SSI Liquidating Inc

OTC:SCOO

Earnings Call Transcript 2018-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the School Specialty's Fiscal 2018 First Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Glenn Wiener, you may begin.

[Glenn Wiener, executive]

Thank you, and good morning, everyone. Welcome to School Specialty's Fiscal 2018 First Quarter Results Conference Call. On our website under the Investor Relation section, you'll see our Form 10-Q, a press release and the updated investor presentation. All documents can be downloaded, but if you need a copy, please feel free to reach out to my office. Joining us today are Joe Yorio, School Specialty's President and Chief Executive Officer; Ryan Bohr, Executive Vice President and Chief Operating Officer; and Kevin Baehler, Executive Vice President and Chief Financial Officer. All will have prepared remarks and will be available during the Q&A portion of the call. Additionally, our call today is being webcast from the website under the Investor Relations section, and we also have a replay available for those who are unable to join. Before I turn the call over to Joe, I'd like to remind everyone that except for historical information contained herein, statements made on today's call and webcast about School Specialty's future financial condition, results of operations, expectations, plans or prospects constitute forward-looking statements. Forward-looking statements also included those preceded or followed by the words anticipates, believes, coulds, estimates, expects, intends, may, plans, projects, should, targets and/or similar expressions. These forward-looking statements are based on School Specialty's current estimates and assumptions and, as such, involve uncertainty and risk. Forward-looking statements are not guarantees of future performance, and actual results could differ materially from those contemplated by the forward-looking statements because of the number of factors including those described in the company's Form 10-K. Any forward-looking statements on today's call and webcast speaks only as of the date on which it's made. Expect to the extent required under the federal securities laws, School Specialty does not intend to update or review the forward-looking statements. As we noted last quarter, we were very active with respect to Investor Relations over the first quarter. We held NDRs in New York, Boston, Chicago and Wisconsin, presented at the MicroCap Conference and held a number of investor calls throughout. We intend to present the LD MicroCap Conference in June. We have some teach-ins planned over the summer, and we will continue to get our story out. We also have some good news to share, but I will let the team cover it. So without further ado, I'd like to now turn the call over to Joe Yorio. Joe, please take it away.

[Joseph Yorio, executive]

Thank you, Glenn, and good morning, everyone. Let me start by piggybacking off with Glenn's remarks and let you know that as of year-end, we had approximately 180 round lot shareholders. As of last week that number stood at nearly 360, and we have now begun our process to uplist our securities on NASDAQ. If you recall, our strategy was to, first, refinance our debts to provide us with increased flexibility and lower rates. That was completed. Then we split the stock to create more liquidity in our shares followed by a more aggressive and focused IR program so we could seek an uplist. Trading has picked up, albeit not at the rate that we believe our stock should trade, and we're going to continue to get our [indiscernible] and tell our story. We have 3 years of solid growth, profitability and strong cash flow behind us. And consistent with the remarks on the year-end call, we're anticipating an even stronger 2018. Kevin will cover our results, Ryan will provide more color around our business drivers and outlook, and I'll summarize the quarter and the momentum we have going thus far in Q2. On the surface, you will see revenue growth of 2.2%, a gross margin improvement of 80 basis points and the 6 -- excuse me, a $9.6 million increase in operating expenses, which resulted in higher operating losses and adjusted EBITDA losses. However, there's no cause for concern. $4.2 million of the expense increase was the result of adopting new accounting principles. Depreciation and amortization expense was up $2.1 million, and Triumph Learning expenses contributed $4.5 million of the increase. And $1.3 million of this amount relates to nonrecurring integration cost. So our remaining SG&A costs were down $1.2 million year-over-year. There's no change to our outlook with respect to revenue, margins or expenses, and we fully anticipate that we are and will be in a position to meet the previous guidance we provided. Driving our confidence is the momentum in our booking since quarter end. Through the first 5 weeks, overall bookings in second quarter, excluding Triumph Learning, were up over 19%. This brings our overall year-to-date bookings to 5% growth over prior year. We're seeing strong performance in our Supplies and Furniture categories, 2 of our biggest revenue contributors within our Distribution segment. AV Tech bookings are up versus plan, and agendas are performing in line with plan, and while our I&I category is slightly below plan, the mix has been favorable as our higher-margin anchor product is performing very well, with an improved outlook over the next few quarters. Our Science Curriculum business is tracking below last year, but this was anticipated and communicated last quarter, as there is limited adoption activity under way and throughout the year. Nothing, however, has changed with respect to our positioning, and the Science category should be a strong driver for us over the next several years, especially with some larger adoptions on the horizon, most notably, California in 2019. Our team-based selling model is gaining traction, and this continues to be one of our highest priorities. We're strengthening and building out the team, collaborating with more inside/outside sales model and most significant, we're leveraging our product line and category expertise with our domain specialist. This is giving us significantly greater support to penetrate not just the larger school districts, but all districts. And Ryan will provide more information to back this up. Additionally, our bookings with channel partners and growth for proprietary brand is continuing. And our revised pricing strategy is beginning to resonate with customers. I talked about this last quarter, there are some areas where we simply were not competitive enough on price, and having a shared approach to contracts and follow-on sales is enabling us to capture even greater wallet share with our customers and support their total spending needs much better. Currently, myself and our Chief Sales Officer, Ed Carr and other chief -- and other key executives are spending more time engaging principles, superintendents and school board administrators to discuss collaboration, business planning and goal setting to better understand how we can become a more integrated and valued partners, helping them achieve success for their students, their schools and their communities. So again, our outlook has not changed, and I'm confident that our results will demonstrate our momentum as the year progresses. One area that I'd like to spend a few minutes on before turning the call over to Ryan is the 21st Century Safe School value proposition. We've covered this for much in the past year, but for those that are newer to our story, the 21st Century Safe School's about overall learning environment, not just physical security. It encompasses physical, mental, social and emotional well-being of students and is designed to create the most productive learning environments for students, teachers and all those responsible for childhood development, beginning from the earliest years of education. Our assortment across many of these categories provides us with a competitive advantage, and our new approach to supporting schools and districts with this one constant theme is leading to a more strategic partnership with our customers, well beyond that of a traditional vendor. While we are supporting key decision makers in their total school spend allocation, we're also looking at all aspects of childhood development to create better and safer learning environments. Progress continues in Baltimore, Cleveland, Texas, 3 areas that I've highlighted in our past investor calls and during recent presentations, but this is not all. The 21st Century Safe School value proposition is picking up steam throughout the country due to the current and unfortunate events our nation continues to face. As I previously mentioned, one of the key reasons I joined SSI was to create a Safety & Security division for schools, because I saw an acute need for this back in 2009 during my time in the defense industry. With the creation of SSI Guardian a little over 3 years ago, we were ahead of the curve, and we knew it, however, we are now at the forefront. We have a deep, broad and nationally recognized team, a global network that is building, and we're working with federal, state and local legislators to help them develop and execute evidence-based best practices. The focus on business security includes a creation and implementation of Safety & Security plans, building and infrastructure upgrades, anti-bully initiatives and collaboration with the deployment of law enforcement and additional security personnel and school resource officers, with training at the forefront. At least 11 U.S. states, 22%, have proposed spending significantly more to bolster school safety. And many are focusing on the learning environment and addressing the full range of the students' intellectual, social, emotional, physical, psychological and moral development needs, which plays right into the 21st Century Safe School value proposition. Additionally, mental health support is now a major factor addressed in many of these new legislative actions, with Connecticut, Florida, Illinois, Kansas, New York, Ohio and Pennsylvania all aligned on the importance of addressing mental health issues. Lastly, among several provisions put forth, mandatory safety and active shooter training is now required for officers, school personnel and students in at least 15% of the states nationwide, and that figures grow. So you can run all the internet searches on school safety legislations for ourselves to see, but to give you a sense of the magnitude of the opportunities, I'll cover just a few. In Florida, there's a proposed incremental $400 million investment that help keep students safe and enhance mental health treatment. There's also an added $99 million to address specific school safety needs within each school-to-school district. The specific spend have not been determined yet, but based on our involvement, we expect classroom door locks, a key product for us, to be included as the recent Parkland Town Hall revealed classroom doors did not lock from the inside. In Colorado, both the Senate and the House have adopted budget amendments to set aside funds to school resource officers and building upgrades to improve school security. Again details are pending, and we're involved. In Maryland, Governor Larry Hogan proposed spending $125 million to enhance school safety plus $50 million annually for the school resource officers. In New Mexico, lawmakers recently approved $46 million for public school security projects over the next 4 years and created a task force to explore the challenges of school violence and classroom safety. We worked with legislators to help to help drive best practices in the creation this legislation put forth. And here in our own backyard in Wisconsin, legislation is creating a $100 million school safety plan, at which we were included to advise on. This will include grants for schools to enhance building security, with an increased focus on trauma-informed care, and stricter reporting requirements for bullying incidents and threats of violence. And finally, Tennessee has announced a $35 million Safe School Act, and we're advising them on best practices here as well. I'm going to stop here, as these are just some of the examples of things that are going on. The market is turning in our favor, and while our Safety & Security may not be a huge revenue and earnings contributor this year, we're confident it will be in the years to come. And we have further ideas in progress to continue to expand this area and this offering. Our strategy is about being proactive, innovative and building partnerships with our customers while supporting and challenging them every step of the way. We are no longer the catalog people, and we don't want to be thought as that. We're thinking about and creating disruptive innovation to deliver better outcomes for our customers and our shareholders, and the future looks bright. Thank you, and I'll now turn the call over to Ryan. Ryan?

[Ryan Bohr, executive]

Thanks, Joe. As Joe mentioned, Q1 results as reported do not tell the full story with respect to how 2018 performance is trending. We can and do experience significant timing fluctuations, both with respect to when orders are booked and to when they are ultimately shipped. The core metric for our business is how orders build each week heading into the peak shipping months of July, August and early September. Although Q1 experienced sales growth of 2.2% over prior year, Q1 bookings were relatively weak compared to prior year, with the exception of the Furniture category. However, the second quarter has been -- has been shown considerable strength across the board, as Joe mentioned. Some additional information around that, for example, in the second quarter, 10 of 13 regions are showing strong positive growth, 7 of which are showing growth of 10% or more. In the majority of states, we are showing strong booking trends in Q2. In fact 23 states are showing year-over-year booking growth greater than 10% in the quarter so far. And please note that both of these measures exclude project Furniture and Science Curriculum and the impact of Triumph Learning. These trends support our view that we are building momentum heading into the peak and on track to achieve our full year growth objective of 3% to 6%. As a point of reference, bookings to this point in the -- in 2017 accounted for 28.8% of full year sales. We have referenced the strength in Furniture projects. This is important not only because we expect it to help us deliver a strong sales number in 2018, but for other key reasons, such as: learning environments are at the heart of the 21st Century Safe School value proposition. Furniture projects typically presents an opportunity to bring more than just furniture to the customer such as classroom supplies, Safety & Security items and learning materials. Our ability to leverage these opportunities in this manner is a clear competitive differentiation. And finally, successful projects can open or strengthen relationships with customers at the highest level. But as it relates to the specific strength we're seeing, Furniture project bookings are up nearly 37% year-to-date, and the pipeline is strong and growing. Our team is executing very well in this area. We have the stated objective to grow the overall Furniture category to $300 million or more over the next few years. We have the product, the team and are making the investments to make this happen. School Specialty has been at this level before, and we are confident we can get there again. Sales of the Triumph product line year-to-date, are slightly down. Limited product development efforts relating to this product line, prior to our ownership, dampened the near-term growth prospects for the product line. This was anticipated, and we have new product development leadership in place over this product line, and a number of product enhancements and extensions are under development. One key area of momentum driven by the TL acquisition is the strengthening of our I&I sales team, which is primarily focused on selling the Triumph product line and the ELA and math supplemental learning products, previously reported as our Reading product segment prior to the combination with a portion of Instructional Solutions to form the Instruction & Intervention category. Through early May, this portion of Instruction & Intervention is up over 5%, and we are seeing even stronger growth in proprietary anchor products such as Spire and Wordly Wise family of products, which are up of more than 15% collectively. This bodes well for the long-term outlook of this high-margin product category. In both the 10-Q and in the investor presentation, we referenced some margin pressure relating to certain key contracts. This is primarily in reference to the transition to the new 5-year contract with New York City, which went into effect in April 2017. Our previous contract had been in place for approximately 7 years when you include extensions. The year-over-year impact of this transition will be primarily felt in the first 4 months of fiscal 2018 for 2 reasons: one, orders booked in the first 4 months of fiscal 2017 were under the old pricing agreement; and two, New York City typically places more than 50% of their full year order volume in the first 4 months of the calendar year, with April being the primary month. Outside of the New York City contract, we are seeing a year-over-year margin pressure of approximately 180 basis points for Supplies orders that flow through strategic agreements, bids and contracts. This is consistent with our expectations and underscores the importance of leveraging our position on these strategic agreements to drive sales of our brand and improve penetration in higher-margin product categories. Importantly, we are seeing growth in these relationships and purchasing vehicles, as year-to-date billings, as of early May, are up 2.5% year-over-year, and bookings are up an even greater amount. Next I'd like to touch on our strategic pricing initiative with -- which Joe referenced. Effective in early 2018, we made significant adjustments to our list prices and the discounted prices published on our e-commerce sites. The adjustments were based on an in-depth analysis of the competitive landscape and our internal bidding and quoting activity. We concluded that our list prices and the discounted prices published on our e-commerce sites in certain areas was not competitive as they needed to be, and were having a negative impact on, a, generating growth among customers who were not accessing major national, regional or state purchase agreements; and, b, our ability to achieve greater growth or greater market share in the fill-in, individual or transactional orders purchased with a standard list less discount or using the web. Our work has also revealed that a number of our branded and/or proprietary items were underpriced based on the product quality and or the competitive positioning versus national brands or competitors in the market. In the early part of 2018 as back-to-school orders build, we expect this will initially put some pressure on our margin rates, but ultimately, we expect it to drive growth and penetration opportunities and be accretive to our bottom line. We see signs that our strategic pricing actions are beginning to have a positive impact on our growth trajectory. When we look at the Supplies category and we exclude New York City, which has its own unique dynamics in 2018, our year-to-date supply bookings through this past Tuesday are up over 6%. The key now is to leverage improving penetration and drive sales of our School Smart brand and the basic Supplies category, and expand penetration in higher margin, less penetrated categories, within which we have strong brands to leverage, such as Sax, Childcraft, Abilitations, Frey and Sportime, among others. The Team-Sell model is designed to accomplish just this, and we feel we are moving in the right direction. I'd like to shift the discussion and talk about other factors we see driving year-over-year fluctuations with our customers. Over the past few weeks, we've taken a close look at -- and within the Tier 1 and 2 districts, the 20 districts that are experiencing the largest increases and the 20 that are experiencing the most significant declines year-over-year. And there are some consistent themes when we look at both groups. Among those large districts experiencing the greatest growth, common themes include: one, e-commerce integration, such as, a custom portal or a connection with their internal ERP procurement system. A second kind of theme is strength in multiple product categories, and their recent penetration in a new category, which is driving outsized growth. And the third most common theme amongst these districts that are performing exceptionally well is a strong relationship at the district level. When we look at some of the districts that are performing weakest year-over-year, there's some common themes that emerge as well. The most common factor we see our budget issues. And in these situations there's commonly a view that orders will improve as the year progresses. Another common issue noted was a lack of relationship, either tied to the fact that a previous TFM or person covering the account was not being effective or there's a gap in coverage as we have restructured the sales organization over the past 18 months. A third factor was a significant prior year opportunity, which may not be repeating in the current year, which kind of points to the natural ebb and flow with our business. There are also specific situations of business lost to competition. Interesting though, the references to losing business to competition almost always referenced a single product category and competitor, for example, basic Supplies business lost to XYZ office supply company. Interestingly, in no cases was business fully lost. Additionally, in almost all of those this situations, ideas and opportunities have been identified to improve the business with the customer. I share these findings because they continue to reinforce the underpinnings of our strategy: Strong relationships at the district level can drive delivery of the full value proposition. Integration into our customers' procurement processes and platforms continues to be a key driver of penetration and stickiness. Our strength is the depth and breadth of our offering. We can achieve substantial growth within a district when we leverage our full offering. Finally, we are difficult to entirely displace within a customer. We need to be sharp in all areas of our offering from the basic commodities to the niche specialty areas. As it relates to the broader range of districts that make up the balance of our core market, we are seeing positive signs as well. In the presentation, we noted year-to-date bookings in Tier 5 through 8 are up 11.4% year-over-year, and Furniture projects are driving the strong growth. And while we noted the strength in Furniture, we are -- we are confident this segment of our customer base is moving in the right direction. Specifically, when I look recently at the performance excluding project Furniture, Tier 5 through 8 bookings in the second quarter to-date are up nearly 4% overall, and the Supplies category is up more than 6%. The future of School Specialty is not about engaging in price wars with office and school products distribution companies. Rather, our focus is on partnering with our customers to accomplish objectives aligned with the 21st Century Safe School value proposition. However, we recognize that providing our customers the right products at the right price is a component of a much larger value proposition, a value proposition that we are uniquely positioned to deliver. I will quickly touch on some strong momentum in 2 other distribution channels that we expect will have a positive impact on our growth plans for 2018. First, through early this week, e-tailer book sales were up 75% year-to-date, and we feel we are only scratching the surface with respect to the growth opportunities this channel represents. In fact, we have recently dedicated certain team members in marketing, merchandising and operations to exclusively focus on our e-tail partners to properly capitalize on this opportunity. Second, we are experiencing strong sales of products through donorschoose.org, an innovative charity that powers crowdfunding of classrooms in need. This is beginning to represent a meaningful growth opportunity for our business. Finally, I will close with some quick comments on SG&A. First, we are slightly positive to our internal plan as it relates to SG&A. Recognize, we expect year-over-year increases relating to transportation cost, fulfillment center wage rates, commissions, incentive compensation and the Triumph Learning acquisition. Year-to-date, transportation cost on stock shipments are running approximately 15% higher than last year. We expect this year-over-year increase to moderate through the peak seasons due to the scale and volume of shipments, but the cost -- but these costs have increased, and they are in line with expectations. As a result of the tight labor market and a strategic shift to a slightly higher permanent staff level in the fulfillment centers, we have seen our labor rates for hourly staff members increase by 3.7% compared to year-to-date March 2017. The bottom line is that our SG&A outlook remains intact, and we expect cost improvements in a number of areas to offset the areas of increase noted above. With that, I'll turn the call over to my colleague, Kevin Baehler.

[Kevin Baehler, executive]

Thank you, Ryan, and good morning. I would like to start by calling your attention to the accounting change which Joe mentioned that became effective in the first quarter, including both how the new accounting standard impacted our Q1 results and clarify the expected full year impact. The details regarding the new accounting principle are discussed in Note 4 of our Form 10-Q and also summarized on Page 12 of our investor presentation. In the first quarter 2018, the company adopted the new revenue recognition standard commonly referred to as a ASC 606, which in addition to changing the timing of revenue recognition for certain types of transactions also changed the timing or periods in which catalog expense is recognized. The adoption of ASC 606 will cause some variances in the year-over-year comparability of our quarterly results, as the standard did not require the restatement of prior periods. Rather, the prior period impact was recorded as an adjustment to our beginning 2018 equity. Despite some expected variability in our quarterly results, the company expects the full year impact of ASC 606 to be minimal as it relates to the company's revenues, gross profit, SG&A and adjusted EBITDA. However, as we have indicated, the year-over-year comparabilities between quarters is impacted. Regarding some of the specific adjustments related to ASC 606 and the impact on our first quarter, the tables on Page 12 of the investor presentation summarize the impact on both the P&L and the balance sheet. From a P&L perspective, ASC 606 did not have a material impact on the timing of or -- of our revenue or gross profit. In other words, the timing for the recognition of a great majority of our revenues in Q1 was not affected by the new standard. The Q1 net impact from a revenue and a gross profit perspective was $722,000 of accelerated revenue recognition related primarily to Furniture revenue associated with projects and $217,000 of acceleration of gross profit. We anticipate the quarterly impact related to the acceleration of revenue and gross profit to be somewhat higher in the second and third quarters as compared to this first quarter impact, commensurate with increased volumes in Q2 and especially Q3. However, these increases in Q -- in quarters 2 and 3 are expected to be offset in our fourth quarter, resulting in a minimal full year impact. As it relates to SG&A costs, ASC 606 primarily impacts the timing of catalog expense. Under the prior accounting rules, we capitalized our catalog cost for the balance sheet as deferred catalog costs and amortized those costs over the period in which we recognized revenues generated from the catalogs. Historically, this resulted in the recognition of the majority of our catalog expenses in quarters 2 and 3, consistent with the periods of higher revenue. Under ASC 606, catalog costs are now recognized as SG&A expense in the period in which the cost is incurred. The majority of our catalog costs are incurred in quarters 1 and 4. Thus, we expect unfavorable quarterly catalog variances in quarters 1 and 4 in 2018 as compared to prior year quarters, offset by favorable quarterly variances in quarters 2 and 3 of 2018. Due to the change in the timing of the catalog expense recognition, we did record an incremental $4.2 million of catalog expense in the first quarter. We expect to realize offsetting decreases in catalog expense in the remaining quarters of 2018. And similar to revenue and gross profit, the full year impact on SG&A, primarily the catalog expense and adjusted EBITDA is expected to be minimal. The adoption of ASC 606 also had an impact on our balance sheet as shown in Note 4 and in the Form 10-Q and Page 12 of the investor presentation. Key balance sheet changes include: number one, a reduction in current assets associated with the immediate expensing of deferred catalog costs. Number two, unbilled revenue related to the acceleration of revenue for our Furniture projects is reflected now as an other current asset as compared to accounts receivable. The amount in accounts receivable reflects only billed revenues. And finally, the deferred revenue line item, a current line item in previously filed balance sheets, has been renamed under the new standard as contract liabilities, as you will see in our current filings. In addition, accrued customer rebates, previously reflected in other liabilities, are -- have been reclassified into the contract liability balance. To summarize, we will not have a material impact on the company's 2018 full year revenue SG&A, adjusted EBITDA or cash flow as a result of the adoption of ASC 606, however, we will experience some variability in the comparisons of fiscal 2018 quarterly results compared to the corresponding prior year quarters. For the first quarter of 2018, ASC 606 negatively impacted our SG&A by $4.3 million and our adjusted EBITDA by $4.1 million. And again, through the remaining 3 quarters of the year, we expect those negative impacts to be offset by corresponding positive impacts during the remainder of the year. Moving on to other areas of note, our effective income tax rate in the first quarter was 24.8%, relatively consistent with the statutory federal plus state tax rate and approximates our estimated full year effective tax rate. The increase in the effective tax rate as compared to last year's first quarter rate of 2.2% was related to the reversal of valuation allowances in the fourth quarter of 2017. While the first quarter 2018 tax rate approximates the new statutory tax rate following last year's tax reform, we continue to expect our cash tax rate in 2018 to be in the low single digits. This low cash tax rate reflects the recognition of a portion of certain deferred tax assets such as our estimated 2017 net operating loss, AMT credits and intangible amortization as well as the impact of the immediate deduction of certain capital investments. We project cash taxes to increase to between 15% and 20% in 2019 and to approximate the new statutory rate by 2020. Moving on to the balance sheet. Quarter end working capital of $116.8 million is down $3.6 million versus working capital at the end of Q1 2017. After adjusting the first quarter of '18 working capital balance for the combination of, one, ASC 606, which reduced working capital by $7.7 million, primarily related to the deferred catalog costs, and two, for approximately $5 million of incremental working capital -- year-over-year incremental working capital associated with the acquisition of Triumph Learning, our year-over-year working capital balances are down approximately $1 million, despite modestly higher revenues. Overall, our working capital levels and metrics are generally consistent with our expectations. Inventory levels are running slightly ahead of our expectations due to the combination of shifting orders from Q1 into Q2 and the timing of inventory receipts, primarily related to imported products. We continue to expect inventory levels to be consistent with our expectations during the season. As for debt levels, our net debt is up $12.8 million at the end of Q1 2018 as compared to Q1 2017 despite positive free cash flow of nearly $14 million over the last 12 months. The drivers of the incremental debt include $19.4 million of incremental debt that we used to fund the Triumph Learning acquisition, $4 million of refinancing fees paid last April for the -- related to the refinancing of our debt, and third, we had noncash interest accretion of $3 million in our deferred payment obligations. You will also note that our ABL borrowings at the end of Q1 are up year-over-year by $18.6 million. This is partially related to a combination of a lower term loan balance and increased cash levels at the end of quarter 1 2018 compared to last year. Although ABL levels are up year-over-year. We remain very comfortable with our availability levels, and we entered the second quarter with approximately $53 million of availability cushion. Finally, we incurred approximately $1.6 million of restructuring and integration related costs in the first quarter of 2018, with the majority of these costs, approximately $1.3 million, related to the integration of Triumph Learning. The integration of Triumph has been essentially completed at the end of the first quarter. As such, we anticipate incurring only a minimal amount of integration-related cost during Q2 and beyond. With that, I will turn the call back over to Joe.

[Glenn Wiener, executive]

Operator, we're ready to begin Q&A.

[Operator]

[Operator Instructions] And our first question is from Kevin Tracey from Oberon Asset Management.

[Kevin Tracey, analyst]

Do you have a better sense of what state budgets are looking like for fiscal 2019 compared with fiscal 2018? And, I guess, related to that, there's been a lot of news about the various states are giving teachers raises and protests happening in a number of more states. And I'm wondering, if you think that can have a material impact on your business just as more dollars flow to education and maybe alleviates some pressure on things like Supplies and Furniture?

[Ryan Bohr, executive]

Sure, Kevin. This is Ryan. I'll take the first piece of it, and then Joe, I can turn it over to you. As we commented in our year-end conference call, overall the picture is improving as it related to school budgets in the -- our current year. And we really have no change to that outlook. When we look at our year-over-year performance, some of the areas that were weaker last year are picking up because of budget improvements, but that being said, we always see a balance in the market. There are certainly still some districts that have tight budgets, even if a state is doing better. So nothing has really changed in our overall outlook. And in the -- to your second point, the competition for dollars and how dollars are allocated are always -- will always impact our business. And there's always going to be an ebb and flow between where dollars are allocated. Increases to the allocation towards teacher wages have been pretty consistent over the years, and certainly there are pressure in certain states to increase that allocation. That is a situation that can affect us kind of on a case-by-case basis in certain areas, but overall, we do not see that as having any sort of material negative impact on our business.

[Kevin Tracey, analyst]

Okay. All right, and the $300 million goal for Furniture sales in the next few years, can you talk about what you need to do to reach that? In the past, you've talked about the market environment being favorable, but it would seem like you expect to grow quite a bit faster than the market. And then can you -- you've mentioned, you've [ been at ] $300 million in the past. Can you talk about why sales fell so far in that category?

[Ryan Bohr, executive]

Sure, a couple of quick things. So we have, in the past 2 years or I'd probably say about 18 months or so, we have increased the number of specialists we have focusing on the Furniture category. That is an area of our market that does benefit from very specific expertise in the field. And so we've invested in that. We are also investing in improving our overall Furniture support operations. It's an area of the market that does require significant amount of support, whether it's in the design-quoting process or managing installation and project completion, it is -- it requires a support -- a higher level of support than other areas of our business. And we have been investing in not only those resources, but also in process improvement to make us more effective. What gives us confidence is the degree of opportunity we see in the market, and that market does remain still quite fragmented and with a lot of local and regional participants. We feel we are uniquely positioned as a core national player and also as a player which has kind of a vertically integrated offering in many areas of our Furniture business. With respect to the decline, the -- this was -- the Furniture market from our peak was an area that was impacted by the last recession. The biggest area of decline in school budget spending was related to capital outlays, and capital outlays are what fund a key portion of the Furniture business. So the recession had an impact. The market also changed with respect to some of the national furniture manufacturers changed their relationship with dealers and kind of went from the national dealer relationships to more state or local. And then I think the third thing was as our company went through some difficult times, this is an area where we lost some key people, and those people maintained some of the Distribution relationships and partnerships with the major manufacturers. And also, with the customers in their geography and by them leaving, it spawned competition in certain markets. As we've been rebuilding this business, we've been rebuilding it much more -- it's much stronger than it was previously, and we are -- our proprietary product lines play a much more prominent role in our offerings.

[Joseph Yorio, executive]

Okay, Kevin, this is Joe. I apologize my call dropped. I do want to chime in with a little bit with some firsthand experience. I've spent time a few weeks ago at the National School Board Association conference in San Antonio, so I got a chance to speak with the a lot of superintendents and school board members firsthand about budgets. And to Ryan's point, well, while there's an ebb and flow in the battle for dollars every year, particularly when you come to teacher wages, that perception was they didn't view this as any different from prior years. As a matter of fact, they hoped that they would get some budget increases, especially those areas that were under budget pressure from prior year, specifically last year. And they all did have an input that they thought, again, as I had mentioned in my comments, that there would be additional funds related to Safety & Security that would impact -- that would not impact dollars associated to other segments of their budget. And there was only one real state that talked about that deferring some, and I think off the top of my head that might have been Alabama, that they were going to use some tech funds, dollars that were going to dedicated to our AV Tech and technology to divert those funds to use for Safety & Security. But for the most parts, they seemed pretty confident that budgets would remain consistent. They were also, as we mentioned, Ryan had talked about filling their shoes, continuing to look for external resources to further bolster their budgets and spending.

[Operator]

Our next question is from Patrick Retzer from Retzer Capital Management.

[Patrick Retzer, analyst]

So congratulations on qualifying for the uplisting in the stock. I think that's going to be a big deal in terms of the investor audience that can invest in School Specialties, and also congratulations on staying on track for an excellent year here even though you had some orders move around and so forth. On Slide 18, you've got your breakdown of leveraged free cash flow outlook, and you show $21.1 million going toward cash used in investing. As we progress through this year and into next year, a lot of those projects will come to fruition. Is that correct?

[Kevin Baehler, executive]

Yes it is.

[Joseph Yorio, executive]

Yes it is true. Yes.

[Kevin Baehler, executive]

That is true, Pat. In that -- This is Kevin speaking. That is true. As we have communicated on prior calls, there are some significant projects that have been under way the past couple of years. We've talked about a phone system upgrade. We've been investing heavily in our e-commerce website. But those projects are peaking this year, and we will begin to see those dollars that are used in the capital investing area declining beginning in 2019.

[Patrick Retzer, analyst]

Okay, great. And then Warren Buffet had his annual meeting this last week. He's pretty well followed, and he's always talking about buying companies with wide and deep moats, and it sounds like the outlook for the 21st Century Safe School proposition is very strong and exciting, and combining that with just the depth and breadth of your product offerings, it seems to me there really is no single company positioned to compete with you folks. Is that correct?

[Joseph Yorio, executive]

Pat, this is Joe speaking. Again, I'm going to try to refer back to my meetings in Texas, and I would say absolutely, yes. I think our biggest challenge, and you heard me mention in my comments, is changing the perception of School Specialty. And so you're going to see us on, in addition to the roadshows that Ryan and I have been doing to get our story out and to gain much larger focus on our marketing particularly through social media so we're not thought of as the catalog people. We've got 50-plus years of history that we've got a -- now we've got the huge -- for example the JCPenney Christmas Catalog. Nobody views us as the huge catalog people but they don't view us as people that are far beyond just basic school supplies. And so as we view ourself much differently, and as we talk about creating a disruptive innovation, we need to get more and more people thinking that way about us, and I think with what we're doing with 21st Century Safe School, engaging at the highest levels of school administration and school board members and becoming a more integrated partner, it's changing their perception of us, which then opens many more doors, particularly just beyond the school environment. So it's an exciting time here. I think there is no true competitor. As we continue to expand with our Safety & Security offering, and you heard me mention about we've got some other exciting things we're working on, as we continue to expand this line, I'm not sure anybody can do what we do, but we've got to make sure people understand we can do what we do. And right now, we're kind of in an evolution of that process of them thinking of us as the catalog guys and us moving to where we really want to be as a true partner with the 21st Century vision.

[Operator]

[Operator Instructions] At this time, I'm showing no further questions. I would like to turn the call back over to Joe for closing remarks.

[Joseph Yorio, executive]

Thank you, operator. I'd just like to close thanking everybody for their continued support and just we're going to continue to drive this business forward and make some really creative innovative changes. So stay tuned. We're going to deliver on our commitment and there's some exciting times ahead. So again, thank you very much, and have a great day.

[Operator]

Ladies and gentlemen, thank you for your participation today's conference. This concludes the program, you may now disconnect.