Q3 2021 Steelcase Inc Earnings Call
[music].
Good morning, My name is Sharon and I will be your conference operator today and at this time I would like to welcome everyone to the Steelcase third quarter fiscal 2021. The conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you'd like to ask a question during the time since Investor day.
And followed by the number one of your telephone keypad, if youd like to address your question press the down thank you.
On the right you may begin your conference.
Thank you share and good morning, everyone. Thank you for joining us for the recap of our third quarter of fiscal 2021 financial results here with me today are Jim Keane, and our President and Chief Executive Officer, and Dave Sylvester, Our senior Vice President and Chief Financial Officer of.
Third quarter earnings release, which crossed the wires yesterday is accessible on our website the.
The conference call is being webcast and this webcast is a cap rate of production of Steelcase Inc. A replay of this webcast will be posted to IR net steelcase at current later today our.
Our discussion today may include references to non-GAAP financial measures and forward looking statements reconciliations of the most comparable GAAP measures and details regarding the risks associated with the use of forward looking statements are included in our earnings release, and we are incorporating by reference into this conference call. The text of our Safe Harbor statement included in the release.
Following our prepared remarks, we will respond to questions from investors and analysts I will now turn the call over to our President and Chief Executive Officer, Jim Keane, Thanks, Mike and good morning, everyone and.
Let's start by talking about co bid and the impact kind of business and how it affects our outlook the before I do that let's recognize that the second wave of whole. David is first of all the human crisis and I want to start by acknowledging that many of you may have been touched by Covidien personally for your family or friends.
Cobot has affected all of us.
And it has affected the business, but it is particularly relevant to our industry because of the effect of office space work. So it's worth spending some time on it.
The quarter ago, we could see the second wave developing and Americas, Southern states and parts of Europe and it was clear of the economic effects will continue for a while longer and steelcase, we moved quickly to implement contingency plans to reduce headcount and other costs.
But even at that point there was hope for the second wave could be controlled similar to Germany's results of to that point.
In fact through early September we have seen increased interest among us based companies and returning to the office. The some expecting more of their workforce backed by November and for some companies January one was the expected start date.
Thats, where we were when we spoke to you last time.
Unfortunately, as we all know the second wave got worse.
October of many northern states and parts of Europe. We're also seeing very high case rates and.
And in recent weeks, many places of implemented Lockdowns and other restrictions.
Of course, our customers put off their plans to return to the office with many now talking about sometime next summer.
The orders and shipments week and as you would expect.
This isn't true for all customers every day, we are shifting furniture to small and mid size business to education healthcare and many others.
For we believe it's particularly true for large corporate customers in major cities and I believe this is the larger part of Steelcase is business and for the industry in general.
I think we get the good job managing through the third quarter clearly.
Clearly our orders and shipments for weaker than we would like but because of tight controls over spending our profits were better than they could have been.
Our people around the world continue to do and amazing job, keeping our business healthy and agile.
The fourth quarter is going to be challenging as we get to the bottom of this crisis.
We've taken additional steps to reduce production hours in the us to better match capacity with demand.
And we continue to work and additional fitness opportunities globally.
We believe these actions will help us breakeven at the net income level, which I think the reasonable at the bottom of an extraordinary crisis like this.
We could have gone far the wood cost reductions for we want to stay invested and product development and I want to strengthen customer relationships for reasons I will discuss next.
As we all know the world got some good news this quarter related to the vaccine.
We already have multiple vaccines proving to be much more effective than anyone was predicting and some of those vaccines are already shipping around the world and are already being administered.
While there were questions initially about how many Americans would get the vaccine. The most recent surveys are actually quite encouraging.
For our customers. This brings a lot more clarity about the end date for this crisis and allows them to plan with more certainty when they will return to the office.
We're already seeing some customers beginning to restart activities on projects that have been idled during the crisis.
If it's true that steelcase was hit harder by cold and because of the impact on our large corporate customers and we potentially also have the most to gain from the certainty the comes with an effective vaccine.
These large corporate customers are strong financially stable get through this and the preparing to accelerate out of the crisis.
Ceos have kept the very close eye on the vaccine development and their confidence in their own business outlook as measured by the business round table is up significantly and the most recent survey.
These Ceos have major investments in real estate and they want to put those investments back to work.
The focus of our conversations with these customers is how the workplace can help them rebuild employee relationships speed juvenate. The culture, we energise teams and help everyone reconnect with the purpose of the organization.
Well, everyone acknowledges more people will continue to work from home and before the focus is on how to make the workplace of magnet hundred drops and pulled back to their offices. So what's the preferred place the work.
We believe as customers prepare their plans many will realize their offices need to be updated and debt starts of safety.
Offices will be open and yet not everyone will be immunized. So many customers will need to rethink high density areas and our data shows there are a lot of high density areas.
Our work with MIT is also helping us understand how furniture design can play a role in reducing the spread of packages and we expect to have new solutions ready for our customers to address those challenges.
Offices will also need to be updated to improve productivity.
Many people have been working in a dedicated home office for the last few months aren't going to accept going back to a work environment for they can't avoid interruptions and distractions the.
Office needs of step it up and provide better places the support focused work.
Some customers are already anticipating these needs and we'll update the spaces before the of the open and net continued improvement in our orders and shipments in the spring.
Other customers are more likely to return employees to the existing spaces assess the situation and then make adaptations in the summer and fall.
Other way as offices, we open we see more opportunities for us to address emerging needs specifically related to the realities of the post closing share price.
We already have a lot of products that can respond to these and other emerging needs, but we've been anticipating these needs and and prioritize investments in new products. The response, specifically to the kinds of opportunities.
Expect to see emerging during the recovery.
We are also continuing to strengthen our approach to serve and work from home needs from both consumer perspective and to support programs set up by our PDP customers for their employees.
We saw a record sales during Q3 through our online stores and through the various third parties, who sell our products.
This is still a relatively small business for us for we significantly increased the resources. We have working in this area and I personally participated in most of the daily meetings over the last few months to make sure the had access to everything the needed.
I believe there are very few product gaps, we need to address but we do have opportunities to improve our logistics and the table and the end to end experience to better match consumer expectations.
In fact, this week and personally assembling and installing and order I place for my home. So I can see first hand, how we might the better.
Work from home and surging this year for obvious reasons. The once we get through the surge. We believe it will still be more important than before because more people will choose to work from home from time to time, and we'll need higher quality of for dynamic furniture.
Of course as more people work from home of the office will need additional updates to support and more remote meeting participants and more individual video meetings.
Before I turn it over to the Dave I'll talk a bit about the cyber attacks, we announced two and 8-K earlier in the quarter.
And just tell US we were hit by a novel day zero attack for orchestrated by very sophisticated factors there.
Their plan is to encrypt all your data the strainer backups and collect the ransom none.
None of that happened.
While we were initially penetrated and some of our network systems were compromised.
Our ITC teams current early and our layers of the fence were able to stop the attack and we were able to restore our data for backup.
Many of our systems for completely unaffected and we are not aware of any loss of sensitive customer for employee data.
You know from the headlines that a lot of companies and even government bodies are recovering from similar attacks and similar actors.
We've been told by the experts that we did much much better than most companies face and this kind of attack.
And it team did an amazing job and I'm very proud of them.
So we got through it but the big issue for US was time.
The time it took to shut everything down the search all our systems for any remnants of the attack to harden certain systems space and what we learned from the attacks and to restore all our systems simultaneously.
It took about two weeks and our factories were largely idled during that period.
Then we had the start operations back up and that took even more time, because deliveries and production schedules and to be completely the work.
Our systems are not designed to stop and start like that so we went through a lot of disruption and while we are completely caught up because of the fleet that was a long time for being a state of recovery.
Unfortunately, the event also caused a lot of disruption for our dealers as the planned deliveries and installations.
While customers were understanding it was frustrating for them as well because the took time for us to get them reliable delivery dates.
During that time, our lead times for new orders for longer than normal of course, and we may have lost some discretionary business. So we don't think this was significant.
We are estimating we incurred about $6 million and incremental costs in Q3, which is significant of course, but not material to our results.
As we mentioned in the release, we had about $60 million of shipments that are visually would of shipped in Q3 and will end of shipping in Q4, but thats just timing.
Whenever anything like this happens we paused afterwards to capture the learnings and to take actions to make the better.
We are already going through that process and will be a better company because of it.
Being the better company also includes our commitment to supporting the environment through aggressive goals that include reducing our carbon footprint.
The third party verified science based targets.
We're doing more to build the for schemes the reflect our communities, ensuring equitable access to leadership opportunities across steelcase, and creating a culture of conclusion.
And we are developing updated goals of consistent with that work.
The received some recognition this quarter for our leadership in the CFC areas the.
The Wall Street Journal named still ticket has one of the 100 and most sustainably managed companies and the world.
And news, we recently included Steelcase and its list of America's most responsible companies for the second consecutive year.
Beyond the recognition beyond the fact that it's good for business. These are just the right things to do.
Now I will turn it over to Dave to cover the financials. Thank.
Thank you Jim and good morning, everyone.
Before I get into the details of our financial results. This morning, I'll start by summarizing the couple of takeaways.
The adjusted operating income of $11 million and adjusted earnings of of eight cents per share in the quarter for pretty remarkable.
Given the significant increase in COVID-19 infections and continued global economic uncertainty as well as the cyber attack encountered during which we temporarily shut down most of our global operations for approximately two weeks.
We believe the resurgence of cobalt cases had an impact on our average weekly orders in the Americas.
Which softened in the third quarter compared to the relatively stable demand, we experienced throughout the second quarter, and which we expected would continue into the third quarter.
Historically, we've seen demand strength and in the fall as customers complete projects and renovations in advance of calendar year end.
The softening demand patterns in the Americas contributed to revenue falling short of our expectations.
EMEA order patterns were also softer than we expected, but they did reflect the modest seasonal improvement compared to the second quarter adjusted for the larger education project awarded in August.
In Asia Pacific Order patterns were soft during the beginning of the quarter, but improved towards the end of November and resulted in the backlog going into the fourth quarter that was on par with the prior year.
In addition to the pandemic impacts approximately $60 million of revenue was delayed the into the fourth quarter due to our temporary operation shutdown during the cyber attack.
We also incurred $6 million of incremental cost and in the third quarter driven by related overtime, and the logistics and efficiencies our response and remediation efforts and the investments to strengthen our defenses against future attacks the.
Despite these challenges we posted adjusted operating income of $11 million and adjusted earnings of eight cents per share roughly.
Reflecting approximately $92 million of savings from cost reduction actions and lower variable compensation expense compared to the prior year.
We also had some additional discrete tax benefits and the third quarter, which I'll cover and a little more detail in a moment.
Lastly, our liquidity remains very strong at $652 million, which includes $168 million of coli balances.
And there are no restrictions on our ability to borrow under our $250 million global credit facility.
Moving into more of the detailed drivers of our financial results I will start with the sequential comparison of the third quarter versus the second quarter.
Adjusted operating income decreased by $93 million, largely driven by the $201 million reduction in revenue compared to the second quarter.
Recall the summer quarter benefited from a strong beginning backlog of customer orders, which exceeded the prior year by 11% and had accumulated while our manufacturing and delivery activities were restricted the during the spring flow.
Plus the second quarter benefited from the strong summer seasonality of Smith system.
The ratio between the sequential reduction and adjusted operating income compared to the sequential reduction and revenue or 46% detrimental margin.
It was relatively high due to the following the items.
First the second quarter included a number of favorable items, which were previously disclosed and included $4 million of land gains and strong coli income, which exceeded the deferred conferences the compensation expense by approximately $3 million versus more closely offsetting each other and a typical quarter.
Strong operational performance across manufacturing and distribution and due to the high level of volume we were producing during the summer.
And second quarter variable compensation expense benefited from not being accrued and so we did first offset the adjusted operating loss for the first quarter and began to exceed our return on invested capital target thresholds.
Second for the sequential gross margin comparison was impacted by seasonal shifts and our business mix from the education sector in the summer to the government sector in the fall.
Plus the gross margin related for the very large project in the EMEA was lower than our overall average during the third quarter.
Third our salary costs of the third quarter were higher compared to the second quarter due to the full restoration of pay for most of our global salaried workforce, partially reduced by the benefits related to our workforce reductions and the Americas.
For us we incurred incremental costs in the current quarter related to the cyber attack.
Compared to the prior year, our third quarter adjusted operating income decreased by $64 million and our revenue declined by $338 million.
Beyond the divestiture of Polyvision last year, and some operational inefficiencies related to the lower volume and the impact of the cyber attack and the current quarter the year over year comparison reflected approximately $56 million of savings from cost reductions, including approximately $20 million of the.
Lower employee costs.
And essentially eliminating travel the events contract of services and other discretionary spending.
And the reduction in variable compensation expense of approximately $36 million.
Before I move to our liquidity I will cover the income tax benefit recorded in the quarter, which totaled $6.3 million and was largely driven by benefits available under the cares Act.
We expect to record a tax loss for us of income tax purposes during the current year.
And the carriers and allows for a five year carry back of that losses.
Which includes taxable periods when the federal rate was 35% versus the current rate of 21%.
Restructuring costs and tax planning strategies completed during the third quarter contributed to the projected loss, we intend to carry back and therefore, we reported the related tax benefits in the third quarter.
Our liquidity of $652 million at the end of the quarter remains very strong and compares to $684 million at the end of the second quarter the.
For the $32 million reduction during the third quarter was driven by a reduction and customer deposits, which accumulated under and incentive program offered to dealers earlier in the year.
As well as the funding of restructuring costs recorded in the second and third quarters.
Moving to our outlook for the fourth quarter, we are projecting approximately $650 million of revenue modest operating and income and breakeven earnings per share.
Our revenue estimate represents and organic decline of approximately 28% compared to the fourth quarter last year.
Which included $48 million associated with an extra week of shipments due to the timing of our year end and polyvision prior to its divestiture the.
The estimated revenue decline of 28% is better than recent order patterns as our beginning backlog of customer orders totaling $545 million was 15% lower than the prior year and included approximately $60 million of shipments delayed from the third quarter due to our true.
Temporary global operation shutdown.
Much of that backlog is expected to ship in the fourth quarter, along with the portion of the orders we will receive in December and early January.
The earnings estimate also reflects projected operating expenses of between 180 million to $185 million and projected the interest expense net of investment income and the other income net of approximately $5 million.
The estimated operating expenses in the fourth quarter included investments in new products and other growth strategies targeted toward the recovery.
As well as some stock compensation expense related to discretionary incentive awards issued by our compensation committee of the beginning of the year.
Which will be expensed, when the committee exercises its discretion to assess the performance under those awards.
In closing our performance in the third quarter was pretty remarkable in light of the circumstances.
We delivered positive financial results during the resurgence of the pandemic.
Substantially completed our restructuring actions.
And manage through the cyber attack.
And our liquidity remains very strong.
The demand pattern softened in the third quarter, but with the initial approval and release of vaccines. Some of our customers are reactivating idled project opportunities. So they will be ready to return to their offices next year and we are very encouraged by the strengthening CEO sentiment Jim mentioned in his remarks.
From there and we'll turn it over for questions.
Thanks.
And finally, I would like to remind everyone in order to ask the question. Thanks stars and the number of one on your telephone keypad, we'll pause for just a moment and compiled.
The Q and a roster for.
Our next question comes from Steven Ramsey and.
Net.
Good morning.
Thanks for taking my question.
I guess on a few few questions on conversations getting more positive and the can you maybe just share more detail and elaborate.
And maybe on the sharing what the factors are net will the customers will convert from talking to placing orders.
Yes, so the advantage and the the conversations take lots of different forms and I had lots of opportunities to the connect to the customers over the last several weeks.
And I think the and similarly, there are different and the we have some customers who already have firm plans in place as I said 90 days ago to come back to the office increased the percentage of people and their offices and November our plans for January and so for those customers had their plans in place if the laid them, but there and ready to the implement them.
For other customers, who didnt have those plants and never kind of reacted type of their office.
And what we're hearing is that they're getting they're being asked questions by their leaders. So the peer the head of this I was speaking for the head of facilities earlier this week.
Of the one of our largest customers and keep getting asked questions by his C suite of what's next and whats our plan with the what are we going to do when the coming back weighted how do we have for the pair offices what does it mean for some of our real estate metrics utilization metrics.
And so on and and the turning philosophy of how do we think about EPS, how or other type of companies that came out of it so.
So.
And you kind of depends on the state of the customer of today, but all of those conversations I think the positive because people and moving from.
The state of of how do we get paid for the work from home effectively which is really a lot of the conversations for the last few months to now how do we come back for the office effectively and we have a lot of say about that because we we did occupier off of this we had 60 plus percent of our people back and our offices here in Michigan and we.
We did so safely and.
We learned a lot and we have a lot of share about that experience and then of course beyond just the.
Of the occupation of the office there is how to use sustaining productive work what happens after all of that how has called the change the workplace.
Permanently and for for a lot of customers. They really want to talk about that so eight the may be less interested now and temperature checks and.
And since and checkers and more interested in debt I think the way the the conversation has changed.
As really as I said in my remarks, the because of the vaccine.
Before the lot of uncertainty about when exactly that this happens and people had planned and.
And of this past year, then they pushed that back to September when the schools would open and they set up all of that and work outlets, Let's think about November and May be January at the latest so the lack of customer is big and moving this day their own dates back back back and on month at a time.
Now with the vaccine and the.
The clear timeline of the the timeline that you all of the about is the one they are reading about which as of now we are where we have the immunization going on of healthcare workers, and then and it's going to be the next wave, which our people and nursing homes and then it's people who are.
Hi, Pete this and conditions and older than of certain age essential workers, but they tend to get the March and April it begins to open up more broadly to the for the workforce and.
And so people are saying, hey, innovate summer, we're going ahead of us a sizable percentage of our workforce inoculate the immunized.
And the level of begin to shift around 98 status in the workplace by outside of the workplace.
Restaurants, and entertainment and travel and so on will begin to reactivate and and we'll have the new expectations and so I think the best doing is tightening up the time frames.
The latest and effort anyone say of September onest over the last few weeks, so that the tightened up the time frames and if people have more certainty thats, probably the biggest change and look at certainty comes more urgency and noticed the flow of those conversations are interesting. The clients now they are actually kind of writing step down because they have France. They have put together and the half to so net.
That's helpful color I guess kind of the next level question would have Derek.
And the pause projects that are that are being discussed again, how much of the project make makeup and composition of different products within the projects how much of those are the same and they were how much are those being edited.
To reflect social distancing and a new.
Work place post pandemic and.
I guess, even brought the can you give the steel for these projects are larger or smaller in dollar terms for it the product makeup has better margins.
Yes, so it's too early to say from any kind of facts here in the Americas all of Europe and so.
My commentary of the more speculating.
And the conversations for head and clients fully expect would happen.
Hi, Tony clear about that I will the campaign is in Asia, where the people moving into the first wave and they Havent had the same kind of second and third ways and places like China that we've had here.
And a lot of those places.
I think businesses back its relatively strong surprising strong actually considering the cove, its not over and and we still have the global economy going on.
And for the.
And talking with our colleagues and I'd say the for the projects are remarkably similar to the kinds of things we would have worked on before.
They have not done a lot of of changes to the projects of of plan. The extent of post coated world and I think for also coming from the different starting point, so and a lot of those places that.
And are moving from office environments that we're actually quite David and they are moving toward modernizing them. So it was already of major leap forward for them toward the and you kind of hype high performance hype and productivity work environment, they're not moving from Super high density of work environments and something else. It's not the same kind of starting point.
And our colleagues there would say it's surprising that the projects are largely the same as full as planned before.
And my speculation for western markets. The Americas in India is that we're going to see a customer segmentation and we're going to see some customers who who are.
Who are going to bring people back for the office, they're going to assess the situation and the will continue the projects that are largely similar to blood safety for.
Albeit with some kind of incense adjustments for density on those new projects.
And and probably with and understanding that.
And as the office as the magazine the test to be appealing for their workers and so turning up and I think that that's probably a fairly significant segment the tender of largely business and the usual formed by the crisis for nothing radical.
At the start the second segment I think is the group that are kind of we think real estate, how do we think about real estate differently and the new world.
This is the particularly true for customers and very large cities for thinking maybe we don't want to have all our people and the one spot and downtown Ig City.
And maybe we need to have the at the aside of the smaller space and then we have satellite offices other the suburbs to reduce commutes and to provide more flexibility.
And so we are hearing a lot of that and we're reading a lot of that the current they havent seen a lot of the yet for that segment is likely to emerge and and may continue to emerge as leases expire and they have the fleet and for me to the actual size some of those actions and.
And Thats fine for Us Thats change and change is good.
The third segment of the segments today that a.
Mostly been returning to the which is the segment that is it's free using this time the rethink the space and they are making changes they're talking about changes to change the way they think about and city for individuals change related think about privacy and freedom of from distraction and Europe interruption for individuals and the workplace.
And to be think there the keane spaces. The client I was talking to earlier. This week was all about that one.
And it's no more and more and more about what they should be doing right now cravey backlight is the practical ideas that cash to the implemented.
And we think of the a significant segment like that the kind of the long answer and.
But it's also kind of the complex answer because of its real in of the says.
Our customers are.
Coming back and different ways and they have different mindset silvers for the in each of them.
A sense of what they need and like you want.
Very helpful and and last question for me just some clarification to understand in Asia Pacific.
Orders not as strong backlog still flat.
Year over year, along with the strong pipeline and things may be pointing in different directions in there and that commentary. So can you just elaborate what's going on and Asia Pacific look for.
I'll start and then I'll, let David add detail so.
I'd say overall as the if you were listening to our conversations for their Asia team. It's it's relatively upbeat and mean, there's a lot of positives for lot of positives in the pipeline that developing but lot of positives in the win rate.
A lot of positive energy, but the.
The recovery is not as smooth.
Team. This line is lumpiness, the 50, and some big projects and the and getting the orders and in the months later, we might not have that so it's a big lumpy and the way back but overall axeda. The tone is very positive and it causes of across the number of the countries in Asia. So we're feeling pretty good about that day do you want to add more nada.
The other moving debt.
If our whole businesses like David right now with the the a different kind of conversation and so we're feeling good about that.
Excellent. Thank you.
Once again to ask the question. Please press star one on your telephone Keypad next question comes from moving Garner the benchmark.
Inc. Thank you good morning, everybody.
And.
All the one of the start with the cost structure and style day last quarter, you provided kind of a breakeven point of.
At the operating income level, I think of of about 650 million and revenue and it looks like.
And even with some.
Investments in new products, and even with some maybe cost associated with the cyber security attack and looks like your your breakeven for a lot better than that now can you talk about what differences you're seeing there and then in the in total for this year, what kind of cost savings of you guys.
And we'll recognize from your your moves.
Well, let me see.
Let the breakeven to start.
I think what I said last quarter is playing out in the fourth quarter, We've said and our adjusted operating income breakeven point was approximately $650 million of revenue and in fact, we're guiding.
The fourth quarter to $650 million and modest operating.
The income I think what you saw in the third quarter was the fact that we under spent our operating expense estimate coming into the quarter of think our guide was 180 185 and we came in.
Less than that in part because the cyber attack slowed down some of our spending with our systems of being down for a couple of weeks and the loss of eyes being focused on that day.
The fence and recovery of some of our spending activity was slowed down and we knew we were shifting some revenue and to the fourth quarter. So we tightened and spending controls as best we could as well, but I still think the breakeven is round about $650 million.
Currently.
Maybe of cab less given the modest operating income were expecting in the fourth quarter.
On the year over year vacated the one thing of the entropy.
A decision to close our amerigas as the for us factories for a week the month.
Is also something that's going to help us in this fourth quarter and when we think about breakeven. We don't think about breakeven after taking actions like GAAP, because that's something fairly expansionary and something we wouldnt try to sustain.
So it is something we can do the temporarily reduce breakeven, but the that its asset sensitive we consider current.
The second from the year over year cost savings.
It's hard to give you a full year number.
Because its change changing each quarter or it's being driven by different things each quarter back earlier in the year was driven off the salary reductions.
And and the of pulling back on a lot of discretionary spending throughout the second quarter. We continued to have salary reductions and we further pulled back on discretionary spending now we've reinstated salaries, but we reduced our workforce and we sustain the level of discretionary spending reductions for.
And I'll refer you back to my comments around the year over year. This quarter 92 million of cost savings $56 million of them coming from lower employee costs, and travel and events and contract services discretionary spending and 36 million coming from lower variable.
For compensation expense.
The.
Okay, and so yes, it is and I guess my follow up for that and if so how the as we're thinking about the go forward and and I know a lot of its going to be dependent on the the growth environment, but how would you.
If you're and Investor or me, how do you think about.
Those costs coming back what needs to come back and order for growth to be there as a possible we see the costs come back for the growth that is because you have the depth of bringing some of the expenses back in order to drive the growth.
Well I think certainly some of them are going to come back me TV right now is virtually it's almost zero.
And we need to get our sales or sales people want to be with our customers face to face and as soon as they can I'm sure. Some of that will restart but I also think the business travel likely is isn't going to be what it was for several years, maybe even if all the if at all other lots articles being written about global business travel look like in the future but I.
I do think some level of of travel and entertainment is likely to come back and certainly as our topline growth and our bottom line improves our variable compensation will come back.
As well and the on the I think for you are asking is or where might we be ahead of the the revenue growth where might we be ahead of revenue growth and investing a little bit that's really going to be on product development and positioning ourselves for the recovery and Thats. What you are seeing a little bit of now where we initially guided for some incremental.
And and the third quarter Didnt fully play out for do it for guiding again to that and the fourth quarter and this is very very targeted toward things that we think are going to make the difference and our differentiation as we come out of this thing in the quarter Scott.
Great. Thanks, Thanks, Dave and and since you guys last reported.
And can talk of.
And other industry participant put out and that's the met for what they thought might not be coming back in terms of office space and I think it was a pretty pretty big number of minus the price and people I'm just curious to get your thoughts Jim and I'm sure you saw what what do you guys think about what percentage of the office might be gone for good.
And does that change and.
I guess and and related question. What are you guys doing on the the work from home product and but you think it's going to be.
The more important factor longer term are you guys changing any of your go to market strategies of marketing or anything else on that side of the business.
Yes, so the let's talk about the first part and I'll come.
And back to the works and compared so.
The the clients and talking to for the most part and not considering any major reductions and their footprint and I do hear some of them talking about the as I say, if there and big cities and the thinking about 15 for large cities is suburbs spaces. They may not reduce their total square footage of night reduce the cost of debt.
Here are some of that are speculating about hey, the pay and what work from home does we might see and need for less space, but it's too early to say for share.
But those.
Those statements don't make the headlines and and other Reits articles about people, who think that things are going to stay pretty much the same.
The of Jericho given the by people it for radical ideas and so I think the the.
The silent majority of customers are not thinking about radical changes like that.
And other and I'll tell you a little bit about why and so if you imagine that and in the future.
And that most people working and offices will still work from home will pay a day or two of weak. So thats, maybe 25, 30% of the time, it's tempting a pure kind of check if you are in charge of real estate costs. The of the goal the Rockies for real estate caustic shade, our top 25, 30% fewer people in the office.
And I think that this much space kind of 25% I should be able to say the much space right.
Of the problem, though is that it's not it's not evenly distributed so when people say I want to work from home the day or two week and you ask them. The next question.
Which as well, which day would you want to work from home a lot of answer Fridays and we've seen this ourselves some room and we had people back weighted.
We have people in the office, we didnt make and mandatory people can work from home they want to keep our active occupancy and the office on Friday of as far as lower than it was on Tuesday Wednesday Thursday.
And so if you kind of time real estate and Unilife.
Yes, 25% of met the working from home, but if if most of them are kicking Friday that doesn't help the new the piece of real estate on Tuesday, Wednesday Thursday. So you still have the peak loading of loan and that that will only go away. If you tell people that you have to work from home on Monday, you have to work from home and Tuesday, the are working for whom and Thursday that.
Not what they want that's not with asking for in service and flexibility tale of the balance there.
The home life with the Worklife family needs and so on site and a lot of people getting that kind of reality check that's unlikely with of the able to recapture a lot of real estate savings.
Because as the take more work from home.
In terms of our work from home business the absolutely I made some comments in the the marks but.
We significantly increased the number of people working on that part of our business and attention it's getting across the company.
I feel pretty good about our the product part of our business model there of weak.
Mike this opportunities for best adequate things, but for really pretty well covered in the and Q acquisition actually helped us quite a bit as well.
The the opportunity I think is really.
The rest of the business model, so everything from making it easier for people to find the products you know our brands and our products select the products.
All the way through altering specifications and and delivery and installation and.
We have an opportunity and we have a great business model, but it's all set up for the business. So our product is ordered by dealers who understand our process of what they do all day long to specify and order so its products and ideally and stylists, who has installed products.
For years and years and years and they've and solve their game and installation of the desks building. It 8500 best over the course of the couple of weeks and not looking at the instructions.
So when you get to the consumer model, yet think about everything from how packages arrive how they're open to people find the constructions grew they call. It. The other question and we of App and the were good but we have an uptake of the a lot better. So those of some of the areas of we're putting focus on and continuing to look at other ways for us to bring our.
Products to market.
We don't have retail stores, but we have there for a lot of other options, because we're not and competition with people who have retail stores and so we have.
The communities to partner with people, who already have distribution and and and they want to be participating more and work from home. So those of some of the things for exploring.
So Jim would would share it would it be fair to say that your total addressable market coming out of it could potentially be even larger than it was before.
With the office.
Essentially consumers might need two offices now more often than not.
And if you guys are increasingly going to participate and the work from home element of it could make your whole mark of bigger is that a fair statement.
I'd say the change is always good for us so the.
And the thing that as always.
Our products last forever I think you guys know the types of people thought and people using price to bucket of 20 years ago.
And and as income out of Kobe because of the work from home, but also because of the other things I talked about and.
As many of the more energy around change and Thats just all of its good for us.
Even if I go back and cutting 20 years workstations for bigger everyone has their own desk and also in the last and a 20 years, we've absorbed cotellic where people share desks in the office and desk for smaller than the word before and the panels and as high as the of our before and yet despite all that and if you did the math the limits the a much smaller market and there was before.
But every can be changed from one state to the next day to create a new wave of reinvestment in the office the when it happened otherwise thats, maybe the way to think about the vessel. The market here is that the size of the market, but the degree of change within the addressable market that will fuel our demand.
I will however, except for the question that the I think Thats true I think people are going to continue to work and more and more places the going to be working.
At home as well as in the office sales within the office, the and not just for me sitting at the desk updated and the sitting and asset sensitivity and ancillary spaces and debt. So it will be a lot more opportunities like that I will the one caution operating here is that our market share is much higher and.
And supporting work in offices than it is work from home and so.
As it has that shift happens the participating and it does broaden our addressable market.
The won't capture for unlikely to capture the same market share and non approval on this we do and we're from office.
And maybe also thinking right and one more thing and we have one other thing to ask the site and I'd like to address flow of market question and.
In other ways of thinking about our addressable market is also to the breadth of products. The offer so the and Q acquisition as I mentioned before helped us address the market the price points that are lower than what we normally participating and also the different if the weighted of banks and the either customers who are not thinking about four to six week lead times and 12 week long project planning windows.
The wake up on a Monday, the OEM gets new furniture and here and we want to buy next Monday and so five day ship is really critical aspects of the and Q business model and helping us reach a whole bunch of customers and we never really addressed before customers that many of our newest served but they serve them to other people's products. So.
For the best that's the that's been a really nice addition to our portfolio Smith system, which was the addition of key to eight education on top of.
Fiscal and college, which had served before is another nice addition of because the schools are changing and people are going to think about what was the feature of education coming out of the post cobot world. So we see a lot of opportunity there orange box, which added a lot of ancillary product, but also added times we.
We see positive being super important coming out of it because more people want the ability to go into the space close the door have of video conference for 30 minutes for an hour and then come back out of that product and kind of private office. The truly of price you go to work for a short period of time.
And it's also has other benefits in terms of pathogen control and so on spoke.
We think a lot of the things we've invested and over the last few years, having improved and addressable market and are quite relevant actually for this post over the world.
Great very helpful. Jim Thanks for answering the questions and happy holidays, and stay safe everybody and.
Thank you thanks.
Once again ask the question. Please press star one on your top and keypad.
One of the question from Greg Burns with Sidoti. Please go ahead.
Morning, both when we look at the work from home opportunity and some of the investments you are talking about making have you considered.
Yes.
The acquisitions.
And to accelerate the strategy.
And and we always look at acquisitions every time, we think about any strategy and we haven't I wouldnt want to yearly and on this day equivalent so I'd say for everything we are doing with investments in our core thinking about.
Ancillary thinking about the investment the acquisitions I just mentioned.
We have and we will take growth opportunity, we start by thinking about how do we want to put do you want to play and how do we want to win.
And acquisitions are just one part of that.
But but I think.
For now I think in the work from home business and our number one opportunity is to better serve the markets for our debt service and I think there's a lot of opportunity for us to grow our business and.
Just doing better what we're doing today, but im not ruling out anything so there is opportunities for us to scale that business up but I think it's wise for us for learn as we go.
Okay and.
She's talking about inflation and other steels.
Sales increased and price recently and I know by the turn of others talk about free so can you just of.
Update us on and.
And the inflationary drivers of the business.
Okay and in general and base, maybe get specific so the yes right now there is definitely some upward pressure on steel because theres kind of and acute shortage of steel.
And free because there is a series of of.
Product coming from Asia, and the there is a shortage of containers on the water and then even in domestic shipping various shortages of driver shortages of carriers and therefore upward pressure on free costs.
And.
And although.
And your question I think is probably going the and the context of our cost but I also the start take on the site.
By the way Thats really good news.
And that means eight and as demand for steel Thats. The news and is demand through the product. That's good news for the economy. So.
If the price is going up because demand of peak supply and it gets driven by both sides of that equation from a sales aspect of the supply side as we understand it is acute not something that's likely the last forever. The has to do with the fact that prices for so.
So so much of the lower last year that that some of the nose test capacity offline some of them such as planned maintenance some of the had events that caused them to have and planned downtime.
And now they are trying to bring it up because as as demand begins the search prices began to rise and at the end of makes sense for the for the big enough for the camping and up overnight that the pending and whether they had.
Completely shut down their mills of the headcount sort of the warm shutdown and.
It takes the more or less time and backup and we have this shortage and have this price impact for watching very closely working with our suppliers.
And if we don't we don't think the steel price is going to last for the year tighter and people to sort of be talking about it as Mike is something that we kept the deal with here for the coming months shave you want to add to that.
Okay and lastly, when we look at your your backlog how how much of that backlog includes maybe longer dated.
Stop said got got delayed during the day because of the pandemic like projects that got pushed out.
And or maybe tied to new.
The new office buildings being built or anything like that like deserted the is.
Is there of the.
Moving number of Bob.
Longer dated backlog of its just kind of just just waiting here for the.
The endemic to ends for that and David in the Summertime, Mike, where we might see a little bit of the snap back in the second half for where some of this gets hit.
Yes.
Cash falls out of the backlog.
Well I wonder if you're referring to our project opportunity pipeline are.
For our backlog is true.
Largely short dated.
David projects that are going to ship most most of our backlog, we expect the shift in the fourth quarter, but the project opportunity pipeline.
The.
I don't I don't know the we have that granular details of give you an indication of how much dates back.
Six months 12 months 18 months.
So.
I think it's the we've.
And we've seen opportunity creation be proved pretty steady certainly lower than last year for be pretty steady. So the fact that we're generating steady.
New opportunities that are coming into the opportunity pipeline I think is an indication that the.
Certainly post co the project thinking of project opportunities.
And does that help yes, yes, yes, I mean, I guess I was.
Yes, this falls into this category, but.
And just wondering if.
The reserve.
And maybe to and that Glenn Euro the some some kind of a number of.
Projects and that and that opportunity pipeline that you know will and are going to ship and not like stuff you have to go out and win that you're seeing and talking about but Mike. It's it's been kind of one of the awarded but it's just.
Sitting on the whole 100 does deserve the waiting and then maybe you get a little bit of relief and net.
At the beginning of the of.
The recovery you see that kind of.
Give you a little bit of initial boost.
Yes, so I think and a lot of industries when projects are awarded to a competitor the.
Those competitors and a count that and their backlog in our industry leasing the case, we don't count that and so the orders actually placed and the difference between those two points. If I can you tell us it might cost and January that we won.
They havent actually at the surface material and they haven't picked the specific products.
After a while.
This is there is for.
Fabrics and finishes and the sizes and options and until all of that decided and they've actually really place. The order, we don't count and enter backlog.
So the backlog pretty clean until the stuff, we're going to shift for the next of six weeks the pace.
Okay.
Great. Thank you.
Once again to ask the question. Please press star one on your telephone keypad and once again Thats star one to ask the question.
And we do not have any telephone questions at this time and the Turkey and I will turn the call over to you. Thank.
Thank you and I would like to end. This morning by thanking all of you for your investment and Steelcase and the time you took to work with US this year to understand our business.
From all of US here at showcase we wish you and your families. The joyful holiday Stacy for everyone and we'll see you next year.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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Hi.
Okay.