Steelcase - Q1 2024
June 22, 2023
Transcript
Operator (participant)
Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Steelcase Q1 fiscal 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Mr. O'Meara, you may begin your conference.
Mike O'Meara (Director of Investor Relations and Financial Planning and Analysis)
Thank you, Rob. Good morning, everyone. Thank you for joining us for the recap of our Q1 fiscal 2024 financial results. Here with me today are Sara Armbruster, our President and Chief Executive Officer, and Dave Sylvester, our Senior Vice President and Chief Financial Officer. Our Q1 earnings release, which crossed the wires yesterday, is accessible on our website. This conference call is being webcast. 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. 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, Sara Armbruster.
Sara Armbruster (President and CEO)
Thanks, Mike. Hello, everyone, thanks for joining the call today. Overall, we feel very good about our Q1 results, which were better than expected, as both revenue and adjusted EPS finished above the guidance range we provided in March. Our adjusted outlook, earnings outlook for Q2 is in line with the prior year and would put us ahead of pace to achieve our fiscal 2024 target. Dave will cover our results in more detail. I'm proud of our sales teams for continuing to capture pricing benefits in response to the extraordinary inflation we've experienced over the past 2 years. I want to thank our operations teams for the improvements they continue to drive. In addition, our win rate has continued to be very strong. Amid our improved performance, the broader market in the Americas still faces uncertainty. Additionally, we're seeing near-term challenges in international markets.
We are taking actions to reduce our costs in the face of those challenges. We are seeing some positive signs that make us cautiously optimistic for the back half of the year. I want to thank those who joined us for our Investor Day in May or who've watched a replay of the webcast. We were excited to provide more details about all areas of our strategy and share our midterm financial targets. I'd like to touch on a couple of those strategic focus areas next and link them to some highlights from last week's annual NeoCon trade show in Chicago. Our goal is to lead the workplace transformation. We were excited to integrate new products that support this vision into our NeoCon showrooms.
One was Steelcase WorkValet, which offers innovation in workplace storage for mobile workers. Another was a range of seating offerings that balance a beautiful design, aesthetic, and high performance with new levels of sustainability. We also celebrated several NeoCon award wins for products that make hybrid collaboration easier and more effective, including the Ocular collection of conference and collaborative tables by Steelcase and several products from the HALCON OPTICS collection. We spoke with many of our larger customers during the week. Some of them described regretting that they put projects on hold during the last 18 months, as they now realize this has slowed their organization's progress toward achieving business objectives. Many customers talked about the need for privacy in the workplace, as well as the integration of technology within their conference rooms to provide better video conferencing experiences.
I consistently heard that they want these solutions in a way that supports their sustainability goals. The conversation really has moved beyond working from home and hybrid work, and it's now about working better as companies focus on updating outdated spaces to respond to their employees' needs. To serve small and medium-sized customers more completely, we showcased our Series 1 task chair with Air Back, which provides superior ergonomics at a great price point. We've also made significant advances in our Series 1 packaging, which reduces our carbon footprint and introduces simplified assembly steps, making it easy for those small and medium businesses to unpack their new product and put it together quickly. Our health team showed applications for waiting rooms, infusion centers, and clinician respite. These applications offer a softer hospitality look and feel while offering clinical performance and providing flexibility.
Highlights included products from KwickScreen, a new Steelcase partner, whose innovative, cleanable partitions create instant privacy for patients and staff. Another highlight was new enhancements to our West Elm Health collection of soft seating. Designed by West Elm, this collection provides the comfort of home with added clinical features to improve the waiting room experience. Response from customers, architects and designers, and dealers was outstanding, and we'll continue to build on the energy of last week to fuel future innovation and shape the transformation of workplaces with our research and insights. While NeoCon is a terrific opportunity to showcase our products and connect with customers, we haven't let up on our efforts to improve our profitability. Our operations teams around the world are continuing to redesign our operational model to lower our cost structure.
As we had previously announced, we expect to complete the closure of our Atlanta regional distribution center during the Q2, as we continue to optimize our distribution system. We also drove additional savings this quarter by finding more opportunities to ship deliveries directly from our factories to the customer installation site, as opposed to consolidating through our regional distribution centers. This allows for improved freight costs, as well as reduced labor handling, and it supports our efforts to achieve our carbon reduction goals. These are just two examples of the many ways in which we're continually rethinking how we operate. As we continue to orient our business for growth, we're also excited to support the growth and advancements of more than 50 summer interns across 11 Steelcase locations.
These interns represent 35 schools across the country and include women in STEM, students from historically Black colleges and universities, and international students. Forbes Magazine agrees. They again ranked Steelcase among America's best employers for new grads, based on an independent survey of more than 20,000 young professionals. I'm excited about our start to fiscal 2024 and where we believe we'll be at the end of the first half. We continue to navigate through an uncertain environment, we expect to be ahead of pace against our financial targets halfway through the year. We remain committed to our strategy to lead the workplace transformation, diversify the customers and market segments we serve, and improve our profitability.
With that, I'll turn it over to Dave to review the financial results and to share our Q2 outlook.
Dave Sylvester (SVP and CFO)
Thank you, Sara, and good morning, everyone. My comments today will start with the highlights related to our Q1 results, balance sheet, and cash flow. I will share a few summary remarks about our outlook for the Q2. As Sara said, overall, we feel pretty good about our Q1 results as we continue to operate in an environment with macroeconomic uncertainty and geopolitical risks, and yet we delivered results that were better than the prior year and better than the expectations we communicated last quarter.
Over the past several quarters, we have taken a number of actions in response to the dynamic environment we faced, including taking unprecedented pricing actions in response to the extraordinary inflation we've incurred over the past two years, implementing cost reduction efforts and workforce reductions in reaction to volume declines and to support new strategic investments, and adjusting our supply chain to improve our operational agility and resiliency. Both revenue and adjusted earnings in Q1 benefited from these actions, and as a result, we exceeded the top ends of the ranges we provided in March. The better-than-expected revenue was driven by the Americas, which benefited from faster order fulfillment patterns, higher-than-expected incoming orders early in the quarter, and favorable pricing benefits.
Across our customer segments, revenue from our largest customers and government business was better than we expected, which was offset in part by a shortfall from our consumer retail segment. The revenue decline in international was primarily driven by a lower beginning backlog, but it was more significant than we estimated due to continued macroeconomic concerns, which contributed to our decision in the quarter to announce a series of restructuring actions in EMEA and Asia Pacific. On a consolidated basis, revenue of $752 million was flat on an organic basis compared to the prior year and included 2% growth in the Americas, offset by a 7% decline in international. Stronger revenue in the Americas drove our better-than-expected adjusted earnings, but we also had better operational efficiencies, which also contributed to higher gross margin compared to our estimates.
The favorability in the Americas was partially offset by the impacts of the lower-than-expected volume in international. Their gross margin also exceeded our expectations. Operating expenses were above our Q1 estimate, primarily due to the estimate, including $10 million of anticipated gains related to the sale of our two aircraft, which was not completed in the quarter. We recorded higher variable compensation expense due to our stronger-than-expected earnings. As it relates to cash flow in the balance sheet, we generated $11 million of cash from operating activities in the Q1, as adjusted EBITDA of $52 million and a reduction in working capital of $35 million more than offset our seasonal disbursements related to variable compensation and retirement plan contributions. The working capital reduction is atypical for Q1, as we tend to increase inventories to support the seasonal strength of our Q2.
However, we continued to reduce safety stocks we built last year in response to the supply chain disruptions we experienced, and inventory levels are also benefiting from some adjustments to our supply chain, which in total more than offset the seasonal build. In addition, we saw an improvement in our days sales outstanding, which drove a reduction in accounts receivable during the quarter. Our liquidity totaled $200 million at the end of the quarter. Total debt aggregated to $447 million, which was $35 million lower than Q4, as we paid off our maturing aircraft loan during Q1. At the end of the quarter, net debt was slightly higher than our trailing Q4 adjusted EBITDA, which totals $235 million and exceeds 7% of trailing four-quarter revenue.
Regarding orders in the quarter, we posted a year-over-year order decline of 7% in the Q1, including declines of 6% in the Americas and 11% in international. These declines compared to strong growth in Q1 of the prior year, which reflected 22% growth compared to Q1, fiscal 2022. On a sequential basis, orders in the Q1 grew 21% versus the Q4 of fiscal 2023, which is consistent with the seasonal increase we experienced in the prior year. In the Americas, the year-over-year decline approximated the level we expected, but the order patterns were a little stronger in March than they were in April and May, which contributed to our better-than-expected revenue in the quarter. Across quote types, the decline was driven by lower project business, partially offset by growth in our continuing business.
In international, the order decline was more significant than we expected and was broad-based across EMEA and in China, partially offset by double-digit growth across all other markets in Asia Pacific. In EMEA, we believe the economic environment may be experiencing a period of slowdown after a surprisingly resilient period over the last year, as many customers are referring to a pause in investment activity this calendar year. At the same time, we are encouraged by 10% year-over-year growth in EMEA, new project opportunity creation. In Asia Pacific, our pre-sales activity levels have also been improving. Turning to our outlook for the Q2, we expect to report revenue within a range of $815 million-$840 million, which would reflect a 3%-6% decline year-over-year.
We expect to report adjusted earnings per share of between $0.19 and $0.23, which compares to $0.21 in the prior year. In addition to the projected range of revenue, the adjusted earnings estimate includes estimated gross margin of approximately 31.5%, which is approximately 250 basis points higher than the prior year and slightly better than the Q1. Operating expenses of between $225 million-$230 million, which is higher compared to the Q1 and includes seasonal sales commissions at Smith System and prioritized investments in marketing, product development, and other initiatives, partially offset by $8 million of expected gains from the sale of fixed assets.
Lastly, we expect interest expense and other non-operating items to net to approximately $4 million of expense. We're projecting an effective tax rate of approximately 26%. Through the first half of the fiscal year, we are projecting to be ahead of pace on achieving the fiscal 2024 targets we have communicated in March. We remain focused on driving improved profitability and achieving our full year targets while implementing our strategy and navigating an uncertain environment. We'll turn it back to the operator for questions.
Operator (participant)
At this time, I would like to remind everyone, in order to ask a question, press star, then one on your telephone keypad. Your first question comes from the line of Greg Burns from Sidoti. Your line is open.
Gregory Burns (Senior Equity Research Analyst)
Morning.
Dave Sylvester (SVP and CFO)
Hey, Greg.
Gregory Burns (Senior Equity Research Analyst)
Can you just start to give us a little bit more color on the activity you're seeing with your large corporate customers? What are you hearing from them? Are they starting to get a little bit more comfort with their outlook for their office needs? Do you expect the, you know, the positive trend you saw this quarter to continue?
Sara Armbruster (President and CEO)
Greg, this is Sara. I would say, if I reflect on some of the conversations last week at NeoCon, as an example, I do think we were encouraged to see that many of the customers that we spoke to, as well as architects and designers, were there with real projects and with meaningful plans to evolve offices. I felt like it was not a window shopping activity. It was people who were there with plans and activity kind of in mind. It's hard to generalize or project what will happen going forward, but I think we definitely felt that there was more focus, more intensity, and real plans behind those conversations, as opposed to, you know, maybe hypothetical discussions about changes we might make to our space at some point in the future.
Gregory Burns (Senior Equity Research Analyst)
Okay. In terms of your gross margin, are we fully offsetting inflation? Have you completely closed the price/cost gap now, or is there some incremental gains to be still had there? I know you announced about $50 million of targeted savings, cost of goods sold savings at your analyst day. Considering all that, should we think about your gross margin going forward if volumes don't recover here?
Dave Sylvester (SVP and CFO)
Well, you have a lot in there. Let me try to unpack it. We'll start with your question about pricing relative to inflation. As we said a quarter ago, our cumulative price yield from the price adjustments we had taken over the last two years finally caught up to the cumulative inflation. That's on a just a dollar for dollar basis. Now what we're targeting to capture is some gross margin on the $hundreds of millions of inflation we've experienced over the last couple of years. That's why you're seeing some of the year-over-year benefits in Q1, and why we're projecting them again in Q2 with, you know, a gross margin estimate that's 250 basis points higher than the prior year.
That, in addition to the targeted improvements in gross margin that Bob Krestakos talked about at our Investor Day, we expect will continue to drive gross margin improvement for us, even if the volumes stay relatively flat or if they declined modestly. If they improve, then we should get even better benefits, which are, you know, baked into the midterm targets that we communicated at the Investor Day in early May.
Gregory Burns (Senior Equity Research Analyst)
Okay, great. Thank you.
Dave Sylvester (SVP and CFO)
Yep.
Operator (participant)
Your next question comes from a line of Reuben Garner from Benchmark. Your line is open.
Reuben Garner (Equity Research Analyst)
Thank you. Good morning, everybody.
Dave Sylvester (SVP and CFO)
Good morning.
Reuben Garner (Equity Research Analyst)
Sara, maybe to follow up on Greg's question, you know, I appreciate your conversations at NeoCon. I'm curious what you're hearing more specifically about return to the office trends when you're talking to company leaders. We've heard a couple examples of kind of either incentive-based pushes or mandates to get people back in the office. Any more color there that you can provide us in your conversations?
Sara Armbruster (President and CEO)
Yeah, I would say that as I talk to other CEOs and business leaders, I mean, pretty consistently for some time, I would say the vast majority have expressed a strong desire to have their employees working together physically in the office. I think you're right. I think, you know, we've seen, at least anecdotally, more companies and more of those business leaders, I think of late, either express the intent or actually announce things that maybe turn up the intensity of that effort to get people back to the office even more.
That certainly isn't true at all companies, but I think pretty consistently for a number of quarters, we've heard business leaders speak to their belief in the value of the office, the need to have people together, the positive impact that has on all sorts of things, whether it's being able to advance business objectives more effectively and efficiently, or things like their corporate culture. I certainly hear that tone continuing from the people I speak to.
Reuben Garner (Equity Research Analyst)
I've heard from some investors lately about concern about commercial real estate and offices, just the occupancy rates are lower than pre-COVID levels and the debt surrounding it. How do you guys feel that that could impact the furniture industry, if at all, over the next few years as leases, you know, expire?
Dave Sylvester (SVP and CFO)
It's hard to tell because we haven't really encountered anything like this in the past. What you're aware of is historically, when vacancy rates have gone up, it generally drives landlord incentives higher, which creates churn, and in kind of work or office settings, meaning companies choose different locations. Sometimes they downsize, sometimes they move to a better, a higher quality part of town. Often in all of that move activity, they don't take their furniture with them. It's generally been a positive for the industry when vacancy rates go up and landlords incentivize some churn. It remains to be seen to what degree vacancy rates might go up from the what you're reading in the media.
Reuben Garner (Equity Research Analyst)
Perfect. Sara, in the earnings release, you referenced your strong win rates. Any color on what you think might be driving that?
Sara Armbruster (President and CEO)
Well, I would say, you know, one thing, certainly anecdotally, we heard last week at NeoCon, and we've heard from many of our clients, is that I think part of what lies behind that is the fact that we chose quite deliberately early in the pandemic, to stay invested in innovation and solutions to support the workplace. You can imagine there were conversations about whether the pandemic would be caused to dramatically pivot our strategy in some different direction, or whether we felt like staying invested in the future of the office and the future of workplaces was a valid path forward. That's, as we've communicated, you know, that one of the paths that we said we need to stay invested.
I think our innovation, our solutions for hybrid collaboration, the investments we've made, the acquisitions we've made to support privacy in the workplace, things that we've done to support partnerships around integrated technologies, I think all of those solutions and that innovation, is perhaps resonating now with organizations that know they need to update their offices and evolve their spaces to move their businesses forward.
Reuben Garner (Equity Research Analyst)
Great. I'm gonna sneak one more in, if I can. You mentioned the ease of assembly of that chair. Knowing that you guys are trying to attack some different markets that, you know, whether it's in small business or healthcare or consumer, what other changes do you think you need to address, to kind of further penetrate those spaces?
Sara Armbruster (President and CEO)
Well, I think as we look at those different market segments, we're certainly aware of the fact that there may be differences in products, the types of products, the price points, the features, and functionality that apply. You know, clearly, a healthcare setting, has different needs and different requirements than somebody's home office. We've continued to obviously draw on our historical strength and innovation and our capabilities there to serve those needs, as well as some of the acquisitions we've made. I think the other thing that we've been focused on and investing in, and will continue to do so, is acknowledging that the customer purchase journey is different as well.
If you think about the path you might take as a consumer in researching and evaluating and then purchasing perhaps an ergonomic task chair for your home office, that's a different journey than the journey that a chief, you know, nursing officer might pursue in thinking about how to open a new clinic. And we have been really mindful of making sure that we are not only understanding those pathways, but also making sure that we're kind of rearranging our business model and our tools and our systems and processes as appropriate, to make sure that we can create the experiences for those different kinds of customers that they really value and that allow them to kind of navigate that research and ultimately purchase journey really successfully.
Reuben Garner (Equity Research Analyst)
Great, thanks, guys. Good luck going forward.
Sara Armbruster (President and CEO)
Thanks.
Operator (participant)
Again, if you would like to ask a question, press star, then one on your telephone keypad. Your next question comes from a line of Steven Ramsey from Thompson Research Group. Your line is open.
Steven Ramsey (Senior Equity Research Analyst)
Hi, good morning. You had talked about project demand overall being down a bit in the quarter. Can you maybe go into some detail on key customer types and trends in that project demand between large customers, SMBs, et cetera, if there's anything positive or diverging within the different customer groups?
Dave Sylvester (SVP and CFO)
I don't recall hearing or seeing anything that jumped out across the customer groups. I also don't think it's unusual at this state of a recovery, an economic recovery and return to office for project activity to trail continuing business. I think it's typically what we've seen in the past as corporations restart activity, either because of economic recovery or because, in this case, of more RTO, return to office, for them to look to their existing continuing agreements to modify spaces, workplaces, or to just get back to the routine of the various projects or activity levels that they had when they were in the office. I don't remember seeing anything that stood out on the project side.
Steven Ramsey (Senior Equity Research Analyst)
Okay, helpful. Thinking about full year 2024 and the project versus continuing trends you've seen thus far, do you expect these trends to continue and basically continuing projects, flattish to modest growth for the year, while project is a negative contributor for the year? Or do you think there's any move in the two lines?
Dave Sylvester (SVP and CFO)
I think it's reasonable to expect that project activity will improve. Whether or not it will grow year-over-year by any kind of significant amount remains to be seen. Project activity is generally what's tracked in our pipeline, and it's generally what is related to the pre-sales activity of visits and mock-ups, and things like that, which have been pretty good. I feel like it could show an improving trend in the back half of the year. If I think of kind of what we assumed in our underlying targets for the full fiscal year, we assumed large company would improve, and therefore you would expect some of that to include project activity.
Steven Ramsey (Senior Equity Research Analyst)
Okay, helpful. Another question, thinking about full year 2024 and being ahead of pace for the year, can you maybe go into any particular line items or anything notable that may not show up on the income statement where you are tracking ahead for your full year targets?
Dave Sylvester (SVP and CFO)
Well, I mean, I do like, it's not on the income statement, it's on the cash flow. I'll go back to my comments about our inventory reductions and DSO improvement on receivables. We feel pretty good about how we're managing liquidity and have access to, you know, full access to our credit facility. I like where our leverage metrics are. They're back within policy range. We're below kind of thresholds that the rating agencies like to see operate below. I mean, those types of things I feel very good about. You don't necessarily see the direct correlation quarter-to-quarter about the operational efficiencies that we're driving, or all of the project activity behind the gross margin improvement work that Bob Krestakos and his team are driving.
Sara and I see that, at least monthly, often twice a month, and get a sense of how we're progressing against the multiple projects that aren't showing up in today's income statement, but we believe will show up in future income statements.
Steven Ramsey (Senior Equity Research Analyst)
Great. Thank you.
Operator (participant)
Your next question comes from a line of Budd Bugatch from Water Tower Research. Your line is open.
Beryl Bugatch (Senior Research Analyst and Head of Consumer Hardlines)
Good morning. Most of my questions have been asked, but first, congratulations on a, you know, very good performance in the Q1.
Dave Sylvester (SVP and CFO)
Thanks, Budd.
Beryl Bugatch (Senior Research Analyst and Head of Consumer Hardlines)
I guess I just wanna hit on the one thing that, Sara, you talked about the win rate in the release, and it's been asked several different times on the call, but I haven't really heard termed, any response about the sales cycle, which we know that the activity level had been high with, people and conversations, but, one thing that had been talked about over the last couple of months had been that the sales cycle was extended. Are we seeing any shrinking in that, in the length of the sales cycle from beginning to end?
Mike O'Meara (Director of Investor Relations and Financial Planning and Analysis)
Hey, Budd, just to clarify, are you talking about, like, customer decision-making processes, that slowing of the sales cycle...
Beryl Bugatch (Senior Research Analyst and Head of Consumer Hardlines)
Yes.
Mike O'Meara (Director of Investor Relations and Financial Planning and Analysis)
Is that?
Beryl Bugatch (Senior Research Analyst and Head of Consumer Hardlines)
Yes, Mike, exactly that. Yeah, with when you're starting to have those conversations, one of the things that's been talked about you know, people were having those conversations, they were some were pushing the out into the future, the actual initiation of the order.
Sara Armbruster (President and CEO)
Yeah.
Beryl Bugatch (Senior Research Analyst and Head of Consumer Hardlines)
Is it getting-
Sara Armbruster (President and CEO)
I, you know, I don't know that I can give you a really definitive kind of quantified answer, but I would say, kind of building on my comments about NeoCon, I think we definitely see, kind of relatively speaking, more customers that have firm plans to make changes of some sort. They either know they're moving, or they're expanding, or they're renovating, or they're doing something. I think from that standpoint, you know, we kinda we see customers maybe not dragging out the process or hemming and hawing, and I think we see more people who have clear plans and timelines and intent to take action.
You know, maybe one thing that is still a bit variable is still, I think some customers are having challenges with construction schedules due to the lack of tradespeople or other factors that are maybe slowing their project timeline relative to what they intended. Again, there, I don't know that we're seeing anything that's dramatically different than what we've seen. I mean, we're used to, like, you know, we're used to managing through those kinds of things when they happen. You know, so I don't know that we're seeing anything that is dramatic or unusual.
Dave Sylvester (SVP and CFO)
Yeah, a positive anecdote here and there, but not necessarily enough to call it a new trend. I mean, hearing from customers at NeoCon that, you know, acknowledge or that they regret having slowed down or paused some activity over the last 18 months because now they're feeling the pressure of being behind as they're bringing people back to the office. That's certainly positive, but we're not hearing that enough to call that kind of a major shift or a trend.
Beryl Bugatch (Senior Research Analyst and Head of Consumer Hardlines)
Dave, that's interesting because over the last couple of quarters and the last releases over the last year or so, you've talked about the backlog having a longer tail. Does that mean that the backlog is approaching a more normal timing now? You're not seeing the same kind of level of deferrals that in the backlog that you noted in the last couple of calls?
Dave Sylvester (SVP and CFO)
I mean, the backlog is definitely changing. I think that's in part linked to the improved supply chain environment, that clients are feeling more confident in ordering with shorter lead times because they've seen the improved reliability of on-time delivery. We've definitely seen some of that, and we had a nice level of orders that we received in the quarter that we shipped in the quarter, and that felt a little bit like, you know, the good old days. It wasn't, you know, it wasn't like necessarily back to pre-pandemic levels or above pre-pandemic levels, but it was higher than we had been experiencing, and it contributed to, you know, our results in the quarter.
Beryl Bugatch (Senior Research Analyst and Head of Consumer Hardlines)
You did talk about orders, at least in the first couple of weeks of this quarter, being above. Did you wanna quantify any, you know, what kind of rate of above are we seeing those orders?
Dave Sylvester (SVP and CFO)
Well, I think in the release, we used the phrase modest growth, which I think you can assume is a low single-digit growth rate. We included that reference because it was notably different than the overall decline that we had in Q1. We also are starting to come up against easier comparisons versus prior year. I think Q2 of last year, I think, grew at 6% for orders year-over-year, whereas the Q1 of last year grew at 22%. We would expect to see this, and it's nice to see it and begin to play out.
Beryl Bugatch (Senior Research Analyst and Head of Consumer Hardlines)
That's good. On the gross margin, moving up ahead by 530 basis points, you've attributed that to pricing and operational efficiencies. Can you parse maybe what, which is which? I mean, how much is quantify those two differences?
Dave Sylvester (SVP and CFO)
We quantified the amount of the pricing net of inflation, and if you do the math, that was clearly the lion's share of it but the others were notable enough that to include in our disclosures, we included them. The operational efficiencies, it was not only labor, but also some logistics favorability, which is nice. I mean, it, the logistics world was pretty messy for the better part of two years, and it started getting better over the last six months, and we had some nice benefits in the quarter, just from being able to get trucks on routes that we wanted and get them more fully loaded with some direct shipments as well. It, the efficiencies were not just labor, but logistics as well.
Beryl Bugatch (Senior Research Analyst and Head of Consumer Hardlines)
Well, yeah, Sara had noted, I thought, and back in the, in her, in her comments about the fact that, trucks now, you didn't necessarily need to go through a consolidation extra step, and you were able to get products shipped directly. You've had a very efficient way of tracking shipments to, from your facilities to customers, and knowing pretty much what's what and with the timing. That's, that was interesting, and I thought that was a kind of a fascinating commentary on that. Overall, it feels like to me, like the industry is kind of getting back to, like, this normal of some sort. Is that a reasonable inference?
Dave Sylvester (SVP and CFO)
It feels like it's certainly, we would say that it's stabilizing to improving. Which is a lot, given the kind of broader macroeconomic uncertainty, you know, that's hanging over us. You know, the sentiment on RTO, while it's improving, there are still a lot of companies that are kind of taking a different approach or a more relaxed approach about getting people back in the office.
Beryl Bugatch (Senior Research Analyst and Head of Consumer Hardlines)
Okay.
Dave Sylvester (SVP and CFO)
The fact that it feels like it's stabilizing and potentially, you know, starting to show, enough green shoots to call it improving, is pretty darn good.
Beryl Bugatch (Senior Research Analyst and Head of Consumer Hardlines)
Agreed. You, make sure I understand. You, the operating expense for the Q2, you talked about $8 million of projected gains. Is that for the aircraft, do you think you will get those sold in the quarter?
Dave Sylvester (SVP and CFO)
Well, we're trying. If you know anybody, let me know. Let's look into the aircraft.
Beryl Bugatch (Senior Research Analyst and Head of Consumer Hardlines)
They're not under contract. Is that right?
Dave Sylvester (SVP and CFO)
We, they're listed, they're listed internationally. The jet market at the moment is not that great. We're priced very competitively, I would say aggressively. We'll see what happens. Our intent was to sell them in the Q1, and we did not have an opportunity. Our hope is that we will have an opportunity to complete the wind down of aviation in the Q2.
Beryl Bugatch (Senior Research Analyst and Head of Consumer Hardlines)
I got you. Thank you very much. Congratulations, and good luck for the balance of this year and beyond. Thank you.
Sara Armbruster (President and CEO)
Thanks, Bud.
Dave Sylvester (SVP and CFO)
Thanks, Bud.
Operator (participant)
There are no further questions at this time. Ms. Armbruster, I turn the call back over to you.
Sara Armbruster (President and CEO)
I just want to thank you all for joining today, and we appreciate your interest in Steelcase as we continue to focus on driving improved results. Have a great day.
Operator (participant)
This concludes today's conference call. You may now disconnect.