Q1 2021 Steelcase Inc Earnings Call

July 1, 2020

[music].

Good day, everyone and welcome to still cases first quarter fiscal 2021 conference call. As a reminder, today's calls we recorded.

For opening remarks, an introduction I would like to kind of the competition within Mr., Michael Mer director of Investor Relations and financial planning and analysis.

Thank you Sarah good morning, everyone.

Thank you for joining up with a recap of our first quarter fiscal 2021 financial results here with me today, or Jim Keane, President and Chief Executive Officer, and Dave Sylvester, Our senior Vice President and Chief Financial Officer.

First quarter earnings release, which crossed the wires yesterday is accessible on our website. This conference call is being webcast and this webcast as a copyrighted production of Steelcase Inc. a replay of this webcast will be posted two IR dot steelcase dotcom later today.

A discussion today may include references to non-GAAP financial measures and forward looking statements reconciliations to the most comparable GAAP measures and detailed 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 tax 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.

Thanks, Mike and good morning, everyone.

It was just three months ago, we released our results for the fourth quarter in fiscal year 2020, and it was a great year. It's the best in nearly 20 years and during our call with all of you. We discuss how it was clear we were facing the worst human health crisis in our lifetimes and we knew the economic impact with the extraordinary.

I told you we had two objectives to keep our people safe and to protect our business.

Three months later I think we've done both.

We modified our production lines around the world provide adequate separation between workers and as we restarted these lines, we ramped up production speeds and staffing gradually.

Where possible our office based employees work from home price.

And in our offices, we implemented modifications to keep everyone space.

Three months ago, we were aware of a few positive cases and since then unfortunately, we've had other employees around the world contract disease. It's the best of our knowledge. We have had no transmission between employees in our factories are offices. So we are keeping people safe.

We're also protecting our business again three months ago, we had already closed or significantly restricted production in many of our factories around the world. We had already taken dramatic actions to reduce our fixed cost through salary cuts in spending reductions. We knew it was going to be a very tough quarter ended was with $21 million adjust.

Net loss as you saw in the earnings release.

But those quit decisive actions really helped us avoid a much deeper loss and we actually did better than some scenarios, we had modeled internally.

Of course, we're also focused on protecting and strengthening our liquidity.

The cost reductions really help but we were also able to work with our customers dealers and suppliers to optimize working capital.

We improved our liquidity position by $98 million in the quarter and finished with $799 million of total liquidity that puts us in a very good position to weather whatever comes next.

I'll give a little more detail on how the quarter played out.

Our started out relatively strong orders were about even with the prior year and revenue was up.

But in the last two weeks of March as stay at home orders were put in place in the Americas in EMEA and many of our factories began closing orders and shipments fell off quickly.

April was an incredibly difficult months of course.

Revenues following 60% versus the prior year.

In the Americas. It took a couple of weeks to reschedule our factories to run orders for customers considered to be an essential businesses and then we ramped up production gradually as we called that workers.

By May our shipments began to increase as restrictions were beginning to each but our lead times for new business remained longer than normal because of our large backlog.

That April and May period was pretty chaotic as we had a change customer delivery dates multiple times as our situation changed and sometimes orders, we shifts could not be delivered because of changing local restrictions.

Now in June lead times for most products were back to normal and our factories have been quite busy.

Only our Mexico in India factories continue to face some local restrictions.

We expect to have a much better second quarter compared to our first quarter, because we have so much backlog to produced and shipped.

We're going to be particularly busy particularly in the Americas.

And we expect to be profitable.

So what's next obviously orders are down significantly because in most places around the world work is just starting to come back to the office. Some customers are getting ready to bring their employees back to work by making temporary inexpensive modifications to their offices often with our help.

However, in more dense metropolitan areas challenges around elevators, and public transportation will likely force many companies to delay of returning to the office until the virus is contained.

We are working with these customers to provide work from home packages. They can offer to their employees to provide a more ergonomic and productive work from home experience.

We do see projects in the pipeline in every region customers with new leases and existing projects on the books are likely to complete those projects. So perhaps on a delayed timeline.

We expect to see continued strength in the government and education sectors.

But many other customers are doing what we're doing protecting their businesses by cutting back on short term discretionary spending as they prepare for a challenging year ahead.

Our conversations with customers are beginning to shift towards actions. They can take now to help them prepare for the next evolution of the office.

We've all seen article, suggesting the office is dead and we will all work from home.

Those types of articles were being written 20 years ago and they were wrong, then and Theyre wrong now based show up every time, there's a new technology like laptops, and then high speed Internet and White Fi and now low cost video conferencing platforms.

The predictions are always wrong, because it's not about the technology, it's about the people.

It's not about whether you can have everyone work from home in the short run it's whether in the long run you can win that weighs versus your competitors, who are always innovating always transforming and always disrupting.

Over 20 years, Weve occasionally seeing customers announced large scale work from home programs and then two or three years later those programs are quite we dismantle and employees are asked to return to the office.

It takes a while for the problems to show up but we always show up.

On the other hand, it's always been a good idea to give employees the flexibility to work from home from time to time. The workplace is an ecosystem of places both in the office and outside the office. We believe as we emerged from this crisis working from home will be embraced by more companies as part of a holistic approach.

Notes to more effective work.

And we will continue to expand our products and our programs to support working from home.

But the office is far from debt.

In fact, we believe customers and their employees will expect more from the office as we look to the future and that's where our conversations are centered.

Meeting spaces will need to more fully support removed participants.

When employees need to really focus on individual work spaces must provide privacy and separation without compromise.

Nobody should feel they have to work from home to get worked on.

Employers will reevaluate workstation density and desk sharing policies to address raised awareness of infection control as part of wellbeing.

And spaces need to be far more flexible so they can adapt more easily changing conditions.

We're excited about the future of the office and we continue to help our clients imagine what might the next.

Yesterday, our board of directors increased our quarterly dividends to 10 cents per share, reflecting the strength of our liquidity position and the expected improvement from the first quarter.

The dividend is still well below last year. Since we expect this will be a challenging year and given the impact on the global economy. The challenges could extend into next year.

We're not providing guidance, but we are committed to continue to take whatever actions are needed to manage our business through the crisis.

Finally, I want to reflect on the conversations we've been having in America and around the world about racism diversity and inclusion.

We've been having those same conversations within steelcase and listening is always the best way to start.

We're also providing opportunities for all of us within steelcase to learn more about these topics.

And we're also taking action for example by setting goals to increase employment of underrepresented groups.

We're also continuing to work with the communities in which we do business to promote social Justice. Most of our work is through social innovation for instead of just making contributions we offer opportunities for our own people to put their skills and talents to work in helping nonprofits in our community.

For example, during the worst of the crisis, we made masks and screens for our local hospitals to use when PE was not available.

This year in addition to our regular internship program, which we kept in place. Despite the crisis for sponsoring 50 additional summer interns from Grand Rapids public schools.

I believe the points of light organization included Steelcase in new Civic 50, which they consider the most community minded companies in the nation.

For a company of our size this was truly an honor.

We are excited about what we can do next.

So in summary, we knew the first quarter would be top and we made some tough decisions. It turned out a little better than some scenarios, we modeled and our liquidity is.

We expect the second quarter will be better as we work through the backlog, but we could face soft demand as customers get ready for what's next and economic conditions remain uncertain.

We're confident the office will remain the best place to work and we'll continue to evolve even is working from home rises in importance.

And we continue to work on being a better company and helping improve the communities in which we operate.

Now I'll turn it over to Dave for more detail on our financials.

Thank you Jim and good morning, everyone. There is a lot of material to cover this morning's call start by summarizing a few key takeaways.

First the management team took decisive and broad based actions to reduce our cost structure due to the unprecedented nature and speed of the government required closures across many of our markets, which ultimately drilled the 41% revenue decline.

As a result, our first quarter adjusted operating loss of $35 million was approximately $70 million smaller than it would have been had we not taken such aggressive actions as quickly as we did.

Second strong accounts receivable collections and a significant increase in customer deposits contributed to sustaining our very strong liquidity position at the ended the quarter, which approximated $800 million and included $162 million of coli balances.

Third we are projecting our strong backlog of customer orders and the continuation of significant cost reduction efforts will result in operating income for the second quarter, which we estimate will more than offset the first quarter adjusted operating loss and drive year to date profitability halfway through the fiscal year.

And lastly in the midst of continued uncertainty we are unable to provide an outlook for the remainder of the year, but to help with your modeling we're sharing that we currently estimate our breakeven points for adjusted operating income is approximately $600 million of quarterly revenue with the current level of salary reduction.

Ones and other cost containment efforts, we have in place.

To better understand the impact of the significant revenue decline on our first quarter operating results I believe its most insightful for me to walk through a sequential comparison to the first of the first quarter in the fourth quarter.

To start we should first adjust the fourth quarter to exclude a few nonrecurring items all of which we are disclosed in detail last quarter.

These items include Polyvision is operating results and the net gain related to the sale of Polyvision.

The impact of the extra week.

And variable compensation expense related to some discrete tax benefits adjusted for these items, we estimate fourth quarter revenue would have approximated $885 million and operating income would have approximated $56 million.

This compares to our first quarter revenue of $483 million and the adjusted operating loss of $35 million or an approximate $90 million reduction in our adjusted operating results.

Without the actions, we took to reduce our cost structure to $402 million sequential decline in revenue on its own would've reduced operating income by an estimated $160 million or more.

The related decremental variable margin of approximately 40%.

Benefited from the impact of a couple items first we made the difficult decisions to enact temporary layoffs across much of our hourly workforce in the us and some other markets, which maintains a variable nature of our direct labor costs during a period of dramatic revenue decline.

Second we recorded $23 million of lower variable compensation expense, which had a positive effect on the decremental margin.

That is until we crossed variable compensation thresholds as the revenue declined deepened and we began posting losses.

As a partial offset to those benefits we experienced some labor in logistics inefficiencies related to the shutdown and restart of our operations.

Plus we funded various temporary employee benefits like the full funding of employee health insurance premiums returned to work incentives and free lunch programs, but these items had a smaller effect on the decremental variable margin.

Beyond these variable items, we took significant actions to reduce our remaining cost structure, which had the effective reducing our spending in the first quarter by an estimated $70 million and lowering the overall decremental operating margin to approximately 22% in the quarter.

The actions included significantly reducing salary costs through temporary reductions in hours of base pay plus we substantially eliminated semi variable costs and aggressively pulled back on project and other discretionary spending.

We took similar actions around the world, but the overall decremental operating margins varied by segment approximating more than 20% in the Americas, approximately 20% in EMEA and less than 20% in the other category each adjusted for the nonrecurring items in the fourth quarter that I mentioned earlier.

Before I move to our liquidity I will cover our income tax benefit in the quarter, which approximated 30% of the pre tax loss.

Historically, we have calculated or tax provision during interim periods by utilizing an estimated full year effective tax rate.

However for this quarter, we recorded our tax provision based on an estimate using only first quarter results essentially as if we were filing a three month tax return.

We took this approach given the heightened uncertainty associated with estimating a reliable effective income tax rate for the fiscal year as well as potential benefits that may be available under the provisions of the cares Act.

As a result, the mechanics of our first quarter tax provision primarily included the following week.

We adjusted the pre tax loss to exclude the non deductible impairment charge as well as some other smaller items.

And then we estimated our international and US provisions for the three month period, assuming the us portion of the pre tax loss would be carried back five years under the cares act and reflect the federal benefit of 35%.

And lastly, we revalued net deferred tax assets in the us that we estimated would reverse in the period.

And contribute to the net operating loss, which can be carry back five years under the cares act and thereby generate tax benefits as a higher statutory rate of 35%.

The first quarter income tax benefit of approximately $17 million included an estimated $10 million of net benefits related to the cares Act.

Our ability to realize the tax benefits recorded in the first quarter is dependent on our full year results, which could be substantially different compared to the first quarter.

It's possible we may be in a better positioned to estimate an annual effective tax rate for this year in a subsequent interim period and it's also possible. We may continue to take a year to date approach in the preparation of the second quarter tax provision.

In either case, the effective tax rate recorded in the first quarter may not be indicative of what to expect over the course of fiscal 2021.

Our liquidity increased by $98 million compared to the end of last year. Despite the adjusted operating loss, we recorded in the first quarter.

The cash surrender value of our coli assets increased by a couple of million dollars and the remaining 96 million dollar increase in liquidity resulted from the following inflows and outflows.

In March out of an abundance of caution we borrowed against our global credit facility and $245 million and borrowings were outstanding at the end of the quarter.

Consistent with many other companies that initially took a cautionary approach to liquidity and credit facility access we will be considering whether to repay some or all of the outstanding balance in the coming months based on the level of stability in the overall capital markets.

We returned $51 million to shareholders through share repurchases in dividends in the quarter. The share repurchases included those made to satisfies participants tax withholding obligations upon the issuance of equity awards.

Plus we repurchased 3 million shares during the first three weeks of March under a tenbfive one repurchase plan, we entered into in December 2019.

The dividend of seven cents represented a 9 million dollar reduction compared to the dividend paid in January 2020, and with the increased to 10 cents approved by the board yesterday, our July dividend represents a $6 million decrease compared to the prior year.

We funded approximately $160 million of variable compensation payments and benefit plan contributions relating to fiscal year 2020, as well as retirement and deferred compensation plan payments.

Customer deposits increased by $95 million in the quarter largely due to temporary discounts we offered our dealers to incentivize them to pursue customer does deposits and sustained positive banking relationships.

The remaining net decrease of $33 million was driven by our operating loss in the quarter, along with capital expenditures of $9 million, which were 36% lower than prior year.

A modest use of cash related to working capital in the quarter reflected a $116 million reduction in accounts receivable, which was more than offset by a significant reduction in accounts payable due to our reduced spending levels and a $33 million increase in inventories, which was driven by government restrictions.

And the increase in our backlog of orders.

We finished the first quarter with a strong backlog of customer orders, which totaled $751 million and was 11% higher than the prior year.

We have seen some order cancellations, but so far they have remained relatively small and isolated.

And some were re ordered with different applications and door at smaller amounts.

Most of the backlog is scheduled for manufacturing and delivery by the end of August and all of our manufacturing and distribution facilities are currently open although a fewer currently subject to some government restrictions on their operations.

It's possible some of the backlog, maybe further delayed or even cancelled and and or our operations could be impacted by changing government restrictions.

The level of revenue, we posted in the second quarter will be dependent on our ability to manufacture in ship, the backlog and or our customers' ability to receive an install the furniture as well as the conversion rates, we experienced relative to new orders received throughout the quarter.

It's also important to note that back the backlog number does not include dealer incentives are various sales returns and allowances, which are an offset to revenue and can vary relative to revenue and performance from quarter to quarter.

We anticipate significant improvement in our second quarter revenue compared to the first quarter, but with so many variables in play we're not providing an estimated revenue range for the quarter.

We expect the incremental operating margin related to the sequential revenue improvement in the second quarter to be better than the decremental operating margin we experienced in the first quarter relative to the sequential revenue decline.

The second quarter incremental margin will benefit from variable compensation expense not being accrued until we offset the first quarter adjusted operating loss and begin to exceed return on invested capital target thresholds.

However, it will be somewhat dampened by the easing of our salary reductions in may as well as the possible reinstatement of some additional discretionary spending in the second quarter.

All in.

We estimate the second quarter incremental operating margin percentage related to the sequential revenue improvement will range between the mid twentys to the low thirtys.

Thereafter, as we approach the back half of the year, our revenue will be dependent on the state of the broader economic recovery and capital spending which will be influenced by CEO and CFO sentiment.

There are positive scenarios, where in employees returned to the office more broadly and in preparation companies invest to reconfigure and retrofit their spaces to improve social distancing health and safety.

And there are other scenarios, we're in one could imagine the company's extend their work from home strategies and prolonged capital preservation.

Larger cities may be impacted for longer periods of time than smaller cities due to concerns related to public transportation and elevator logistics and Tolerability inc.'s certain vertical markets may rebound faster than others.

Our recent order patterns really reflect some of these variations now, but we don't know how long it will last and which sectors are markets will begin to loosen up and get back to work more quickly than others.

Thus, we are unable to provide an outlook for the remainder of the year.

What I will share his some color around our current back breakeven point.

Taking into consideration the current level of temporary salary reductions and other cost containment efforts we have in place.

As I said at the beginning of out of my remarks, we estimate the adjusted operating income breakeven point approximate $600 million with quarterly revenue.

That level of revenue.

I would translate to an approximate organic decline in the second half of the year of between 35% and 40% compared to the prior year adjusted for the sale Polyvision and then in the extra week in the fourth quarter.

Let me stress, though that this is not a forecast.

While orders in June have so far averaged a 34% decline from the prior year compared to the 47% and 42% declines we posted in April and May respectively.

They remain volatile week to week and the prior year comparisons very week to week in month to month as well.

And while we are having a growing number of conversations with customers about how to improve the safety and effectiveness of their offices.

It's too early to predict the timing and magnitude of any related order patterns.

Our breakeven estimates assumes.

The continuation of our current cost reduction efforts, but those may change or take on a different form as we could experience attrition and not backfill all positions or we may choose to increase our investments in growth strategies.

It's also possible that we might take action to reduce our cost structure more permanently. If we think our revenue may remains severely impacted through next year.

We just don't have enough information to make any of those decisions right now which is why we are currently maintaining the averaged 20% salary reduction and keeping very tight controls over our semi variable costs and discretionary spending.

In closing I feel very good about how effectively our leaders are navigating through this crisis, serving our customers taking care of our employees and supporting our community partners.

All while protecting the company and our liquidity.

I remain very impressed with the agility of our dealer partners as well as our suppliers across our global supply chain.

And I cannot say enough positive things about the resiliency of all steelcase employees.

Especially those in manufacturing and distribution.

Many of whom went from working full time in early March two facing restrictions are being laid off for nearly two months and are now back working as hard as ever to fulfill our backlog while in during the heat of the summer months with modifications to their standard work due to social distancing and other safety measures.

From there we will turn it over for questions.

Thank you.

I'd like to ask the question. Please dial up this whole lot crack recycle followed by the one on your touched on telephone.

Selling isn't as big a fall. Please make sure you government function is turned off to allow your secondary chocolate.

Again that is falling from one if he would like to ask the question.

Our first question comes on the line of seeing Randy will Thompson Research group.

Your line is now open.

Good morning.

I guess.

Thinking about.

Conversations you're having with customers just just more detail on any conversation center around more near term solutions are they thinking longer term in nature yet about.

How offices will look.

And our they talking about.

How they will do work from home scheduling with offices were full time office and.

If you're going to be expanding square footage can you just kind of the color qualitatively around those conversations.

Sure. So this is Jim I'll I'll take that on the I'd say the conversations are on all those things and it's difficult to quantify it because we're not like transit score, but even with the same customer will sometimes have a conversation of will cover the full range of the things you talked about so I'd just add more to that I'd say that the first.

Level of conversation, we had within his offerings is how the running their business.

For companies that have factories are curious about what we did in our factories.

All of our customers have offices of course, they want to know about the protocols, we using temperature checks and.

One way aisles and.

Temporary modifications to workstations and how they can they can do that in south so the conversations often start there some customers choose to make those kinds of short term modifications I'd say.

It generally when they're doing that they're looking for inexpensive options are imagining that those are going to be temporary ends and largely disposable and I want to spend a lot of money on it and they want to get it includes quickly. So we have products that allow them to do that whether its.

Clear plastic screens or its corrugated screens temporary solutions to help and do that so that that's often where the conversation start starts with protocols amended may start with.

With modifications to their space.

Now how eager they are to deals not applications depends on where they are geographically and how they're thinking about their own returned to the workplace.

As I mentioned you have customers in very large cities, they're probably going to be the last to do that because because it's not just by the office is how do we get people to the office has eight with the deal with public transportation on people comfortable getting on the subway as a comfortable how did the ambulance deal with elevators and very tall buildings delegated just can't can't be filled at today.

Entity that they done historically, so people are managing it could take a long time to get people up and down.

Some companies right now I think I'd say starting in mid June through now are beginning to ease people back into the office for hearing about ideas like bringing the first 25% back in places where they weren't there I spoke to a customer yesterday note that isn't it isn't essential business and they they are at 95% occupancy right now and they'd never really.

We went through the shutdown so it really depends on what industry there in annual credit differentiator and beyond that very short term discussions.

We're also trying at the same time to extend the conversation to talk about how people could renovate spaces to help they can make their meeting rooms work more effectively for example, we know that for significant period of time here, we're going to have in most cases people in the office and people at home and so every meeting is going to require people connect.

And using Microsoft teams are zoom or other platforms and and at the space is really on set up for that and we're not easily access in the last several weeks for companies have been largely shutdown everyone has been on.

The video call, but they're all playing in our home, it's a different dynamic when happened workforces and in the office and half is calling in from home. It changes the experience for everyone. So how do you create space do that again, we have lots of ideas about how we can help people have support that came to port and then the longest term conversations more about reinvention. So how do you change the office.

The long run to benefit from all the things we've learned so for example in the office as I as I mentioned before our people will expect more privacy and it will be more attention and sensitivity around infection control and I think that will extend beyond the next few months so be extend beyond when there's a vaccine not everyone's planning and getting a vaccine and we know that.

Teens, even the best vaccines for clues we have today on fully impacted so the sensitivity around infection control will continue and people will need to make changes to their office.

To support that.

And they're going to value more the power of the office when it comes to creativity innovation and collaboration so a lot of clients are saying, let's start there, let's think about where our office is going to be long term and then let's let's move that move backwards to now what are the things. He can do now that are actually no regrets moves there not disposable they're actually a path to any kind of office.

And those are the kind of conversations we're having about that topic and then secondly, you mentioned work from home and of course, we're having a lot of conversations with customers about that as well they realize that work from home is working okay for someone plays but not to well for other plays and even even for in place we'd like to work from home. They don't have the furniture, they really need to have the safe.

Productive ergonomic environment, and and discovering that is the time those buys so customers are coming to us that they have been put together at some sort of a program or how should we support our employees as they try to.

Outfit their offices at home with better furniture, and we're working lots of different ways with maximum that idea.

That's helpful and I will focus on education for a minute.

Typically what is near term demand looking like in the education basin is there opportunity here with Smith.

Over the near in the long term.

And maybe just strategic update and how you're pursuing this market I would assume it's it's somewhat dynamic right now also.

Yes, it's dynamic and yet I'd say, it's strong so we've had a continuation of strong demand from the education sector.

I'd say in fact, if he looked across all the sectors in which we give business essential business of course has been strong throughout government is strong the education is particularly strong and this summer as as we all know schools from from kindergarten through college are are working to try to change their environments to prepare for what's next.

How do they have the right level of social distancing, how do they changed their density.

How did provide more flexibility.

And so.

This is true in the United States, It's really too all around the world, we're seeing a uptick in demand in orders. Just this morning, We got news that we won a project in Europe for 4000, no shares from the school system.

In an area that was hard hit by kroner virus and.

And the idea of getting order for 4000, no chairs all at once is that mean that doesn't happen every day. So that that was up thats just a sign of what we think is happening right now as people are trying to prepare for what's next.

Our challenge is just being able to keep up with the demand right now and the education sector. There are certain products there in high demand and Thats, where were getting our production up to full capacity and we're working to be able to fulfill that demand or to suggest alternative products to help people on meet these needs.

Yes, Stephen if you think about the Smith system business in K 12, the over the last several months or quarters various communities in school districts raised capital to modify their school systems in that capital raise was.

Was that cannot be used for normal operating purposes. It has to be used for renovations. So a lot of that activity is is continuing this summer and of course some of it as being modified.

Given the pandemic, but is.

Moving forward. So our Smith system business has remained quite busy and they can remember two thirds of there historically two thirds of their revenue.

Annually is recognized in the summer.

Excellent thanks for the color guys.

Thank you. Our next question comes on the line of Greg Burns with Sidoti and company. Your line is now open.

Morning.

Dave we.

Think about the the 600 million.

Breakeven point for revenue obviously the.

The incremental margins.

Second quarter will be a little bit.

On the higher side.

Looking beyond that.

Normalized basis, if you take the 600 million as the.

Fine breakeven.

How should we think about the decremental an incremental margins from that 600 million baseline.

Based on the current cost structure.

Well I don't know how to answer that because I just.

To imagine decremental margins beyond 600 million would it would require me to imagine further cost reductions.

If we thought that we were going to move below that level, we would very likely be talking about taking additional actions, which would influence the decremental margin.

And on the incremental margin, it's going to depend on the level of confidence that we have really in the mid term outlook.

Because the the point of our the strength of our liquidity is to not only protect us in this but also to be one of the first ones to play offense on the way out.

So at the point, where we anticipate things are starting to solidify and improve more significantly we may look to more aggressively investor get behind some of our growth initiatives. So I can't really give you a.

From incremental or decremental I'm, just trying to give you a sense of at our current cost reduction efforts we are.

We would expect our breakeven to approximate 600 million.

Okay. Thanks, and then in terms the.

The backlog.

The commentary you gave there.

Cautionary commentary about.

It's going to depend on government regulations, but as it stands now.

With what you're seeing in the market.

Thank you.

Be able to deliver that the majority of that backlog with something has changed from here for you to not be able to deliver that backlog.

We think about kind of the current state of the market, how you see it and your ability to deliver against that.

That's correct something would have to change from here and what I was trying to provide color on as we've seen a lot of change and therefore, we could experienced some additional change, but if nothing changes to that backlog is scheduled for manufacturing and delivery those comfort those schedules have been confirmed with dealers and customers and so if that plays.

We would expect to manufacture ship and recognized much of the revenue associated with backlog.

And I'll add to that a lot of the lot of the government regulation shifts that we've seen our matter of moving shipments up a couple of weeks are back a couple of weeks I doubt. If we see we don't have any intelligence right now that would suggest that the actions that could cause us to push.

Backlog, we have currently have into further further out into other quarters. It's really just a matter of a couple of weeks are there.

Okay, great. Thanks, and then lastly.

In terms of the evolution of work small.

You'd mentioned.

Uniquely position.

More like a fee to be.

Environment, where.

Companies our.

Leveraging.

Yourself too.

Hi, there there.

Our workers, but what about the BDC side of.

The the market.

And maybe.

Consumers are on the road.

Go up at all home offices.

How are you position.

Overall, the the work from home mortgages, it going to be mostly b to b traditional model for you.

Do you have a BDC component is their investments and you can make there.

Characterized the opportunity for workforce.

Thanks, It's really both so.

In summary, and to some degree is because you need to have the BDC to have an effective BTD. So what I mean by that is that sometimes business. The business customers will come to us and actually want to put together a discrete program for their people they want to help choose the furniture and and by a package and then have us fulfill that and thats, great sometimes business the business customers.

We'll instead provide a second to their employees and direct into certain.

Website, where the customers liquidity in place can go up and they get additional discounts and so on and those are typically our b to C.

Platform that they go to now we might create a special version of that PDC platform just for that customers employees.

But we have a our platform I'll start out still hit that timing you can go take a look at it was recently invested in upgrading the back end of that platform to improve the buying experience into.

Modernize the.

Reliability of the back end of that system. So that just happened a couple of weeks ago. So we are ready to go to support that kind of business.

And then we also and has helped would do and half a longtime sold product directly to consumers to that same website and that demand is can is also raising so people who who's companies may not have a program still are finding themselves working from home and are often saying I want that same chair at home that I sit in at work I want to.

Adjustable table and so we're seeing rising demand for that and then beyond our own website Weve sold our products to partners, who have their own retailers etail platforms and most recently with extended our partnership with West Elm as you know with West Elm, we've used a lot of their designs and.

Interpreted and we engineered they're designed to be sold as ancillary products in corporate work settings, but.

But now Weve extended that partnership so that we're selling steelcase work from home product to the west Elm websites. So if you go to West Elm, you can see a collection of products there that integrate still has products with west Elm pass, including products that we do for west Elm. So it's just another way for us to address this market.

Great. Thank you.

Thank you as a reminder to ask a question you only need to press Star then one on your telephone.

Our next question comes from the line ever been Gardiner with the benchmark.

Seasonally the benchmark company. Your line is now open.

Thank you good morning, everybody.

Whenever that Rubin.

So I had some connection issues of working from home.

On that so if I repeat anything sorry about that but maybe I'll just start with Dave the the color you gave around the detrimental in incremental.

Sequentially.

I guess, maybe some backlog envelope math if you're.

Thank you said that you're expecting year to date after the second fiscal quarter that you'll be.

Breakeven or profitable I can't remember high worry that but.

That does that imply with that with the decremental or im sorry sequential.

Incremental margin comment that commentary that you gave that we should be looking at and I know, you're not giving guidance, but just based on what you have provided that we should be looking at kind of a minimum.

Minimum revenue number in the below 700, then on minimum.

Profitability number in the 35 million EBIT number for Q2 is that what you pointed us to.

Leased to start.

No. If I was I would have said that you.

You know on me Ruben I would I would have been explicit no I was a really just trying to give you the math of what was behind the decremental margin of 22% at the operating line between Q4 in Q1 again adjusting Q4 for the nonrecurring polyvision.

Sale and extra week et cetera.

And then trying to articulate why we think the incremental margin between Q1, and Q2 will actually be better than that.

And then we range that.

In my quote in the release and in my earlier remarks. This morning, I've said that we expect to be profitable in Q2 and profitable year to date.

And that's on that's on an adjusted EBIT basis, I guess is yes, I mean I'm, excluding the I'm, excluding the impairment charge, we took in the first quarter.

That.

Alright, and then.

Jim You mentioned lead times I think you said, mostly back to normal or maybe those most products are back to normal what are what if any.

Products or.

Dave I think you mentioned certain countries there was or jurisdictions there were still restrictions on your manufacturing how how big of a deal is that for you guys are right now and I guess are there any stakes.

Specific states or countries that we should be watching for us it's the virus does.

Pick up again in there and restriction scope.

Backwards and not forwards.

I know, Michigan, the Big one for you guys, Mexico, what where should we be keeping an eye on to make sure that you guys are able to actually manufacturer and ship the product.

Yes. So we have I'll just give you a list of effective locations in the us.

So, Michigan enforces Super important to US, Alabama is also important to us.

We have smaller but important facilities in Texas, and California, and then we have regional distribution centers that are I will go to try to give you list that wouldn't be able to do a mall, but now they're located in different spots not for the our disease.

If you is in our to see happens to be in a state restricts distribution, which we did running to briefly before that can have an impact temporarily while we ranked higher our shipments by fleet. We usually are just dealing with that is a matter of disruption that permanent.

Closure of our inability to serve customers in a market.

For manufacturing.

[music].

Give me the list for our site as they can I think Michigan, Alabama, the tubular watch the we're always going to be watching and.

I think every time that I don't know with the governors are going to do a CEO arising cases, I think as a general understanding that the first the first wave is that hit caused people to take fairly.

Kind of across the board.

Actions to just shut everything down I think now that theres more information about how virus various is transmit in house spread happens, there's a recognition that it isn't everything in the economy, that's causing that like I said before we've had zero transmission or factories. So factories that are operated safely can be very safe that in some countries.

We've been told that they prefer to have had a.

The population working in the factories, because the timing the factory is actually much safer than the time people can how in the general community. So.

We're hopeful that if we do have a rising cases, even this first wave or we have emergence of the secondly.

That the actions taken in different states will be different than before.

In terms of specific products.

We have a couple a few factories around the world and it's this is really more outside of the U.S.. We have factories around the world that is still limited not named just a couple of into limited.

To either essential business or they're not allowed to have people commute long distances to get to work things like that and I can't go through all the details of the here, but things like that create temporary and just I take a impairment of a part of our ability to operate that factory, but it's it's not major.

And then the other source of longer lead times would be places, where the supply chain just hasn't come to only back to normal yet we add production shutdowns in some places in Asia and those components have to come across the water to get to the factories elsewhere in the world and so some of that just hasn't started out yet.

In two or three weeks four weeks have every week that goes by that system gets a little bit more stable and.

My expectation is in 30 days now we won't be document that anymore.

Okay. That's very helpful and just a quick follow up on that form has done an excellent maybe I should ask the manufacturing part. This way is there or are you guys able to so so let's say, Michigan those backwards in shutdown manufacturing, even though it may not be likely at this point.

For the right thing to do if they did that are you guys able to move things around are you able to manufacture the things that you're doing in Michigan elsewhere to hold you over a if that happens or is that just now possible just given the way you're set up.

It is that it isn't so there are some products, where we have good redundancy and we can move production around.

And we we every every year, we've kept battery pack, but Theres also cases, where we can't where there is something we only making one place and.

And then we we have to do that calculus and say okay.

We can move it but it's going to take US eight leases that are 16 weeks to move and do we think by then we move at that the order will have been reverse and that we have those conversations all the time in general it's now worth moving it because these actions are usually not long term and the cost of doing it is something you don't get back so you'll get efficiency. When you do that you actually spent money.

We don't see back so we try to make our best decisions about that but generally we don't really remember, though like one of the things we learned in Michigan.

Is it.

And if they went back and tighter restriction remember, Michigan right now is one of the best States and in the country as it relates to virus transmission Super low here.

And and so hopefully they'll stay that way, but what we did you learn as we went through this is what is the definition of essential business in Michigan, what percentage of our production could continue to run and we didn't know that when we first got the ordered shutdown I mean, we literally shutdown it took us a little bit they just figure out where we were allowed to make it took us a little bit more time to.

Resort our production so that we can make get get everything outside of the way and be able to make the products for the allowed to make how we learned a lot from that and so we've already had several meetings about okay. If this were to happen again, how do we have respond to it and order in a way that lets us stay operating to agree realty without the hedge.

The disruption was how the first time.

Got it and then last one for me.

Jim you spent a good deal time talking about reasons at the office is not dead in your prepared remarks like I tend to agree I agree with the Oh My technical difficulties.

This morning, our Prime example, I need to be in an office, but can you can you talk about your confidence and.

I guess over the last few months, how it's trended based on your conversations with customers that there is going to be not only a return to the office, but the investment needed to two to make that happen in and how you guys will benefit and I guess the part of that how quickly should investors think about that business.

Starting to return I know, it's really hard to tell but are your customers talking about doing.

More of the second stays not just putting up shields, but but actually changing the way. They allow the office of the talking about doing that later this year is that a next year thing is that just a debt down the road hypothesis at this point just talk about your confidence level and how it's moved over the last few months based on your conversation that's it for me thanks guys.

Yes, I I'd say, if you went back to two months ago.

I will just have to remember where we were back on into this like end of April we are the middle of firestorm.

Not just in the furniture industry not just at Steelcase every customer was going through this.

Suddenly everyone is working from home.

People weren't even allowed to go into their own offices in some cities.

It was things were on very tight lockdown and so conversations were all happening it with customers were also at home and eight.

We are no position to be thinking about anything at that point. So today, it's very different they're beginning to operate their offices people are coming back into the office people at the any asked those questions. So it has a very different situations to ask about my confidence and how it's changed.

We we weren't having much time to think about it when we were focused on making sure. We can keep cup customer commitments and just the lead times every day, we solve one problem. The two new problems solved so we weren't thinking all that much about the long term.

Yes, I go home at night, and I'd read by news feed which he would have article for article about how working from home is the next thing in us at that and all that and as I said earlier.

This is only the twentyth year I've read articles like that whenever something like this happens you see those articles.

In the last several weeks.

And our customers arenas articles, but in the last several weeks you're seeing different articles, you're seeing articles now talking about the the impact on people being isolated working from home from kind of a human perspective.

Yes people are having technology problems, but I'd say, the technology and I'm sorry about years. This morning, driven by I'd say the technology part for most people have gone better than it would have gone unified ready to our 15 years ago 20 years ago. That's the human part is that people people I deal with all kinds of things and we've done a large surveys to see what people are actually feeling as they've been working from.

Home.

The first couple of weeks you have this kind of momentum and everybody's like Okay. We got to do this and Rollins together and we're trying to figure it out but as time goes by with the survey show is that frankly people at that at the top if we changed the Ceos in the executives you know people who in this room with me we have.

We have less with with homes that have dedicated spaces in which we can work.

If you work for showcase sneaking using play discounting decorate home office furniture in most Ceos and executives there in that state. So from the C. Suite. The perspective is this has been signed so far.

But if you were 25 years older or 30 years old he might be living in a studio apartment in an urban environment and Thats studio apartment was not intended for you to be the place where you're going to be spending eight hours a day every day the week.

Or 24 hours, a day, which is really the rates working for lot of these people.

Our you've picked up and you've moved home, which a lot of people have done because.

They just don't have room. So they went home they're working from parents' home is the thing nobody is talking about and that can't last forever believe me that's not the dream that have a lot of 25 yields to move home with their parents. So they can keep keep working.

So as time goes by people getting Gleason heat with pets and so our customers are also hearing that and so if you say my confidence my confidence is actually going the same all the way throughout but if that if they track the trend they go amongst our customers and their people.

The momentum is actually shifting back now we had a customer I just heard about this yesterday our customer we are doing a work from home program with it was going to be a large scale work from home program because thats just a couple of days ago inside what we're not going to do it we can get people back the office and I think that is beginning to happen now so again, we're not against where from home.

Just I want to.

Finished with that no work from home is a good idea provide people flexibility to be able to you that from time to time, it helps and balance work in life. They certain kinds of work activities for individuals they might be able to get better from home I think I just need a break but when you're in the office reconnecting with people building relationships. It gives a senior leaders and opportunity to.

Not just leverage the culture fulfilled the culture invest in the culture and coming out of this crisis I think everyone ceiling that we didn't get people back together, we've got to legal.

A sense of who we are collectively.

And and we got to get get busy and working on our creativity and innovation. Those are the things that we haven't heard as much about this impossible you can measure productivity by the way on process, where you can't measure productivity and things like creativity and innovation eventually shows up in your stock price.

Don't you can't measure it out for a few leasing certainly kept measured in the crisis like this so our confidence remains high.

People will.

In terms of when will they make investments that's probably a tougher one to say.

It's in momentum shifts from thinking about investing in working from home towards investing in working in the office there will be sooner rather than later I think also there was probably a sense there for a while we just have to get to a few months of this and you have a vaccine will be done I think a lot of people realizing.

Post asking it will be a lot better but it won't be perfect. So we're still going to have made changes in the workplace to have a place that is facing fuel sales to our people just those people have done in our factories.

Out of these changes are going to be.

Maybe not as significant as severe as they have to be here in the short run that they are.

We're going have to sustain.

Beyond in January or February.

Ill stop there in case you follow up.

No that was great. Thanks, Jim and good luck guys that were getting through everything.

Thank you.

Thank you there no further questions in the queue at this time I would now like to turn the call back then came for closing remarks.

Thank you and thank you all for joining our call. This morning, we I'll just close by wishing you all a safe and relaxing fourth of July weekend. Thank you its touching next time.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Good day, everyone and welcome to the Okay. That's first quarter fiscal 2021 conference call.

A reminder, today's calls we're recording.

For opening remarks introductions I would like to telecom whats all with the Mr. Michael Matt.

The other Investor Relations financial planning and analysis.

Thank you Sarah good morning, everyone.

Thank you for joining us when a recap of our first quarter fiscal 2021 financial results here with me today, our Jim Keane, President and Chief Executive Officer, and Dave Sylvester, Our senior Vice President and Chief Financial Officer.

First quarter earnings release, which crossed the wires yesterday is accessible on our website.

This conference call is being webcast and this web cast is copyrighted production of Steelcase Inc. a replay of this webcast will be posted you IR dot steelcase dotcom later today.

Our discussion today may include references to non-GAAP financial measures on forward looking statements reconciliations to the most comparable GAAP measures and detailed regarding the risks associated with the use of forward looking statements are included in our earnings release, and we are incorporating by reference ended this conference call. The types of our Safe Harbor statement included in that really.

Following our prepared remarks, we were assigned to questions from investors and analysts.

Well now turn the call over to our President and Chief Executive Officer joking.

Thanks, Mike and good morning, everyone.

It was just three months ago, we released our results for the fourth quarter and fiscal year 2020, and it was a great here the best in nearly 20 years and during our call with all of you. We discussed how it was clear we were facing the worst human health crisis or lifetimes.

And we knew the economic impact would be extraordinary.

I told you we had two objectives.

Keep our people safe and to protect our business.

Three months later I think we've done both.

We modified our production lines around the world provide adequate separation between workers and as we restarted these lines, we ramped up production speed and staffing gradually.

Where possible our office based employees work from home.

And in our offices, we implemented modifications to keep everyone space.

Three months ago, we were aware of a few causative cases. It since then unfortunately, we've had other employees around the world contract disease. It's the best of our knowledge. We have had no transmission between employees in our factories are offices. So we are keeping people safe.

We're also protecting our business.

Again, three months ago, we had already closed to significantly destructed production in many of our factories around the world. We had already taken dramatic actions to reduce our fixed cost through salary cuts in spending reductions. We knew it was going to be a very tough quarter ended was with $21 million adjusted net loss as you saw in the earnings release.

But those quick decisive actions really helps us avoid a much deeper lots and we actually did better than some scenarios, we had modeled internally.

Of course, we're also focused on protecting and strengthening our liquidity.

The cost reductions really help well we were also able to work with our customers dealers suppliers optimize working capital.

We improved our liquidity position by $98 million in the quarter and finished with $799 million total liquidity that puts us in a very good position to weather whatever comes next.

I'll give a little more detail on how the quarter played out.

Started out relatively strong orders were about even with the prior year in revenue was up.

But in the last two weeks of March stay at home orders were put in place in the Americas in EMEA and many of our factories began closing orders and shipments fell off quickly.

April was an incredibly difficult months portal.

Revenues following 60% versus the prior year.

In the Americas. It took a couple of weeks to reschedule our factories to run orders for customers consider to be an essential businesses and then we ramped up production gradually as we called that workers.

By May our shipments began to increase as restrictions were beginning to each but our lead times for new business remained longer than normal because of our large backlog.

That April and May period was pretty chaotic because we had a change customer delivery dates multiple times as our situation changed and sometimes orders, we shifts could not be delivered because of changing local restrictions.

Now in June lead times for most products were back to normal and our factories have been quite busy.

Only our Mexico in India factories continue to face some local restrictions.

We expect to have a much better second quarter compared to our first quarter, because we have so much backlog to produce and ship.

Got to be particularly busy particularly in the Americas.

And we expect to be profitable.

So what's next.

Obviously orders are down significantly because in most places around the world work is just starting to come back to the office.

Some customers are getting ready to bring their employees back to work by making temporary inexpensive modifications to their offices often with our help.

However, in more dense metropolitan areas challenges around elevators, and public transportation, well likely force many companies to delay of returning to the office until the virus is contained.

We are working with these customers provide work from home packages Bacon offered to their employees to provide a more ergonomic and productive work from home experience.

We do see projects in the pipeline in every region.

Customers with new leases and existing projects on the books are likely to complete those projects so perhaps on a delayed timeline.

We expect to see continued strength in the government and education sectors.

But many other customers are doing what we're doing protecting their businesses by cutting back on short term discretionary spending as they prepare for a challenging year ahead.

Our conversations with customers are beginning to shift towards actions. They can take now to help their prepare for the next evolution of the office.

We've all seen article, suggesting the office is dead and we will all work from home.

Those types of articles were being written 20 years ago and they were wrong, then and Theyre wrong now.

They show up every time, there's a new technology like laptops, and then high speed Internet and Wi Fi and now low cost video conferencing platforms.

The predictions are always wrong, because it's not about the technology, it's about the people.

It's not about whether you can have everyone work from home in the short run it's whether in the long run you can win that way versus your competitors, who are always innovating always transforming and always disrupting.

Over 20 years, Weve occasionally seen customers announced large scale work from home programs and then two or three years later those programs are quite we dismantle and employees are asked to return to the office.

It takes a while for the problems to show up but we always show up.

On the other hand, it's always been a good idea to give employees the flexibility to work from home from time to time. The workplace is an ecosystem of places in the office and outside the office. We believe as we emerged from this crisis working from home will be embraced by more companies as part of a holistic approach.

Coach to more effective work.

And we will continue to expand our products and our programs to support working from home.

But the office is far from debt.

In fact, we believe customers and their employees will expect more from the office as we look to the future and that's where our conversations are centered.

Meeting spaces will need to more fully support remote participants.

When employees need to really focus on individual work spaces must provide privacy and separation without compromise.

Nobody should feel they have to work from home to get worked out.

Employers will we evaluate workstation density in depth sharing policies to address raised awareness of infection control as part of wellbeing.

And spaces need to be far more flexible so they can adapt more easily changing conditions.

We're excited about the future of the office. So we continue to help our clients imagine what fifteenx.

Yesterday, our board of directors increased our quarterly dividends to 10 cents per share, reflecting the strength of our liquidity position and the expected improvement from the first quarter.

The dividend is still well below last year. Since we expect this will be a challenging year and given the impact on the global economy. The challenges could extend into next year.

We're not providing guidance, but we are committed to continuing to take whatever actions are needed to manage our business through the crisis.

Finally, I want to reflect on the conversations we've been having in America and around the world about racism diversity and inclusion.

We've been having those same conversations within steelcase and listening is always the best way to start.

We're also providing opportunities for all of us within steelcase to learn more about these topics.

And we're also taking action for example by setting goals to increase employment of underrepresented groups.

We're also continuing to work with the communities in which we do business to promote social justice.

Most of our work is through social innovation for instead of just making contributions we offer opportunities for our own people to put the skills and talents to work in helping nonprofits in our community.

For example, during the worst of the crisis, we made masks and screens for our local hospitals to use when PE was not available.

This year in addition to our regular internship program, which we kept in place. Despite the crisis, where sponsoring 50 additional summer insurance from Grand Rapids public schools.

I believe the points of light organization included Steelcase in their specific 50, which they consider the most community minded companies in the nation for.

For a company of our size this was truly an honor.

We are excited about what we can do next.

So in summary, we knew the first quarter would be tough so we made some tough decisions.

It turned out a little better than some scenarios, we modeled and our liquidity is.

We expect the second quarter will be better as we work through the backlog, but we could stay soft demand as customers get ready for what's next in economic conditions remain uncertain.

We're confident the office will remain the best place to work.

And we'll continue to evolve even is working from home rises in importance.

And we continue to work on being a better company and helping improve the communities, which we operate.

Now I'll turn it over to Dave for more detail on our financials.

Thank you Jim and good morning, everyone.

There is a lot of material to cover this morning's call start by summarizing a few key takeaways.

As a result, our first quarter adjusted operating loss of $35 million was approximately $70 million smaller than it would have been had we not taken such aggressive actions as quickly as we did.

Second strong accounts receivable collections and a significant increase in customer deposits contributed to sustaining our very strong liquidity position at the end of the quarter, which approximated $800 million and included $162 million of coli balances.

Funds and other cost containment efforts, we have in place.

To start we should first adjust the fourth quarter to exclude a few nonrecurring items all of which we are disclosed in detail last quarter. These items include Polyvision is operating results and the net gain related to the sale of Polyvision.

The impact of the extra week.

And variable compensation expense related to some discrete tax benefits.

Adjusted for these items, we estimate fourth quarter revenue would have approximated $885 million and operating income would have approximated $56 million.

This compares to our first quarter revenue of $483 million and the adjusted operating loss of $35 million or an approximate 90 million dollar reduction in our adjusted operating results.

Without the actions, we took to reduce our cost structure to $402 million sequential decline in revenue on its own would have reduced operating income by an estimated $160 million or more.

The related decremental variable margin of approximately 40%.

Benefited from the impact of a couple items first we made the difficult decision to enact temporary layoffs across much of our hourly workforce in the us and some other markets, which maintains a variable nature of our direct labor costs during a period of dramatic revenue decline.

Second we recorded $23 million of lower variable compensation expense, which had a positive effect on the decremental margin.

That is until we crossed variable compensation thresholds as the revenue declined deepened and we began posting losses.

As a partial offset to those benefits, we experienced some labor and logistics inefficiencies related to the shutdown and restart of our operations.

Beyond these variable items, we took significant actions to reduce our remaining cost structure, which had the effect of reducing our spending in the first quarter by an estimated $70 million and lowering the overall decremental operating margin to approximately 22% in the quarter.

The actions included significantly reducing salary costs through temporary reductions in hours and base pay.

Yes, we substantially eliminated semi variable costs and aggressively pulled back on project and other discretionary spending.

Before I move to our liquidity I will cover our income tax benefit in the quarter, which approximated 30% of the pre tax loss.

Historically, we have calculated or tax provision during interim periods by utilizing an estimated full year effective tax rate.

However for this quarter, we reported our tax provision based on an estimate using only first quarter results essentially as if we were filing a three month tax return.