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SCS Steelcase

Participants
Mike O’Meara Director, IR and Financial Planning and Analysis
Jim Keane President and CEO
Dave Sylvester SVP and CFO
Matt McCall Seaport Global
Katherine West Raymond James
Greg Burns Sidoti & Company
Bill Dezellem Tieton Capital Management
Call transcript
Operator

Good day everyone and welcome to Steelcase’s Third Quarter Fiscal Year 2018 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 and Financial Planning and Analysis.

Mike O’Meara

Thank you, Sharon. Good morning, everyone. Thank you for joining us for the recap of our third quarter fiscal 2018 financial results.

Here with me today are Jim Keane, our President and Chief Executive Officer; Dave Sylvester, our Senior Vice President and Chief Financial Officer; and Mark Mossing, Corporate Controller and Chief Accounting Officer.

Our third quarter earnings release, which crossed the wires yesterday, is accessible on our website. This conference call is being webcast and this webcast is a copyrighted production of Steelcase Inc. A replay of this webcast will be posted to ir.steelcase.com later today.

Our discussion today may include references to non-GAAP financial measures and forward-looking statements. Reconciliations to the most comparable GAAP measures and details regarding the risks associated with the use of forward-looking statements are included in our earnings release. And we are incorporating, by reference into this conference call, the text of our Safe Harbor statement included in the release.

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

Jim Keane

Thanks, Mike, and good morning, everyone.

We’re reporting today on our third quarter that produced earnings in line with our expectations as strong operating expense control and better than expected gross margin offset most of the impact of lower revenue. Americas’ orders were slow in the first two months of the quarter, but improved in November. We said last quarter, we’re seeing more large customer opportunities than we saw earlier in the year, and it feels like that’s continuing, and we’ve been happy with our win rates.

In fact, we have won some significant contracts in the last few weeks. And by significant, I mean situations where we would expect more than $25 million of business from the account over several years. And there are more large opportunities with decision dates approaching.

Of course, we won’t win them all, but we feel good about our competitiveness, because of the recent investments we made in product development and the new partnerships we’ve put in place.

While that’s all good, we also believe it’s possible those customers contemplating changes to their workplace strategy slowing down or stopping incremental investment in their current space. We think that’s most likely to be true in the Americas right now, because of the degree of change happening in the workplace. And we are probably more affected by this trend than anyone else in our industry, because of the size of our install base.

As a result, our day-to-day business is weaker and more unpredictable that in the past, which makes revenue forecasting more difficult. Many of these customers are standardized on products we’ve been selling for a long time. We’ll refer to them today as legacy products and applications. These products make up about 25% of our business in the Americas, but our revenues for these products fell about 10% last fiscal year and they were down about 15% in these last two quarters.

We are taking steps aimed at slowing this decline by helping customers update their spaces without abandoning their investment in these legacy platforms. But some gradual decline in this business is inevitable for the next several years. This is why it’s so important for us to invest in other areas of the business that can fuel growth. About one-third of our revenue is from new products we’ve launched or enhanced in the last three years. These products are targeting new ways of working and new design trends, and we’ll hopefully establish new platforms for the future. Products we launched in Q3 and expect to launch in Q4 include several products collectively expected to generate over $50 million in year one sales globally, which is quite significant.

Just one example is our new chair Series 1, which during Q3 won Interior Design’s Product of the Year Award. Most of the growth from these new products will begin to be felt in fiscal 2019.

This quarter, we announced the pending acquisition of AMQ, we expect to complete at the end of this month. This acquisition is consistent with our stated intent to broaden the range of price points where we compete to increase our relevance to customers and drive growth with our core customers and core distribution. AMQ also expands our customer base and distribution footprint, creating additional opportunities for growth.

We have a solid value capture in place and we are targeting to double revenues related to this acquisition within two to three years.

We also intend to grow by offering partner products including Bolia, FLOS and Mitchell Gold + Bob Williams. We began taking orders for these products during Q3.

So, revenues are not material at this point, but we expect to see good revenue growth in fiscal 2019 and beyond. Including these products in our offering is helping us win projects, which helps support growth in every category.

While gross margins on partnered products are lower than our average, the incremental operating margin is comparable to our average, and the return on invested capital is excellent because we have no successive investments.

We are actively working on additional partnerships to broaden our offering in the US and around the world. The remaining part of our business we’ll refer to as core and this is the largest of the three. These are products that launched more than three years ago and span a wide range of categories. In this quarter, revenues from the core were negatively affected by the weakness in orders in September and October.

Some products in the core can feel cannibalization effects as we launch new products with higher levels of performance or values, and we saw some evidence of that this quarter. That’s not a surprise and we estimate cannibalization effects whenever we launch a new product.

Of course, for the same reasons, this part of the portfolio is vulnerable to outside competition from lower price points or substitution of ancillary products from other manufacturers. This is why we really focus on lifecycle management for products in the core, adding enhancements and line extensions to broaden the offering and implementing cost reductions to leverage the scale efficiencies possible at these higher volumes.

While growth may be slowing, we have an opportunity to sustain attractive returns for shareholders from these investments to build on a successful platform.

The third and fourth quarter of this year are challenging in part because we are seeing the higher operating expenses related to increased product development and market development before we are seeing the revenue benefits. And because of the rate of decline in the legacy products accelerated, especially from our largest customers, this decline is more than what we’ve been able to offset from the growth in new products. We see evidence of our investments paying off in our win rates and we believe the areas of growth will begin to fully offset the areas of decline during the first half of fiscal 2019. If the US tax reform is successful in stimulating increased business capital investment, we feel we will be very well-positioned to help our clients update their work environments. At the same time, we recognize the need to be fiscally prudent. We increased our level of product development spending over the last year to build our growth portfolio but we believe we are now at the right run rate of spending in that area. And in other areas, we are continuing to take specific actions to improve our operating efficiency and reduce overall spending.

So, we fully expect to deliver operating expense leverage as we grow.

Before I turn it over to Dave, I want to make a few comments about EMEA. We weren’t expecting to be above breakeven in the quarter but breakeven is a fine line, and we missed slightly because of accounting adjustments and some severance charges. The next step in this journey is to break even for a full year. And because of seasonality and EMEA customer demand, that means reducing our losses in the first half of the year and delivering profitability in the second half of the year. Why do we believe that’s possible? I’ve spent a lot of time there this year and we can feel the momentum building.

We are pleased to see back-to-back quarters of order growth and we officially opened our Munich Learning and Innovation Center to dealers and therefore to customers. Customer traffic to the facility has been steady and customer reaction to the space and the story it tells, has been outstanding.

We have sales and marketing efforts in place that should help us drive profitable top-line growth.

We have efficiency improvement goals in our operations which should help us improve cost of goods sold. And we continue to implement specific actions to improve operating expense leverage as we do in the Americas. We recognize, it’s been a long road towards profitability and we aren’t there yet but we see solid evidence with the things we’ve done are showing results. In summary, although we’re facing the challenge of legacy products that are declining faster than before, we believe the investments we have made and are making in product development, partnerships and the acquisition of AMQ will help us build new platforms for profitable growth.

We’re seeing positive momentum in our win rates and plenty of large opportunities in the pipeline even before the potential impact of tax reform and business capital spending in the U.S.

Now, I’ll turn it over to Dave.

Dave Sylvester

Thank you, Jim. I will cover our third quarter financial results first, noting where results differed from our expectations and highlighting year-over-year and sequential quarter comparisons. And then, I will talk about our balance sheet and cash flow, before getting into our order patterns and outlook for the fourth quarter. We were pleased to report third quarter earnings within the range of guidance we provided last quarter, despite revenue coming in lower than our estimates. The Americas drove the revenue shortfall as orders for day-to-day business from both large and smaller customers softened in September and October, after showing some improvement in the second quarter.

In addition, revenue associated with traditional furniture applications continued to decline.

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

First, order patterns in the Americas improved in November, declining by 2% compared to the prior year versus a 7% decline, which we experienced earlier in the quarter.

In addition, the November comparison was negatively impacted by initial orders related to a very large project in the prior year and the divestiture of a dealer in the current year. Adjusted for these items, our orders in the Americas grew by approximately 4% in November, reflecting growth in project business and our marketing programs and relatively flat orders in continuing business compared to a double-digit percentage decline through the first two months of the quarter. I will give some additional color around our order patterns in a few minutes, but one of the highlight upfront that we saw some improvement in our November order patterns in the Americas.

Second, we are continuing to see growth in the pipeline of large project opportunities beyond the few notable increases I mentioned on the call in September. These opportunities will be highly competitive, but we expect to leverage our growing portfolio of new products and partnerships, as well as our smart and connected offering to compete aggressively for each of them.

Third, as it relates to our new product introductions, we have launched a significant number of new products and enhancements through the first three quarters of this year and we have plans to launch several additional new products over the next three months. And this latest wave includes some pretty significant introductions, many of which are receiving positive reviews and pre-sale activities with current customers and competitive accounts. Revenue in the third quarter from new products and enhancements launched in the last three years continued to grow at a double-digit percentage compared to the prior year. Fourth, we’re excited about the pending acquisition of AMQ, which we expect will help us grow our business with new customers, as well as protect our share of business with existing customers who are broadening their spend across lower price points. Fifth, as I said in the release, we are feeling positive momentum in EMEA. Even though, our results were below our breakeven expectations in the quarter. And lastly, the other category continues to perform largely consistent with our expectations. Operating income in the category was lower than the levels we have posted in recent quarters due to the very high level of revenue we posted in Asia Pacific in the first half of the year, as well as the seasonal strength at PolyVision in the second quarter.

As it relates to revenue compared to our expectations in the third quarter, the organic decline of approximately 3% was below the bottom of the estimated range we provided in September.

For the Americas, revenue declined 4% and was negatively impacted by reduced demand for day-to-day business in the first two months of the quarter. The divestiture late in the quarter also had an unfavorable impact of a few million dollars versus our expectations as did a few project installation delays compared to the level we typically experience at the end of the quarter. Revenue from continuing contracts in our marketing programs were also down in the third quarter, after growing in total in the second quarter.

For EMEA, revenue in the quarter was slightly lower than our expectations due to a few project installation delays. 1% organic revenue decline reflected strong growth in Iberia which was more than offset by lower revenue in the Middle East and the UK. The UK may be poised to improve in the fourth quarter, given recent improvements in order patterns and project win rates. Revenue in Germany and France was relatively flat compared to the prior year as continued strength in day-to-day business was offset declines in project business.

With the improvement of economic and political sentiment in France and Germany, we are continuing to see improvement in our pipeline of project activity compared to the prior year, and we believe our new learning and innovation center in Munich will contribute to an improvement in our win rate as we compete for projects across the region. In the other category, revenue was largely consistent with our expectations and reflected organic growth from each of the three businesses. From an earnings perspective, the $0.22 per share in the quarter was within our range of expectations we communicated in September, but included a few plusses and minuses across the segments and below the operating income line. In the Americas, most of the favorable impact of lower revenue was offset by a better than expected gross margins and lower operating expenses which also included a $1.5 million cost recovery from a supplier and a $1 million gain related to the divestiture in the quarter.

For EMEA, as I said in the release, our results were negatively impacted by customer postponements of installations and various operational issues, which our teams are working diligently to resolve.

We also recorded approximately $2.5 million of out of period accounting adjustments and unanticipated severance costs in the quarter. Below the operating income line, other income net was favorable to the typical 1 to $2 million estimate we have communicated in the past due to very strong income from our joint ventures, reduced in part by foreign exchange losses.

We continue to believe a range of 1 to $2 million per quarter for other income net is a reasonable estimate for your models.

Regarding our effective tax rate, excluding the favorable tax adjustments we recorded in connection with filing our tax returns in the quarter, the effective rate approximated to 36% estimate we communicated in recent quarters. Switching to year-over-year comparisons, operating income decreased by $16 million in the third quarter due to a $12 million reduction in the Americas and a $6 million in EMEA. The Americas reduction in operating income was driven by the 4% revenue decline and increased spending to support product development and other areas of growth. These impacts were reduced by approximately $10 million of lower variable compensation expense. In EMEA, the reduction was driven by approximately $1.5 million of unfavorable out of period accounting adjustments in the current quarter, compared to approximately $2 million of favorable items in the prior year.

In addition, operating expenses in the current quarter included approximately $2 million of costs related to our sales and dealer conference and some anticipated severance.

Beyond these items, favorable impacts from our gross margin improvement initiatives and lower variable compensation expense offset the unfavorable impacts of lower revenue, higher commodity costs and the operational and efficiencies we experienced in the quarter.

We are planning to implement a global price increase in February, which we expect will begin offsetting some of the commodity cost inflation we have been talking about over the past few quarters. Sequentially, third quarter operating income was $16 million lower compared to the second quarter, primarily due to seasonal and other unfavorable shifts in business mix and $9 million of higher operating expenses, which included the items impacting the third quarter that I mentioned previously, plus the impact of recording a $4 million property gain in the second quarter.

Moving to the balance sheet and cash flow. Cash generated from operating activities totaled $73 million in the third quarter, which was lower than the prior year, primarily due to lower levels of profitability. Capital expenditures totaled $22 million in the third quarter and $58 million year-to-date.

We continue to expect capital expenditures for fiscal 2018 to fall within a range of $80 million to $90 million. We returned approximately $15 million to shareholders in the third quarter through payment of the quarterly dividend of $0.1275 per share and yesterday, the Board of Directors approved the same level of dividends to be paid in January. We did not repurchase any shares during the quarter, except for those used to settle income tax obligations related to the vesting of equity awards. Other noteworthy items include the sale of an own dealer in the U.S., which resulted in $4 million of proceeds in the recording of a note receivable of approximately $4 million. And in early December, we received an $18 million refund of U.S. taxes in connection with the tax planning strategy to accelerate the monetization of foreign tax credit carry-forwards.

Turning to order patterns, I will start with the Americas segment where our orders in the third quarter declined 6% compared to the prior year. The prior year included initial orders from a very large project and we had an owned dealer divestiture during the current quarter. Adjusted for these impacts, third quarter orders in the Americas declined by approximately 3%. Across the months, year-over-year order comparisons in September and October were impacted by the pull forward effect of an October price increase in the prior year. Combining the months, orders decline by 7% in the first two months of the quarter and in November, orders declined by 2%. Early in the quarter, the decline was driven by reduced demand for continuing business from our largest customers and in November, the decline was driven by the very large project in the prior year that I just mentioned.

In addition, the rate of decline for continuing business moderated to nearly flat in November compared to the prior year versus the significant declines earlier in the quarter.

And so far in December, we’re seeing a modest growth rate. Orders from our marketing programs also improved in November and early December growth at a high single-digit rate compared to a decline earlier in the quarter. Project order comparisons have continued to reflect year-over-year declines, in large part due to the very large project in the prior year. Customer order backlog at the end of the quarter was 7% lower compared to the prior year with approximately half of the decline attributable to the very large project in the prior year.

Turning to vertical markets in the Americas, order patterns have remained mixed and somewhat volatile quarter-to-quarter, reflecting year-over-year growth this quarter from the energy, government and education sectors while the most notable declines came from the healthcare, manufacturing and technical professional sectors.

For EMEA, we experienced broad-based order growth in the third quarter with the only notable decline coming from one market which faced a strong prior year comparison linked to a large project win. Order growth rates were strongest in some of our owned dealers but we also posted solid growth rates in Iberia, the UK and Germany. Across the months, orders in Western Europe have now grown for five consecutive months; and so far in December, the growth trend is continuing. In other EMEA markets, monthly ups and downs in order rates are usually linked to the quantity, size and timing of larger projects. Customer order backlog in EMEA ended the quarter down 4% compared to the prior year due to the large project in the prior year I just mentioned.

Within the other category, orders in total will modestly compared to the prior year and included growth from PolyVision, partially offset by small declines in Asia Pacific and Designtex compared to strong prior years.

Turning to the fourth quarter of fiscal 2018, we expect to report revenue in the range of 740 to $765 million which includes approximately $17 million of estimated favorable currency translation effects, expected revenue from the pending acquisition of AMQ, and the impact of divestitures. The projected revenue range translates to an expected organic decline of 3 to 6% compared to the prior year, which included initial revenue from the very large project in the Americas, as mentioned previously.

For AMQ, we expect to close the acquisition before the end of the calendar year and include the results of their operations with ours beginning in January.

As we said in the announcement earlier this month, their revenue over the past 12 months approximated $37 million, and we expect to drive growth by leveraging the strength of their offering and our dealer network and global customer base.

Our growth objectives will require some investment, and we also expect some amortization of intangible assets.

So, we are expecting a relatively small contribution from the AMQ acquisition to our operating income for the next couple of quarters.

As we said in the release, we expect to report diluted earnings per share between $0.14 to $0.16 for the fourth quarter of fiscal 2018. This estimate includes an expectation that our consolidated gross margins will be slightly lower in the fourth quarter compared to the third quarter driven by lower volume, unfavorable shifts in business mix, and higher commodity costs. Operating expenses in the fourth quarter are expected to be similar to the level we reported in the third quarter.

For the segments, we expect to report sequential and year-over-year decreases in Americas operating income offset in part by expected sequential and year-over-year improvements in EMEA.

In addition, the effective tax rate assumption embedded in this estimate includes an unfavorable adjustment, approximating $1 million related to the upcoming vesting of equity awards.

Beyond the fourth quarter, we are optimistic about the potential for growth across our segments. We estimate that growth in revenue from new products and partnerships could begin to exceed the declines in legacy applications within the next few quarters. And we are pleased to see an improvement in large project opportunities. At the same time, we are beginning to moderate the level of incremental investments in operating expenses and across our industrial model, which should have a positive impact on our operating leverage related to the projected growth. From there, we will turn it over for questions.

Operator

[Operator Instructions] Our first question comes from Matt McCall with Seaport Global.

You may begin.

Matt McCall

So, Jim, early on, you said that you expect to start to leverage operating expenses. I guess, the first part of the question, I assume that that is kind of when you start to see the growth in new products to offset the decline in other products in the first half of 2019. And I guess, the second part of the question is really related to gross margin. Can you maybe discuss trends with pricing with incentives? Should we expect the same trend to occur on the gross margin line about that time as well?

Jim Keane

Well, what I was referring to and the first part of your question, which is the growth of new products offsetting decline of legacy that’s kind of all things equal, we’re expecting to see that happen sometime in the first half of fiscal year 2019. And what we’re finding is -- as you heard us talk about before, you can expect those new products to take a little bit of time on new products before the gross margins get up to the same levels you see with legacy products or with core products. Legacy products have the benefit of having fully depreciated capital expenditures and so on, so that can have an effect. But I wouldn’t expect that the growth of new products would have a downward pressure on our gross margin at the same time. Even though, they can be a little bit lower, I wouldn’t expect that to be lower.

Now, the second part of your question is about incentives and so on. We’ve been doing that all along and we are continuing to do what we feel we need to do to be competitive on price and on incentives. I don’t expect that to dramatically change from the rates we’re at right now. We’ll be opportunistic as we try to win business. But, I don’t expect to see a major change in that as we go forward.

Matt McCall

Okay.

So, maybe to summarize, as we look at the crystal ball for 2019 and you gave that kind of look into the outlook for better -- or return of leverage on the SG&A line, there is going to be a much gross margin -- is the expectation that the margin pressure should end and we should see some margin expansion in 2019, based on what you see today?

Jim Keane

Well, I would hope that the main driver of margin expansion should be efficiency improvements; that’s the way I would look at it.

So, we have a golden place for operating improvements, both in the Americas and in EMEA. And I wouldn’t say that’s anything discrete, that’s just part of lean.

So, when you’re lean every year, you set new goals and have been touring the Americas plants for the last couple of weeks, I can tell you, they’ve got golden place for this year where we haven’t hit the full run rate benefit of for next year and then they’ve got goals for next year that take it to a better level still. In EMEA, as we discussed for a couple of years there, we were just trying to get through the restructuring and trying to get through the disruption effects. And over these last 12 months we’ve been able to begin working on the cost reductions that would drive future gross margin improvements.

So, we would hope to see gross margin expansion in EMEA as time goes by.

Dave Sylvester

We should also see some expansion in our margins from absorption of fixed cost as we try to grow. And I’d like to think that the pricing that we’re putting in place in February will begin to offset all or at least some of the commodity cost inflation we’ve been feeling for the last several quarters.

Matt McCall

And then, one more.

So, I am just trying to make sure I understand all the numbers. I’m trying to make sure my math works here.

So, revenue down about 4%, orders down about 6%.

You said the legacy business which is about 25% of revenues is down about 15.

So, just backing into the other 75% of the business, it seems like that would be flat to down 3% and that just to me -- conceptually that doesn’t seem to make sense with what I think is going on with the business. Can you just help me understand what is wrong there, or if it’s flat to down 3% and what that’s the trend?

Dave Sylvester

So, Matt, we gave you a couple of anchors, one was new products continue to approximate a third. And as I said in my comments, that continues to grow at double digit. And Jim mentioned that legacy applications are approximating 25% of our business and that continues to be down and was down pretty significantly again in the quarter. The remaining part of business, which call it a little bit more than 40% was, doing the math right, was in fact down. And it’s a fair question of why. We don’t know exactly all the answers. Jim was speculating to some of them in his comments. And I think a fair amount is attributable to the fact that we have just reduced levels of demand in continuing business from our largest customers, as well as the fact that our marketing programs were off versus last year early in the quarter. And both of those categories, I won’t say rebounded because it was only one month in November, but they both performed much better compared to last year in November than they did in the earlier part of the quarter.

Jim Keane

I’ll build on this.

So then the segment, we call the core, as Dave said is the largest of the three segments. And the broad weakness we saw in September and October in orders would result in broadly speaking a reduction in shipments in October, November.

And so, that drives order pattern, maybe unrelated to any particular product or segments but the core that’s affected by it probably more than anybody else. Because as Dave said, we saw growth in new despite the fact that we had weakness in those orders.

And so, we have some decline in the quarter. Again, I don’t think that’s specifically related to those products, just broadly speaking what we’re in the business.

Now, when I double click on the quarter and you look at specific products that are in there, there are some products that are part of our core business that are in categories similar to new products we’ve launched that we’re calling the new. And therefore, we think there are some cannibalization effects. And that’s okay because when we launch new products, we expect that we are going to get some of that like our return on invested capital calculation assumes some level of cannibalization. And I can point to specific time spread I expect that would have happened. There is also products in there that could be the kinds of products that could be substituted by customers who are looking for something different, like ancillary products that we don’t offer even to our partners today or haven’t in the past.

So, it’s either we cannibalize these products or the industry will cannibalize it for us. And that’s why we’re working so hard to broaden our product portfolio to bring these partner products and to work on life cycle management for those products, make sure we’re constantly making improvements in them, expanding their capabilities and doing what we can to extend the life of those products. But yes, we saw a decline in the core [indiscernible] kind of combined.

Operator

Our next question comes from Budd Bugatch with Raymond James.

You may begin.

Katherine West

Hi. This is Katherine West on the line for Budd Bugatch. I just have one quick question about EMEA. Can you walk us more on what caused these operating inefficiencies in EMEA and what the new outlook is on the segment and when it’ll start to break even? I’m starting to get a good feel for the expectations for EMEA in 2018.

Jim Keane

So, the primary reason EMEA performed below breakeven in the quarter was the combination of the accounting adjustments and some severance charges. But as you point out, there were also some operating inefficiencies. And those operating inefficiencies offset some of the good things that were going on also in operations. And the operating efficiencies, we’re kind of -- we’re going into the reaps kind of detail, but I think is worth talking about it, because we actually do get involved in these things. We had some line outages, some specific pieces of equipment that had unscheduled stoppages in one of our factories. And it took a few days for that machine to back online. And then once that happened, it kind of backed up -- backs up the entire factory for a few days and it creates inefficiency that goes beyond the period where machine was down.

So, when you see something like that -- and the reason for the back of this, because we weren’t pretty lean. Everything is really tightly coupled in these factories and they’ll carry a lot of inventory in process. It’s all very, very efficient. And we really rely on high equipment run times and really don’t expect to see outages like this.

So, when we see them, we dig into preventive maintenance. And we have taken some steps to do deep dive into our preventive maintenance schedules and execution and found opportunities to improve PM in that particular factory.

So, as of now, we believe that we have resolved those problems; we have strengthened the PM processes in the factory. We don’t expect to see it again.

So we think we’ve got that behind us.

Operator

Our next question comes from Kathryn Thompson with Thompson Research Group.

You may begin.

Unidentified Analyst

This is Steven [ph] on for Kathryn. I guess to back up and make sure understand it right.

You guys are talking about your business conceptually in three different segments legacy, core and new products. And I guess, to get a feel for the day-to-day business being slower, was it slower in all three segments or components for the business, when you think of it that way?

Dave Sylvester

I would say probably.

You’re talking about a slice that we are -- we haven’t made and would probably have difficulty making. But we feel like we felt it certainly in legacy and certainly in core and probably, to some extent in the new products. But it’s a pretty thin slice that you’re asking for.

Jim Keane

It’s an interesting question but the nature of each category would mean that you would have a different mix of project and continuing.

So with new products, it’s almost all project business because people don’t have installed base of those products yet.

And so if they’re going to put it in, they are going to put it in typically where they’re doing nothing significant. Legacy products, on the other extreme, where the machine installed base and a lot of the business that flows through our system is ongoing in smaller investments that we would refer to typically as day-to-day.

So, I’d say, that’s just directionally true. We don’t have the data on how much loan was up or down within those categories, but new relies more on projects, legacy relies more on day-to-day, and the core is mix of both.

Dave Sylvester

And the only reason new products would be impacted by continuing is because we include those products enhancements launched in the last three years.

So, some of them that were launched two or three years ago might be beginning to make their way into continuing agreements.

Unidentified Analyst

Okay, helpful. And then, thinking about AMQ, the sales upside there makes it -- and I think it’s attractive. Will it have much of a headwind on the margin side as looking into 2018 and then, will AMQ be totally or mostly included in the Americas segment?

Dave Sylvester

It will be rolled up into the Americas segment but we certainly have global aspirations for growth. And from an earnings perspective, I wouldn’t count on much in the fourth quarter, given the purchase accounting amortization of intangibles that we will set up as part of the opening balance sheet that will roll off with the initial shipment of backlog. But, thereafter, we would expect it to be accretive to our earnings that how much is going to be dependent on how fast we’re growing and level of investment that we’re making.

Unidentified Analyst

Excellent, that’s it from me. Thank you.

Dave Sylvester

Just one point of clarification before we move to the next question. Mike pointed out that in my remarks about the outlook I made reference to the expected diluted earnings per share to be between $0.14 and $0.16 and that’s not accurate. In the release, we indicated that we expect to report diluted earnings per share between $0.14 and $0.18. And that’s what I should have said.

So I just want to correct that for the record. We can take the next question now.

Operator

Thank you.

Our next question comes from Greg Burns with Sidoti & Company.

You may begin.

Greg Burns

Good morning. Do you have an estimate on the benefit to your earnings from the reduction of the corporate tax rate?

Dave Sylvester

Not yet that we’re ready to share publicly. We’ve certainly done some high level estimation modeling but have not -- our team is not quite finished sifting through the 1,100 pages of the draft legislation yet.

So, I’m little hesitant to throw out a number but we’ll continue our work.

Jim Keane

We think the impact will be significant though, because so much our profits are in the Americas and this reduction in the effective tax rate will be a good thing for the Company. We’ll take a big shot as like most companies, to write down our deferred tax assets, most likely in the fourth quarter, assuming that that is put in place. That’s why I have the potential item quote in the release. But as far as what it will do to our effective tax next year and thereafter, we believe that it will reduce it significantly, but how much within a range of a few hundred basis points, we’re not quite there yet in our estimation.

Greg Burns

When we think about the businesses, leverage seems like your undercapitalized at this point. What are your thoughts on leverage levels and your appetite for maybe larger acquisitions than AMQ?

Dave Sylvester

Well, as you know, our balance sheet is pretty conservative and has capacity as balanced on the liquidity side, and we could, I think handle a higher level of leverage. But, we’ve also said, we’ve been comfortable operating in a very relatively conservative way historically. And I don’t see that changing materially go forward. And from an acquisition perspective, we’ve consistently said what we are intrigued by the idea of bolt-on acquisitions that help us accelerate strategies that we have in the business. And I think those are going to tend to be smaller than larger. But we would certainly be open to a mid-sized acquisition if we felt like it was accelerating a key strategy in the Company.

Jim Keane

Yes.

We haven’t drawn any red lines about acquisition side. It really is a matter of fit to our strategy. And after when we close the business, we want to be better owners to the current owners.

Operator

[Operator Instructions] Our next question comes from Bill Dezellem with Tieton Capital Management.

You may begin.

Bill Dezellem

Would you please discuss the out of period adjustments that you referenced that affected the EMEA results?

Dave Sylvester

Yes. Sure. I’d say every quarter, we have some things that we discover in our results and we don’t typically talk about, because they are relatively small and immaterial. But we don’t always -- while we stride to get everything reported in the right period, it doesn’t always happen. And this quarter, we had a couple more than normal and one was a few hundred thousand dollars higher than any of us would have liked to see in finance, still not material. But because we were -- the fine line of breakeven was what we were targeting. And I wanted to make sure you guys understood that operationally we were in that ballpark, it was more about accounting adjustments, we call them out. In the prior period adjustments, the favorable items last year, we called those out a year ago when we reported the results in the third quarter.

Jim Keane

That’s really -- was kind of a big deal, because we had, let’s say good guys a year ago and bad guys this year.

So, when you do a year-over-year comparison, it’s the additive effective of both. And we wanted to make sure everybody -- only investors were able to understand that difference.

Bill Dezellem

So, the takeaway message is that the EMEA results were actually better than they would appear, if we can just look at the reported results from last year compared to the reported results this year?

Dave Sylvester

Yes. Also, we had some severance in the quarter that I called out, which we don’t have every quarter. And historically, when we were doing restructuring, we were using the restructuring line for that. But because we don’t have a large restructuring program in any area of our business, as we’ve incurred miscellaneous severance costs, those have been running through our operating results.

So, we call those out as well.

So, between the accounting adjustments and the severance costs, that was $2.5 million of the $3.3 million loss.

So, we were very close to breakeven and with the only difference is being, couple of project, installation delays that were more than normal and the operational inefficiencies which were unfortunate, not the biggest deal. But again because -- and normally, I probably wouldn’t even have called now but because we’re trying to reconcile back to the breakeven results that we had projected, I probably got into a little bit more granular detail than normal.

Bill Dezellem

Thank you for that. And since you did call it out, would you please talk about the severance -- and since that from an outsider’s perspective probably would have thought was done?

Dave Sylvester

Yes. I mean, we’re continuing to move our business forward in Europe and that often requires us to move or we desire to move a few people around into new positions. And in Europe, they have to accept to move to that new position. And if they don’t, then, we have to go into a negotiation of an access [ph] and sometimes that can lead to severance. Again, it doesn’t happen every quarter. And it certainly wasn’t because people weren’t doing a great job or weren’t doing what we wanted them to do, it’s just we wanted to make some changes in different parts of our organization to help us move to the next level. And unfortunately, we couldn’t reach an agreement as to what those people might do next within the new organization and they chose to leave.

So, we negotiated severances.

Jim Keane

But it’s not part of a broad program. These were fairly -- very narrow and discrete type of actions.

Bill Dezellem

And given, the description you just laid out, it also sounds like it doesn’t have anything to do with the operational issues that took place either.

Jim Keane

No, completely unrelated to that.

Dave Sylvester

No. And again, the only reason we got into those was because of the breakeven forecast. They were unfortunate, but not the biggest deal.

Operator

Thank you. I’m showing now further questions at this time. I’d like to turn the call back over to Jim Keane for closing remarks.

Jim Keane

Okay. I want to thank everybody for joining the call today during a very busy time.

All of us at Steelcase wish all of you a very happy, safe and healthy holiday. Thanks for joining us.

Operator

Ladies and gentlemen, this concludes today’s conference. Thanks for your participation and have a wonderful day.