Logo of jester cap with thought bubble with words 'Fool Transcripts' below it

Image source: The Motley Fool.

Steelcase (NYSE:SCS)
Q1 2019 Earnings Conference Call
Jun. 21, 2018 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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.

Mike O'Meara -- Director of Investor Relations

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 President and Chief Executive Officer Jim Keane.

James P. Keane -- President, Chief Executive Officer, Director

Thanks, Mike and good morning everyone. We are 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 will 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 have said in the past we are targeting the level of operating expenses in EMEA to stay relatively flat so as to 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 had 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 scale 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 receive six product awards and two showroom awards. From a product perspective, the biggest buzz in our showroom was around Mackinac, a furniture solution with a cantilever work surface that makes it easy to shift from one work mode to another. That'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 the Best NeoCon award for innovation. Our new SILQ chair was another best of NeoCon innovation award winner and we're now taking orders down that chair in the Americas and Asia-Pacific with EMEA to follow. I mentioned 6% order growth in the Americas which was 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 sought 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 in ordering process is very complex and costly for design firms and our viewers. In Chicago, we showed new products from Steelcase, Coalesse, and Turnstone is vying to address this trend and we also showcased products from some new and existing partners. These partnerships allow our dealers to specify the order and receive product just as they do with Steelcase products. We can leverage our scale to negotiate volume discounts in priority lead times where appropriate.

We can test products and 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 dealers to sell 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 compliment to our Coalesse outdoor offering. We 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 brands help to fund needed improvements in the U.S.

educational infrastructure. Still, we knew this was a very different market and we 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 energies 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 two to three 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 the 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 they 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 at the start of the year. Our win rates are improving fueled by new products and by customers who eagerly use space as a means of attracting and retaining talent. Macroeconomic factors, such as CEO competence 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.

As 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 are seeing an impact on 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 in 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 tariff amounts so far since our Americas supply chain largely buys from the U.S. suppliers. We are 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 related to how the tariffs have been a trigger for inflation, just to give you a sense of the impact the cost of coal rolled steel in the U.S. has risen over 20% since January 1st and because the price is rising in the U.S. it's causing increases in other parts of the world as well that took over marketplace after all. We are 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 cost 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 costs as the capacity shortage is forcing us to pay more to procure some loads. If we consider all the commodities we purchased 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 have talked about the need to address gaps in our product portfolio and the investments we made in product development and acquisitions like AMQ have largely filled those gaps. Now, this is a competitive and pretty innovative industry so we will face new competitive challenges but I really feel this is a new day for Steelcase. We are not 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 grow. We will continue to deal quickly with the short-term issues we faced 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 hoping 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.

David C. Sylvester -- Chief Financial Officer

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 the 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 three 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 two times 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 risk price adjustment on June 18th which represented our second increase in four 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 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 the Asia Pacific. In the Americas, the effects of higher commodity costs and unfavorable shifts in the 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 cost compared to our estimates helped to offset shortfalls in the Americas and the 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 are experiencing and we are on it.

And in Asia, our shortfall was more about timing and 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. 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 cost, 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 a collection of V80 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 the higher mix of business from direct-sell customers in the current quarter which has longer payment terms and had the effect of increased 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 the 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. The 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 [Inaudible] 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 divesting of equity awards and 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 the dealer divestiture, we estimate first-quarter orders grew by approximately 8%.

Customer-order backlog at the end of the 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 five 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 five quarters. Insurance services is the only sector that has posted year-over-year order declines for five 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're 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 been even stronger than the 7% we recorded. Custom 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 the 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 the 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 two-thirds 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 the 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 and $0.33 for the 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 the 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 improvement to be dampened somewhat by a higher mix of project business.

From there we'll turn it over for questions.

Questions and Answers:

Operator

[Operator instructions]. And our first question comes from the line of Budd Bugatch from Raymond James. Your line is now open.

Budd Bugatch -- Raymond James -- Analyst

Good morning and thank you very much and good morning Jim and Dave and Mike. Congratulations on the quarter and on the guidance. Nice to see some increased growth. On West Elm you've announced a partnership, I am not sure all the details are complete, we visited at NeoCon, looks like it is 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?

James P. Keane -- President, Chief Executive Officer, Director

Yeah, so the first step is to finalize the agreement and we are still working on the details of that. So, we believe we are 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 designs teams are meeting, the engineering teams are meeting and we're beginning the process of identifying the first part of the operative part of that. There are already existing products in the West Elm line that can be offered to our dealers as part of that.

So we will 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.

Budd Bugatch -- Raymond James -- Analyst

OK and obviously the biggest question I think in 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 think if that's a net number can you kind of give us a feel for how that will play out in the other two quarters of the year and I know we are going to see some net impact of the June 18 price adjustment to those prices but maybe you can give us an idea of how it will flow?

James P. Keane -- President, Chief Executive Officer, Director

Yeah, I will let Dave --

David C. Sylvester -- Chief Financial Officer

The $5 million that Jim was referencing was for 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 coincidentally 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 are using on a day-to-day basis. Hopefully, by Q3 and into Q4, we will be back to more of a normalized pattern where we're covering the lion's share of inflation if not all of it.

Budd Bugatch -- Raymond James -- Analyst

Sure, just to make it clear, so excluding the benefit of the increased absorption you think a net of maybe $10 million impact in Q2, maybe three-quarters of that in Q3, and by the end of Q4 maybe be back to whole or not back to whole. I wasn't quite clear on what is the percentage?

David C. Sylvester -- Chief Financial Officer

I think Q4 it's not unreasonable to assume that we could be back to the whole by that point. There's 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 pure inflation being closer to let's say $10 million but not quite at that level and pricing offsetting a portion of that.

Budd Bugatch -- Raymond James -- Analyst

So pricing will obstruct maybe $5 million, so the net is $5 million drag to gross margin in Q2?

David C. Sylvester -- Chief Financial Officer

Plus or minus, yes. And absorption is separate from that, right. The fixed cost absorption benefits would be on top of that.

Budd Bugatch -- Raymond James -- Analyst

And the big outlier ...

James P. Keane -- President, Chief Executive Officer, Director

The gross number is really the thing. The gross number is the part they are trying to predict because if you look at some of the external steel inflation forecast, for example, that is 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 forecasts 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 are going to have to just watch that carefully and stay really agile.

Budd Bugatch -- Raymond James -- Analyst

Thank you very much. I'll let others have the floor now.

Operator

And our next question comes from the line of Reuben Garner from Seaport Global. Your line is now open.

Matt McCall -- Seaport Global Securities -- Analyst

Thanks. It is actually Matt on for Reuben this morning. Let's see. So let me start with, Jim, you made a comment, in the morning you were talking about gross margin and the price cost pressure, you said you would take actions to protect your profitability where needed.

I'm curious maybe what that meant, is there more you can do, sounds like you're kind of in a little bit of a wait and see mode here, or is there more you can do as you move forward, it appears to me it is needed, I am just wondering what more you can do while there is a way, how difficult it is to implement some of these additional measures?

James P. Keane -- President, Chief Executive Officer, Director

Well, since I am 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 have ever done before. 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 as ever that we have two 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 will continue to take steps to do that. This is a really dynamic situation so they've already done some of that but we will continue to work toward 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 are opportunities to do more there. And then there are opportunities to find efficiencies across our business both in operational fixed cost and non-operational fixed cost. And we already have fitness initiatives under way in the company to find ways to be more efficient.

So 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 maybe a few examples of things we are working on. I just didn't want to constrain this to be 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.

Matt McCall -- Seaport Global Securities -- Analyst

Got it, got it, OK. Dave, you referenced some pull forward from the February increase and I think you quantified or requantified some of the puts and takes around orders. I thought you referenced some pull forward from this most recent increase but I didn't hear any quantification there, was there any benefit in the quarter ahead of the second price increase?

David C. Sylvester -- Chief Financial Officer

We don't think so Matt, I mean because we just put the second price increase into effect on Monday, June 18th. So we would have had to have seen orders pulled forward in advance of May 25th which was the end of our first quarter. And that would be a bit unusual. The pull-forward I was referencing as we've seen very strong order growth globally through the first three 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 two to four weeks.

Matt McCall -- Seaport Global Securities -- Analyst

OK, got it. And apologies, I am going to sneak in one more. You referenced two things. You talked about lower corporate cost and maybe I can quantify that from the release but what was behind the lower corporate costs, was it in any way the same number but you also referenced Dave some delays in EMEA in the quarter, can you kind of put some more meat behind those two items?

David C. Sylvester -- Chief Financial Officer

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 projecting the old operating expenses relatively flat and constant currency 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 will 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 the income was higher than expected in the quarter and therefore benefited the corporate cost.

Matt McCall -- Seaport Global Securities -- Analyst

OK. Alright, thank you all.

Operator

And our next question comes from the line of Kathryn Thompson from Thompson Research. Your line is now open.

Steven Ramsey -- Thompson Research Group -- Analyst

Good morning, guys. 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?

James P. Keane -- President, Chief Executive Officer, Director

This is Jim. So, I will 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 a month or three months or six months as you look backward in time. What we see when we look at the industry numbers is the 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, what we've been saying on these calls is that business confidence, 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 that 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 and Mark is 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 it's encouraging to see it will 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, the adjustments we made to pricing and improved customer experiences in places like 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 a lot of midsize and smaller companies and we've noted that in recent months it seems like the large public companies have done more than just hold their position, that's actually strengthened a bit versus the industry and we're one of those.

So kind of depends on the compares to the industry broadly speaking or our direct peers. So there are a few different pieces of that and it maybe even a little foggy after I get done but that's the best I can do based on the data I have.

Steven Ramsey -- Thompson Research Group -- Analyst

Great and then you have 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?

James P. Keane -- President, Chief Executive Officer, Director

Yeah, it might feel like that as you're looking at it in a kind of quarter by quarter but it feels more like a steady continual building of momentum. Since I compare 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 the pit goes through the pipeline and we will 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 is 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 characterized this more as a steady gradual building of momentum.

David C. Sylvester -- Chief Financial Officer

I think that's right and we have been talking about that across our new products and across vertical markets and different sizes of orders, etc. 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 the 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 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.

James P. Keane -- President, Chief Executive Officer, Director

And just to put some numbers back on that again, I'll go back to the remarks but in Q3 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 because that is the steady improvement from decline to small growth to more significant growth.

Steven Ramsey -- Thompson Research Group -- Analyst

Excellent. And the 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?

David C. Sylvester -- Chief Financial Officer

Well, I continue to think that our continuing orders are impacted by our larger customers and it's historically been driven by some of our legacy furniture applications, products in furniture applications. So like 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 of 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 percents and actually I could 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.

Steven Ramsey -- Thompson Research Group -- Analyst

Great, thanks so much.

Operator

And our next question comes from the line of Greg Burns from Sidoti & Company. Your line is now open.

Greg Burns -- Sidoti & Company -- Analyst

Good morning. When we look at all the partnerships you have signed in aggregate how much revenue is coming through those channels and what type of growth in revenue or bookings are you seeing? Thank you.

James P. Keane -- President, Chief Executive Officer, Director

The revenue so far is really relatively small and I would say immaterial to our results but that's because we're moving super fast so if you want to go back even six months ago or nine months ago and look at the number of partnerships we had versus what we have today. A lot of them are brand new, first time as I talked about, is something we unveiled to our dealers and our customers and design community had great support but they haven't even really finalized the agreement, that will be done in the next few weeks. So we are 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 would expect the revenue to start become more material as this year continues and into next year. And the second part of your question, I missed.

Or did I? No? OK.

Greg Burns -- Sidoti & Company -- Analyst

OK, thanks. And then you talked about the revenue seasonality from Smith System in terms of their profitability came throughout the year, did they lose money in three out of four quarters and make all that profit in one quarter, how should we think about the profitability of that business on a quarterly basis?

David C. Sylvester -- Chief Financial Officer

Well, as I said I think for the balance of the fiscal year, the back half the fiscal year Q3 and Q4 I kind of was alluding to closer to a breakeven expectation given the amortization of intangibles assets that we expect to record in connection with the acquisition but for sure make most of their money in the summer quarter with two-thirds 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 we would expect that.

Greg Burns -- Sidoti & Company -- Analyst

OK, thanks and then one last one you talked I guess have a generally positive outlook for the demand environment, seems like but also at the same time you're talking about your competitive pricing pressures over the last couple of quarters what seems to be counterintuitive. 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 pipeline that you're seeing gets converted?

David C. Sylvester -- Chief Financial Officer

I wish we knew.

James P. Keane -- President, Chief Executive Officer, Director

And its, I don't have any basis to say exactly what is going to happen with pricing, and it's kind of dangerous ground anyways to look to the future but I will maybe recharacterize a little bit about or clarify how we describe the pricing pressures we are feeling today. I say pricing pressure, first of all, is a reality in our business all the time and I think over the last couple years we've seen a gradual increase in pricing pressure. Now we've said before that we adjust our pricing as we see fit and a few quarters ago we could feel that the pricing was moving down market 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 were already building. So maybe that helps but I'll stop short of trying to predict what happens next.

Greg Burns -- Sidoti & Company -- Analyst

OK, great. Thank you.

Operator

And the next question comes from the line of Bill Dezellem from Tieton Capital. Your line is now open.

William J. Dezellem -- Tieton Capital Management -- Analyst

Thank you. I'd like to circle back to 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 that 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 to a reevaluation and look for 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 are seeing there?

David C. Sylvester -- Chief Financial Officer

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 is a very good customer of ours globally and they wanted to upgrade to a premium solution. They had approved and 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 an agreement that worked for both of us and is moving forward.

On the general overall results, as they 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 the first quarter. They came in June so we have a little bit of a timing issue there and now you go well Asia was 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 continue to feel quite good about the region and our ability to grow orders for the full year in the Asia Pacific.

James P. Keane -- President, Chief Executive Officer, Director

We are still on the first part again. So Dave was very accurate. 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 we go through the buying process sometimes things like this happen and you end up in this trade-off between short-term economic impact versus long-term customer relationship.

We have been around for 106 years because we generally will 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 a change. We think it's going to be a great solution for them. There were no quality problems on our side, this was simply a combination we made and I am glad we made that choice even though was material enough in this case that shows up in the overall Asia results but in the long term it is the right way to run the business.

William J. Dezellem -- Tieton Capital Management -- Analyst

Thank you both.

Operator

[Operator instructions]. And at this time I'm showing no further questions. I would like to turn the call back over to Jim Keane for any closing remarks.

James P. Keane -- President, Chief Executive Officer, Director

Thanks. So, again we're pleased with the steady building of momentum in both the Americas and EMEA. I am 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 have to view very quick back to back pricing increases, it is a tactical challenge for IT folks and people who manage the details of how we manage pricing. Both of our sales organization 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. That happened because our legal team and others made sure we were there at the front of the line in the days, the first days that that window for exclusion requests 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're able to build so many partnerships so quickly, announce them to our dealers, announce them to our customers, even as we're working on the final details of the contract, I think shows a shift in our culture toward speed and agility. The speed at which we were 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 as NeoCon was a significantly broadening of the range from where we were even six months ago, so whether it's product development, or 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 partners, like West Elm, and welcoming Smith System into our family. Thank you again for joining the call this morning, and thank you for your interest in Steelcase.

Operator

Operator signoff.

Duration: 59 minutes

Call Participants:

Mike O'Meara -- Director of Investor Relations

James P. Keane -- President, Chief Executive Officer, Director

David C. Sylvester -- Chief Financial Officer

Budd Bugatch -- Raymond James -- Analyst

Matt McCall -- Seaport Global Securities -- Analyst

Steven Ramsey -- Thompson Research Group -- Analyst

Greg Burns -- Sidoti & Company -- Analyst

William J. Dezellem -- Tieton Capital Management -- Analyst

More SCS analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

10 stocks we like better than Steelcase
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Steelcase wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of June 4, 2018

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.