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Executives

Raj Mehan

James P. Hackett - Chief Executive Officer, President, Director and Member of Executive Committee

David C. Sylvester - Chief Financial Officer and Senior Vice President

Terry Lenhardt

Analysts

Chad Bolen

Jack C. Stimac - BB&T Capital Markets, Research Division

Joshua Borstein - Longbow Research LLC

Todd A. Schwartzman - Sidoti & Company, LLC

Steelcase (SCS) Q1 2013 Earnings Call June 21, 2012 11:00 AM ET

Operator

Good day, everyone, and welcome to Steelcase's First Quarter Fiscal 2013 Conference Call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would like to turn the conference call over to Mr. Raj Mehan, Director of Investor Relations. Please go ahead.

Raj Mehan

Thank you, Stephanie. Good morning, everyone. Thank you for joining us for the recap of our first quarter financial results. Here with me today are Jim Hackett, our President and Chief Executive Officer; Dave Sylvester, our Chief Financial Officer; Mark Mossing, Corporate Controller and Chief Accounting Officer; and Terry Lenhardt, Vice President, Finance, for the Americas and EMEA segments.

Our first quarter earnings release, which crossed the wires yesterday, is accessible on our website. This conference call is being webcast, and presentation slides that accompany this webcast are available on ir.steelcase.com. And a replay of this call will also be posted to the site later today. In addition to our prepared remarks, we'll respond to questions from investors and analysts.

Our discussion today will also include references to non-GAAP financial measures. And these measures are presented because management uses this information to monitor and evaluate financial results and trends. Therefore, management believes this information is also useful for investors. Reconciliations to the most comparable GAAP measures are included in the earnings release and webcast slides. At this time, we're incorporating by reference into this conference call and subsequent transcript, the text of our Safe Harbor Statement included in yesterday's release. Certain statements made within the release and during this conference call constitute forward-looking statements. There are risks associated with the use of this information for investment decision-making purposes.

For more details on these risks, please refer to yesterday's release and Form 8-K, the company's 10-K for the year ended February 24, 2012, and our other filings with the Securities and Exchange Commission. This webcast is a copyrighted production of Steelcase Inc.

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

James P. Hackett

Thanks, Raj, and good morning to everyone. We're reporting today on another strong quarter for Steelcase, and one that was in line with our expectations overall. As you have seen in our earnings release, we performed extremely well in the Americas segment, and we fell short in the European segment and our Other category. The volatility in demand in Europe is not surprising, given the upheaval in the economy there. But there were also some timing factors at play that Dave will discuss in a few moments. And I wasn't pleased with the performance in the Other category. That's the segment that holds Asia PolyVision and Designtex. And again, Dave will describe in more detail that there were several factors that impacted these results that were just in the first quarter, and we expect improved results in the second quarter.

Now from a growth perspective, this was our ninth consecutive quarter of organic revenue growth on an Inc. or enterprise basis. And in the Americas segment, we've seen 7 straight quarters of double-digit growth. There is definitely growth from the direction set by our strategies and the operating income margin in the America, illustrates the power of our transformed business model and what we would say is a diverse revenue base.

Now our first quarter call always comes on the heels of our trade show in Chicago called NeoCon. So it tends to be a focus of my comments. And this year, I thought the highlights of this show for our company aligned especially well with the aspects of the strategy that I just mentioned. Let me point out 3 of those connections. First, is the response to a key vertical market for us in the education segment. Our education solutions team, which has just gotten started a few years ago, had a dedicated space in NeoCon this year, which is indicative of the ideas growing in the products now dedicated to this segment. Our research into what we're calling active learning translated this year into a new product portfolio called Verb. It's a table-based system that supports a variety of teaching and learning styles, and it pairs very well with that very successful node chair that we introduced earlier. This product, Verb, won a Best of NeoCon Award, and it was one of 5 earned this year by our brands. Now this was initially targeted for the higher education market, but we think it can appeal and extend to high schools and certain corporate environments as well.

Next is the connection that links the impact of technology to the future workplace. We're getting a rhythm as being great spokespersons for this. If you were at NeoCon, you would have seen the competitive effort to catch up to our media:scape product, and I have to say I'm flattered by the emulation. But we're already moving forward to the next iteration in this category. We showed concepts and prototypes about the next generation of what we call, Living On Video. And note that this is more than a casual connection to one's technology and one's future. This is where our teams excel in getting that nuance just right.

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

And let me point out again that because of the nature of work blurs work and life, you would -- if you didn't know our business, you'd see the products from the commercial market don't really cut it in home settings or residential settings. And residential products used in commercial interiors looked misplaced. So Coalesse is a brand that we chose to interpret the fusion of work and life, which is the bridge between commercial and residential. And it's going extremely well, as again, we see a lot of emulation coming from our competitors. We're also formally launching the Coalesse brand in Europe this year, given the global need for a product line that speaks to the same question.

Now it is true that we have a lot of uncertainty in Europe, and we want to point out that, that really never tempers our enthusiasm because it's been our philosophy to continue to invest in our long-term growth strategies during a downturn. We see opportunity for Coalesse in this niche, and we will be well-positioned when that rebound happens there.

Now before I turn it back to Dave, let me say a little more about this view of Europe. And like everyone, we continue to watch the situation very closely. You will recall that we have limited activity in most of the countries that are in trouble in the headlines, and we believe that some of the shifts taking place in the market provide a clarifying opportunity for our brands and their missions. This is a time to actually make up and take space. Companies can't afford to take a great deal of risk on suppliers that haven't demonstrated that they're here for the long haul, or they're doing business in a limited way. We have a full complement of products, services and local applications that should allow us entrance to that -- to areas where we have the highest preference already.

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

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

So in summary, it is a solid quarter overall with excellent results, really extraordinary results in the Americas, when you look at us versus BIFMA. And an excellent customer feedback from the NeoCon reaction to our products that we launched there. It is a year where we're celebrating our 100th anniversary. So it's been a good year for Steelcase, and this is a good quarter. I'm sure many of you will be taking time off during the upcoming holiday and summer months, so let me wish you a great vacation, and now let's turn it over to Dave Sylvester, our Chief Financial Officer, who will give you more detail. Dave?

David C. 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 of fiscal 2013, and then we'll move to your questions. Before I get into the details, let me highlight a few of the key takeaways for the first quarter. First, customers remain receptive to our portfolio of insight-led solutions that address the forces of change impacting work, which we have talked about for several years. And this is continuing to contribute to our market share gains and overall strength in the Americas. Second, the mix of business from some of the Americas' largest corporate customers, as well as the mix of project business across EMEA and Asia Pacific, was relatively high and impacted gross margins. And this higher mix of more heavily discounted business is expected to continue into the second quarter.

Third, the North America plant consolidation moves generated net savings in the first quarter as expected, and we estimate these net benefits will increase in the second quarter and over the balance of the fiscal year. Fourth, uncertainty in the global economy continues to take its toll on specific parts of our business, such as PolyVision and EMEA. PolyVision remains in recession, as their domestic revenue remains significantly impacted by funding cuts imposed by state and local governments, as well as competitive pricing pressures. EMEA on the other hand, remains in a mixed state, not entirely in recession but not consistently growing either.

Now for the details. Overall, results were in line with our expectations, as strength in the Americas offset the weakness we experienced elsewhere in our business. For the Americas, revenue gross margin and operating expenses were all better than expected, and resulted in an adjusted operating income margin of 8.9% or a 200 basis-point improvement compared to last year. We continue to gain market share in the U.S., based on our analysis of monthly data reported by BIFMA, and we expect the strength of the Americas segment to continue in the second quarter, likely surpassing the 10% adjusted operating income mark for the quarter.

As it relates to EMEA, our overall business remains in a mixed state. We anticipated an organic sales decline in EMEA for the first quarter, following growth in the fourth quarter. But the decline was larger than expected, as our order patterns during the quarter reflected a higher mix of project business expected to shift in the second quarter, and softer day-to-day business in a couple of countries, plus a few project shipments were delayed by customers at the end of the quarter. Accordingly, the 4% order growth we experienced in the quarter largely helped to grow quarter-end back log, which is up approximately 14% compared to the prior year.

Our earnings estimate for the second quarter contemplates year-over-year revenue growth and the smaller adjusted operating loss for EMEA, whether measured sequentially or compared to the prior year. You will recall that the second quarter in EMEA is seasonally the weakest quarter of the year. So we grew revenue in the fourth quarter. It declined in the first quarter and we expect it to grow again in the second quarter. As I said, our business remains in a mixed state. Therefore, we continue to push on longer-term business model enhancements, as well as short-term contingency plans across EMEA.

Within the Other category, each of the 3 businesses, Asia Pacific, PolyVision and Designtex, underperformed our expectations in the first quarter, albeit to different degrees and for different reasons. For Asia Pacific, we experienced a double-digit percentage increase in revenue again this quarter, in line with our expectations, but the mix of large project business and spending and growth strategies were both higher than expected, resulting in an operating loss for the quarter after several quarters of break-even or profitable results.

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

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

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

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

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

As we discussed on last quarter's call, we have intentionally slowed down the production moves, given the high level of demand we have been experiencing. The consequence however, is that we are incurring higher levels of redundant costs as we start up operations in Mexico, prepare other receiving plants for production moves and cautiously move our assembly lines. During the first quarter, benefits realized of approximately $5 million were reduced by approximately $4 million of additional freight costs linked to existing supply chains, start-up costs in Mexico, and redundant manufacturing processes during the product transition periods. We expect the benefits to improve and the redundant costs to reduce, increasing the net year-over-year savings to approximately $2 million to $3 million in the second quarter, and improving from there through the end of fiscal 2013, and into early fiscal 2014.

Moving to the balance sheet and cash flow. Consistent with our historical seasonal patterns, we used $40 million of cash in our operations during the first quarter, which included the payment of prior year variable compensation, the funding of retirement plans and growth in working capital. Capital expenditures totaled $10 million, but we also sold the corporate aircraft, which was replaced last fall, receiving proceeds of nearly $14 million. For fiscal 2013, we continue to expect capital expenditures to approximate $75 million to $85 million.

We returned approximately $21 million to shareholders in the first quarter, $9.3 million through repurchasing a total of 1.1 million shares, and $11.6 million from the payment of a cash dividend of $0.09 per share. The repurchases during the quarter were made pursuant to a stock repurchase agreement, which expires in September.

As it relates to order patterns, I will start with the Americas, where we experienced year-over-year order growth in the first quarter of approximately 9% or approximately 11%, adjusted for the estimated pull-forward effect from a May 2011 price adjustment. Customer order backlog for the Americas ended the quarter, up approximately 11% compared to the prior year, and continues to include a higher mix of project business. In particular, 2 large projects, which we have referenced on prior calls, positively impacted the first quarter order growth rate and the quarter-end backlog growth rate, by a few hundred basis points.

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

Vertical market order growth rates in the Americas were the strongest in the energy, insurance, state and local government, and Information Technology sectors. Federal government, Financial Services and education were the only tracked vertical markets to post a year-over-year decline. Our business is now well-diversified across several vertical markets, as demonstrated by the fact that our overall orders still grew at a strong rate, despite declines in certain markets like federal government and Financial Services. Within our product categories and brands, order growth rates in the Americas were fairly broad-based with notable strength in Details, technology, architectural solutions and furniture. And across our geographic regions, first quarter orders were fairly broad-based, with only a few markets posting year-over-year declines.

Switching to EMEA, order patterns in constant currency continued to reflect a mixed bag, but grew at approximately 4% in total, compared to the prior year. We experienced order growth in Germany, Spain and in the export markets of eastern, central and southern parts of Europe, Middle East and Africa, as a group. Orders in France and Northern Europe declined by a mid-single-digit percentage rate, compared to the prior year. As I stated earlier, customer order backlog for EMEA was up 14% at the end of the quarter, compared to the prior year, as orders during the first quarter included a relatively high mix of project business expected to shift in the second quarter.

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

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

Turning to our second quarter outlook. After taking into consideration the strength of our backlog in the Americas and EMEA, we expect to report revenue between $715 million and $740 million. This compares to $701 million in the second quarter of fiscal 2012, which included $5 million of revenue from the small PolyVision divestiture, completed at the end of the second quarter of last year. Currency assumptions included in our revenue estimate represent a $17 million negative effect on the year-over-year comparison, and a $6 million negative effect on the sequential-quarter comparison.

After giving effect to these items, we estimate organic revenue growth in the second quarter, will approximate 5% to 9% in total, compared to the prior year, and include organic growth across the Americas, EMEA and the Other category. Sequentially, the second quarter revenue estimate translates to a seasonal organic growth rate of approximately 7 -- between 7% and 11%, which is a little bit better than normal seasonality. We expect the mix of business from some of our largest corporate customers in the Americas, as well as project business in general across EMEA and Asia Pacific, to remain relatively high and thus, continue to negatively impact our gross margin and operating income percentage in the second quarter. And we expect to continue investing in sales, product development and other initiatives, likely at somewhat of a higher level, compared to the first quarter.

As it relates to our North America plant consolidations, we expect savings to improve and start-up in other related costs, to reduce, compared to the first quarter. In addition, our second quarter earnings estimate anticipates year-over-year improvements in price yield associated with pricing actions taken in prior years, as well as initial yield from a recent price adjustment in April. With respect to commodity costs, our earnings estimate contemplates modest inflation, whether compared sequentially to the first quarter, or versus the prior year.

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

From there, we will turn it over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Chad Bolen from Raymond James.

Chad Bolen

I guess a couple things. Dave, could -- you talked about the order growth in the Americas, 9% obviously, very good. Can you parse for us at all, orders in the U.S. versus the other geographies?

David C. Sylvester

I don't want to get into that much detail. I would just comment that it was actually 11% adjusted for last year's pull-forward effect from the May price increase, so it was actually double-digit when adjusted for that. I think Latin America was pretty strong, and Canada includes one of the large projects that we've referenced on previous calls. So that -- so orders up there were pretty good. But they did not -- I wouldn't suggest that the map of those 2 geographies were so much that they drove the overall rate to 11%. The Americas were still -- or the U.S. was still pretty good.

James P. Hackett

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

Chad Bolen

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

David C. Sylvester

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

Chad Bolen

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

David C. Sylvester

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

Chad Bolen

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

James P. Hackett

Sure. I would probably summarize it in 2 or 3 key features as you look out. One is an area that I've described in the past, which is that at the end of the last decade, you had a number of our customers who had spent that decade building their presence in developing countries. And think of that, in translating into facility investments that they were making. And as those emerging markets didn't generate revenue -- or excuse me, profit for them, that tended to crimp the investments in the developed markets because they had to fund it from somewhere. That effort paid off in those developing markets. Those businesses generally, are making profit, funding themselves. And so they've returned back to their developed areas and said, it's time to modernize those facilities. So I think that explains some of the demand, which is not correlated, frankly, to some of the real estate numbers we normally see, but more correlated to cash positions and this dynamic that I'm talking about. There's a small nuance in that, in that as they invested in the developing countries, they adopted more recent technology. And that further levered the perspective that the developed business areas weren't as far along. So it's the old notion that they didn't have to build landlines in the developing countries, they used mobile technologies. And when they built mobile technologies, they had a much different kind of layout. Because Steelcase, as the second point, for more than a decade, had been advancing the perspective of what happens when teams come together and teams in mobility have proximity to them. I think we continue to see the nature of spaces needing to respond to that kind of adjustment. They have to kind of deconstruct parts of it that were too fixed because the -- at any given time, the population in these buildings are changing because of the mobility. Sometimes they're not there, sometimes they are there. That would be the second part. The third part though, is more of a question of, what's the tipping point in which the corporations are now concerned about the economic prospects because of the debt situation. I still, from the networks I'm in, believe that most -- virtually all the business people, see the way out of the debt problems is through GDP growth, not more austerity in the sense of -- I don't want to get into a political argument, but in terms of the real core return to GDP growth, you've -- we've got to have investment. So I think that bodes well for our business. So I'd been saying to as many people that ask, that the last decade was a unique period in our lifetime. The industrial change, the way that the investments were shifting, like I'm talking about. This decade is about paying for some of that, and building innovation and growth engines. And so that bodes well for people needing to change spaces in our industry.

Operator

Our next question comes from Matt McCall from BB&T Capital Markets.

Jack C. Stimac - BB&T Capital Markets, Research Division

This is actually Jack, filling in for Matt today. So last quarter, Dave, you had kind of walked us through an earnings bridge that takes into account some of the different items you guys have outlined. And I was just wondering if maybe we can get an update on that? So the numbers I had from the last call, as far as a reversal on inflation, you'd said maybe $20 million on the year, most of that coming in the back half. It sounds like you have a little bit of inflation baked into your Q2 forecast. And then kind of $10 million to $15 million on the year from restructuring, and it sounds as things accelerate, that still might be okay. And then is the $20 million from growth investments still a good number on the year? Or have there been any changes with any of those going on, with changes directly to them or maybe an impact from what's going on in EMEA?

David C. Sylvester

I think the bridge that we talked about last time is largely still valid. The couple of new pieces of information are related to how much the mix has shifted on us across the business toward more heavily discounted projects. It's not just in the Americas that we've been talking about for a few quarters. We now are seeing it significantly in EMEA and significantly in Asia as well. And so that can dampen the contribution margin, as you would expect on the revenue growth. But from a manufacturing savings perspective, I said last quarter, I felt very confident in you all modeling something to the -- in the tune of at least $1 million, $2 million, $3 million, $4 million, across the 4 quarters of net savings, but I wasn't quite convinced you could go as high as $2 million, $4 million, $6 million, $8 million. So I sized it between $10 million and $20 million and that's still where we think that's going to come in. And pricing is a very, very difficult one to project because it changes so quickly. And then it can also be impacted by the mix of business, the number of projects that are out there, et cetera. But we do expect year-over-year benefits from our pricing actions because we had 18 months of year-over-year costs where we were not -- weren't able to put pricing actions in place fast enough. So I think you guys kind of came up with a $20 million number, but is it in that range? I think it has the possibility to be in that range for the full fiscal year. And then on the incremental spending, we're not seeing anything at this point that would suggest that $20 million or a little bit higher, is a bad number, high or low. So I'd still keep modeling that. Yes, and then the last piece of the bridge is the lower interest expense. And that's certainly playing out because our debt levels are significantly lower.

Jack C. Stimac - BB&T Capital Markets, Research Division

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

David C. Sylvester

Well, volume is the biggest driver right now. It's volume and mix. Right now, volume is down and the mix of projects is higher, so it's a bit of a double effect on our gross margin percentage. What we're doing in the meantime is of course, continuing to pursue cost reductions that we pursue every year, and we continue to look at our footprint. But we're not prepared to announce anything now or in the near term about anything more aggressive than just normal cost reduction. And again, the big driver of that is our business remains in a mixed state. It is -- one quarter is up, the next quarter is down, the next quarter is up. That's -- we're not convinced that we're falling off a cliff.

Jack C. Stimac - BB&T Capital Markets, Research Division

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

David C. Sylvester

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

Terry Lenhardt

Thanks, Dave. I'll answer your second question first. We have not seen project delays related to -- any kind of related project delays on orders. As far as visibility, in Europe, a lot of project activity remains. Our visibility's not as far out right now as we can get it in the Americas. But -- well day-to-day business is a little weaker, project activity remains strong. In the Americas, visibility's out a little bit further. Our visibility for second and third quarter, project activity remains very good. And as you get further out, obviously, you get to the fourth quarter, there's still -- customers haven't made decisions on certain projects. But the funnels remain strong.

Operator

Our next question comes from Josh Borstein from Longbow Research.

Joshua Borstein - Longbow Research LLC

Yes, this is Josh in for David MacGregor. Now you had mentioned previously the -- some impact on the operating margin from your accelerated investment on new project introductions. And I was just wondering if you can discuss a little in terms of dollars and cents or percentage, the impact on operating margin from those accelerated product developments?

David C. Sylvester

Well, the best, I think data point to point you towards is in our webcast slides, Josh. We give -- we provide a year-over-year reconciliation of operating expenses, and in that waterfall chart, we give you a view of what kind of incremental investment we've made relative to the prior year, and I would tell you, more than half of that incremental investment, which I think is just under $10 million year-over-year. So excluding changes in currency, excluding acquisition or divestiture effects on OpEx, the net increase is roughly $10 million or a little under $10 million. The majority of that is going to be related to our product development and growth initiatives that we've been pushing out over the last 3 quarters.

Joshua Borstein - Longbow Research LLC

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

David C. Sylvester

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

Joshua Borstein - Longbow Research LLC

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

James P. Hackett

In a way, the answer to that lies in some of the work we're doing going forward, which I think that I'm really confident that the team that's on top of that have been -- have an outstanding track record of turning around situations which aren't where they need to be. But my hint to you would be, the place where we're getting the most value has to do with its application in, of course, in learning settings. And you heard in my comments that education group is really, 3 years into its life and gaining a lot of steam. And so I think the platform of that education group is the form and force for PolyVision's success. The second thing I'd say about it is, that it had a lot to do with the media:scape evolution because we've learned so much working with vertical planes and how the Web is used in space. As you just have to kind of trust me that, that the science of that is not just straightforward. It's a difficult question. And our design and -- our insights and design only are getting better because of that.

Operator

[Operator Instructions] Our next question comes from Todd Schwartzman from Sidoti & Company.

Todd A. Schwartzman - Sidoti & Company, LLC

Just hoping you can speak a little more about product development and innovation, specifically I'm wondering about the life cycle from conceptualization to the marketplace. At any point in time, how much of what you've got in the works, in the pipeline, is specifically designed or targeted for the following year's launch, and how far out do you generally look with respect to whatever you've got in the pipeline in any particular time?

James P. Hackett

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

Todd A. Schwartzman - Sidoti & Company, LLC

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

James P. Hackett

Yes. I mean, and most definitely so -- just call that the gestation period. That's the word I was looking for. Yes. The gestation in this industry on the outside could be 3 years in development. If something is taking longer than that, then I get really nervous. The pressure to go faster is extraordinary, and I've kind of put a goal to -- that's different, which is to be ahead. In other words, to be ahead of the market is as important as being fast. And I know they seem like the same thing, but they're not. And Steelcase is starting to find itself in a -- humbly in a position, we're ahead of the market in some categories, and we gain margin advantage and all the things that you want to translate as you just asked. I know from just studying this last night, there's over a dozen ideas just in the pipeline that we -- that Dave and I track. There's more than a dozen things that are on and coming. There's a dozen at the highest level that we watch. And they do fit into all of them, fit in our 3-year plan.

David C. Sylvester

Now some of those, Todd, are relatively big revenue generators, or product life cycle management from new categories. Some of them are more niche, but Jim's right, there's a pretty extensive list.

Todd A. Schwartzman - Sidoti & Company, LLC

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

David C. Sylvester

Terry, you want to take it? If you know the figures off the top of your head, otherwise, I can look it up.

Terry Lenhardt

Yes, the orders were down in single digits, mid, upper single digits. It's a little chunky as far as the vertical orders, which again at specific verticals. They're getting into the busier part of the season, so we should see -- be seeing an uptick in the overall orders as we go into the summer.

Todd A. Schwartzman - Sidoti & Company, LLC

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

James P. Hackett

Yes. And shipments were up and orders were down.

Todd A. Schwartzman - Sidoti & Company, LLC

Okay. And the growth in shipments, also single digits, low single-digits?

James P. Hackett

Higher single-digit.

Todd A. Schwartzman - Sidoti & Company, LLC

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

David C. Sylvester

A few million.

Todd A. Schwartzman - Sidoti & Company, LLC

A few million?

James P. Hackett

Less than $5 million.

Operator

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

James P. Hackett

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

Operator

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

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