Capital Markets

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?

Dave Sylvester

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 are working in a productive way but we expect labor premiums and other inefficiencies associated with the startup in the Czech Republic to continue and we also anticipate some incremental disruption from the activities we announced today. So our estimate include six, 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. 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.

Matt McCall - BB&T Capital Markets

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

Dave Sylvester

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 8k that we filed in connection with the earnings release was updated estimates on Durlangen and for -- that's the German plant and for the opening of the plant in the Czech Republic. We estimated that incremental disruption for the fiscal year to be at seven and for the activities that we announced today all we have provided is a wide range of total estimated cost and the reason it's wide, and the reason we haven't given specifics is we don’t know how that’s 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 8k to the extent we have information we will certainly provide it.

Matt McCall - BB&T Capital Markets

And so you’re referencing the 30 million to 50 million, which would include the restructuring costs that you strip out, but also disruption-related issues?

Dave Sylvester

Disruption, move costs, consulting et cetera.

Operator

Our next question comes from the line of Todd Schwartzman of Sidoti & Company. Your line is open.

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?

Dave Sylvester

Yes I mean as I said to Budd it wasn’t specifically driven by anyone product or two products. In fact we saw some claims experience increase with some products and decreases in other products.

Todd Schwartzman - Sidoti & Company

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

Dave Sylvester

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

Jim Keane

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

Dave Sylvester

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.

Todd Schwartzman - Sidoti & Company

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.

Dave Sylvester

Yes 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, put in a continuing agreement along with that project business.

Terry Lenhardt

Just to add to that we think about just our core product sales, product orders, growth was about 2% so the exact number Dave has given you relate to a 2% average. Our overall was flat when you take in consideration a wholly-owned dealer and some services.

Dave Sylvester

Good point.

Todd Schwartzman - Sidoti & Company

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

Dave Sylvester

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 40s at 7 [ph] 40% is roughly flat and the balance is down or to equate to 2% like Terry is saying then it was down but not down dramatically.

Todd Schwartzman - Sidoti & Company

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. 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?

Dave Sylvester

Well we’re 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's either fallen a little behind, if it's a move they may have rescheduled the move. If it's renovation that might be falling behind but it's not because of any uncertainty about the economy or anything like that, it just seems to have to do with installation schedules.

Jim Keane

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.

Terry Lenhardt

Todd, back to your marketing question about marketing programs, just to be clear that marketing programs also includes sales to dealers for special showroom kind of 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.

Dave Sylvester

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 push-out will be. I would say in three of the last six or seven quarters or eight quarters it's 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.

Todd Schwartzman - Sidoti & Company

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?

Dave Sylvester

Yes.

Todd Schwartzman - Sidoti & Company

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?

Dave Sylvester

Well we had 41.5 in the first quarter and so really that’s what we’re assuming in the second quarter. We’re not aware of any discreet items or tax law changes or anything like that, so it's implied by us booking 41.5 in the first quarter, it's implied that our second quarter estimate is the same.

Operator

(Operator Instructions). Our next question comes from the line of Josh Borstein of Longbow Research. Your line is open.

Josh Borstein - Longbow Research

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?

Dave Sylvester

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.

Josh Borstein - Longbow Research

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

Dave Sylvester

I 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. Raj will get back to you.

Josh Borstein - Longbow Research

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?

Dave Sylvester

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 and certainly full forward this year but we would have had pull-forward last year.

Jim Keane

A little different than we expected in another words.

Dave Sylvester

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 get close to -- back to flat, is that right Terry?

Terry Lenhardt

Yes.

Josh Borstein - Longbow Research

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

Dave Sylvester

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 patterns but they are up year-over-year.

Josh Borstein - Longbow Research

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

Jim Keane

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 look at though are mock-ups, 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.

Josh Borstein - Longbow Research

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?

Dave Sylvester

It's Dave, as I said in my remarks the order pattern started relatively weakened and strengthened in May and have continued in June and when we were there Jim and I and Terry, we 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.

Josh Borstein - Longbow Research

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

Raj Mehan

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 mix of higher education and then a lower mix of financial services and government business.

Josh Borstein - Longbow Research

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

Operator

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

Jim Keane

I would just like to thank everybody for your participation in today’s call. Again we’re encouraged by the progress we’re making along a number of fronts including the importance of us helping the EMEA business get back to profitability and prove it's 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 future.

Operator

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.

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