Q4 2021 Steelcase Inc Earnings Call
David.
Mark.
Yes.
Sure.
Good morning, My name is Michelle and I will be your conference operator today at this time I would like to welcome for one the steelcase fourth quarter and fiscal 2021 and 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 would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question. Please press the pound key I would now like to turn the call over to Mr. O'meara you may begin your conference.
Thank you Michele good morning, everyone. Thank you for joining us for the recap of our fourth quarter and fiscal 2021 financial results here with me today are Jim Keane, our President and Chief Executive Officer, and Dave Sylvester, Our senior Vice President and Chief Financial Officer for.
Fourth quarter earnings release, which crossed the wires yesterday is accessible on our website.
This conference call is being webcast and this webcast is a copywriter production of Steelcase, Inc. A replay of this webcast will be posted to IR steelcase com later today.
Our discussion today may include references to non-GAAP financial measures and forward looking statements reconciliations for 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 statements 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. Our fourth quarter EPS was a little better than we expected because of stronger revenues and the Americas and some tax benefits, partially offset by higher freight costs.
We also had a significant increase and a work from home business. This quarter that helped drive some profit.
Dave will talk about the fourth quarter and more detail and.
I'd like to spend a couple minutes, reflecting on the year. We just finished and then focused on what we see going forward.
And just a year ago were reported in fiscal 2020, which was one of our best views and two decades.
And we didn't have time to celebrate because COVID-19 was causing factory shutdowns and first in Asia and in Europe and the Americas.
Our customers also began to shut down their offices and while some projects going forward many reported.
For several weeks, we focused on serving customers and essential industries and helped out by making PPE for local hospitals and the U S. S.
And as we reopen factories and offices, we adopted new protocols and processes to keep employees safe.
We reduced our fixed costs by temporarily reducing salaries and working hours and then later by reducing head count when it became clear the first wave of the virus wasn't going to be the last phase.
We reduced discretionary spending but continue to invest and selective new product development with.
And we protected our liquidity for us.
Series of actions, including a reduction and our dividend and aggressive actions to conserve working capital.
Because of all those actions we were able to report a profit for the full year, despite more than a $1 billion drop and revenue.
We are and office furniture company, and we were able to deliver a profit and a year when many of our largest customers were not using their offices.
We will share some of those profits with our employees for our annual bonus and they deserve it because they really helped us get through the year.
The decisions we made during the crisis put us and a strong position as we enter this next year, we have a lot of new products that are relevant to the post COVID-19 workplace, we invested and our relationships with customers dealers and designers and we maintained our strong liquidity position to support future investments.
So we feel prepared to capitalize once demand returns more strongly.
On our call last time, I talked about the importance of the vaccine rollout because Ceos, who are eager to put their real estate investments back to work.
We were having conversations about the post COVID-19 workplace with our customers throughout the year, but when January came the rising confidence and the vaccine got more urgency to those conversations and.
Now, we're seeing an increase and actual projects.
And these last several weeks, particularly in the Americas, we have seen more and new opportunities as well as we start the projects that have been put on hold last year.
The project opportunities, we track and the customer Rfps. We've received saw double digit increases and February versus January and our customer visits to Grand rapids, including both physical and virtual visits and more than doubled.
And those trends have continued through the first few weeks in March.
So our salespeople are very busy our pricing and quoting people are busy and.
And our leadership team is busy as customers want to know, how we see and new workplace emerging.
We're hearing the same thing from the design firms, we work with they are busy and expect to continue to get busier through the spring.
I really believe we're seeing the positive impact of the rapid rollout of the vaccine and the U S.
CEO confidence is very high as measured by the business round table.
Many ceos are getting the vaccine themselves and promoting it to their employees because they see it as key to getting fully back to work.
Previously many were targeting September one is the return to office space and now we're hearing more talk about early summer or even spring at the beginning of their first wave and returning.
Many states have released prescriptions and many more are expected to and the coming weeks.
So when does this translate to higher orders for <unk>.
Sales process takes several weeks to go from project initiation through design bid selection specification and finally and order <unk>.
And we expect to see orders and build later and our first quarter and into our second quarter.
Some good news is we believe many of these projects seem to be operating towards the faster installation deadlines and we normally see probably because many of these projects were originally scheduled to be completed by now. So there is some pent up demand.
We also believe many customers will return to their offices without making significant changes as table wait to assess the challenges of the hybrid workplace and then begin projects to update the office.
So we expect those projects are likely to develop and the second half of our fiscal year.
EMEA Unfortunately appears to be on a different timetable because of the challenges they've seen with rising case counts, leading to new shutdowns and a slower rollout of the vaccine.
The stimulus efforts have also lagged and boosting the economies so far.
We expect to have a clearer picture next quarter of the trajectory of EMEA recovery.
APAC continues to recover nicely and new project opportunity level has been very strong for the past few months and our fourth quarter orders in China were up 11% versus the prior year. We believe APAC is on track to have a strong year ahead.
As we enter our first quarter, we have a relatively low backlog and we have not yet seen an inflection and our order rates.
We're also facing some higher cost due to commodity inflation and because of the number of temporary global supply chain challenges, including a foam shortage caused by the Texas ice storm a few weeks ago.
And we expect to reported operating loss and the quarter, but it's largely consistent with the scenario we've been managing toward.
At the same time, we're also seeing really strong preorder activity levels, which is why we didn't want to take any additional cost reduction actions that could interrupt our participation in the recovery.
We are targeting to be approximately breakeven on a year to date basis by mid year for the second quarter profit that approximately offsets the expected first quarter loss.
And we consider the rest of the year and beyond we are quite optimistic about the future of the office and the implications for our business and.
Everyone seems to be talking about the hybrid office.
Operating employees the option of working from home one to two days per week.
Initially there were articles about companies, hoping to save money by making significant permanent reductions in their office space needs, but we were skeptical and.
And KPMG.
Outlook Pulse survey.
Shows only 17% of Ceos think they will downsize that footprint compared to 69% back in August of last year.
We agree completely with the principles of a hybrid workplace, but as employees return to offices companies will discover that hybrid is hard to get right.
Every meeting might have around low participants, but it's not going to feel the same as when everyone was remote <unk>.
And at the same as when everyone was in the same room.
Individual work will be different too as they will often include the need for jumped on a video call without distracting others.
During the crisis, we've learned how much we miss all of the important connections we make when we were together and in office.
Before meeting after meetings, but when we're just moving through our offices, but many offices could do a better job, helping make these connections happen.
As employers offer more choices for their employees. The office has to compete with the home it has to be worth for commute.
Officers have to help people work better.
So we don't see the office getting smaller and we believe companies will have to make investments and the office. So that people can work better.
Office and tech to be safe and feel safe and we can help with that.
Offices have to be more productive for collaborative work, but also for individual work.
And he has new products designed for that <unk>.
Officers have to be flexible so flexible be users can reconfigure the space based on what they need right now.
And offices have to be inspiring.
And people, we connect with each other and with the purpose and culture of the company.
I think CEO and get that and its why they are less interested in reducing their office footprint now.
Recovery is right in front of US every company is going to have to be more competitive during the recovery.
Not just about attracting and retaining talent, but it's also about helping every person every team every part of the business reach its full potential.
<unk> understand how important it is to get their people back together safely and productively. We're here to help and this is why we are targeting double digit revenue growth for the second half of our year now I will turn it over to Dave to cover the financials.
Thank you Jim and good morning, everyone. My comments today will include details related to our fourth quarter results and outlook for the first quarter as well as some highlights related to our targets for the second quarter and back half of fiscal 2022.
I will focus largely on comparisons to the estimates we provided last quarter and sequential changes and our results as the year over year comparisons recovered and the earnings release.
Versus the outlook, we provided in December 4th quarter revenue finished $27 million higher and earnings per share were favorable by <unk> <unk>.
While order levels were largely in line with our expectations for the quarter and the timing and requested delivery dates were a little earlier and faster than expected.
At the same time, our operations team recovered from the temporary shutdown in Q3 and navigated several supply chain challenges, we outlined and the release.
The operating income benefit from the higher than expected revenue was somewhat dampened by higher freight and labor costs associated with the supply chain challenges as well as higher variable compensation expense associated with some favorable tax items.
The favorable tax items and the quarter were driven by tax planning and optimization strategies implemented during the quarter.
And which increased carry back benefits available to us under the cares Act as well reported tax loss for U S income tax purposes and fiscal 2021.
With respect to the sequential comparison of the fourth quarter results versus the third quarter adjusted.
Operating income decreased by $3 million, despite revenue increasing by $60 million.
The sequential change in revenue included organic growth of approximately $50 million and was driven by the delayed revenue from Q3 related to the shutdown.
Order levels only declined modestly compared to the third quarter, which was better than historical seasonality and suggests we may have reached the bottom of this cycle.
The $3 million sequential decrease in adjusted operating income was driven by the following items, which more than offset the incremental operating leverage from the organic increase in revenue.
First we incurred higher aggregate costs and the fourth quarter related to the supply chain disruptions and catching up from the operation shutdown last quarter.
Second we began to see increased inflationary pressures across a number of commodities and the fourth quarter, which negatively impacted the sequential comparison and.
And we expect will impact us more significantly and the first quarter and advance of a price adjustment plans and take effect in April.
Third operating expenses increased by approximately $10 million driven by investments and the areas of marketing product development and information technology.
Plus we received lower government subsidies related to continued employment and incurred modest severance costs related to a few organizational changes around the world.
Fourth we incurred approximately $7 million of stock compensation and operating expenses related to the discretionary incentive awards that I mentioned last quarter.
Plus we recorded higher variable compensation expense related to the favorable tax items.
Yes.
Moving to the outlook and our targets for next year, we are projecting a net loss for the first quarter and we are targeting earnings and the second quarter that would approximately offset the first quarter loss and.
And in the back half of the year, we are targeting double digit revenue growth.
For the first quarter, we expect to report revenue within a range of $540 million to $570 million, which is lower than the $677 million of revenue we reported in the fourth quarter.
Because.
The estimated sequential decline is being driven by the following factors.
First our year end backlog of customer orders as approximately $100 million lower and at the start of the fourth quarter, which included approximately $60 million of delayed shipments from the operation shutdown in Q3.
The remaining decrease was driven by typical seasonality and our business, but the timing of orders and requested shipment dates and the fourth quarter that I mentioned earlier also contributed to the decline.
Second supply chain disruptions continue to impact the company and are expected to result, and the delay of some shipments from the first quarter of fiscal 2002 to the second quarter.
We are doing all we can to minimize customer impacts, including procurement and delivery of materials outside our normal supply chain processes.
Which is expected to continue impacting our costs and the near term.
We expect order levels to improve sequentially and the first quarter typically we see a seasonal improvement driven in part by Smith system and the rest of our education business as orders build for the peak summer months.
We are also projecting orders to begin benefiting from the increased sales activity Jim mentioned in his remarks.
But much of that is projected to end up and backlog for the second quarter and back half for fiscal 2022.
Taking this range of revenue into consideration along with the other projections, we highlighted in the earnings release related to inflation net of pricing benefits, where operating expenses between $190 million to $195 million and and effective tax rate of 28%, we expect to reported a first quarter.
Net loss between 27% to <unk> 34 per share.
For the second quarter, we are targeting higher revenue from seasonality and improved order patterns as companies begin returning to their offices more broadly and increased capital spending for their workplaces.
With the higher revenue plus the benefit of a projected $15 million land gain we are targeting earnings and the second quarter to approximately offset the first quarter net loss and bring us to approximately breakeven halfway through the year.
Thereafter across the second half of fiscal 2022, we are targeting double digit revenue growth as customers return to their offices and our recovery and our industry begins to play out more significantly.
From an earnings standpoint, we're targeting relatively strong operating leverage from this targeted revenue growth and the second half of fiscal 2022 as compared to the first half of the year.
As we are targeting operating expenses before the projected land gain to remain at or below $200 million per quarter for the balance of the year.
Lastly, a couple of other data points for your fiscal 2022 modeling.
We expect interest expense to approximate $6 $5 million per quarter for next year, assuming current levels of debt for the entire year and we expect minimal investment income given the low level of market interest rates.
And for other income net which includes income from our unconsolidated affiliates foreign exchange gains and losses and other miscellaneous items.
We're targeting $1 $5 million or more per quarter across the fiscal year.
As I mentioned earlier, our first quarter outlook includes an estimated effective tax rate of approximately 28%, which represents our current estimate for the full fiscal year.
And lastly, we expect depreciation and amortization to approximate $80 million and capital expenditures to fall between $60 million to $70 million for fiscal 2022.
And closing our fourth quarter results were better than we expected while navigating several supply chain challenges during the quarter.
And the outlook for the first quarter projects increased inflation and some continued supply chain constraints, but we've announced a price increase that will begin to offset some of the inflation and we expect the supply chain and supply chain challenges to reduce over the next several months.
Our optimism continues to build as we progress into fiscal 2022 and were targeting seasonally higher revenue and the second quarter and net income that would approximately offset the estimated first quarter net loss.
And for the second half of fiscal 2022, we're targeting double digit revenue growth versus prior year and relatively strong operating leverage from the targeted growth.
From there we will turn it over for questions.
Okay. At this time, if anybody would like to ask a question. Please press star one.
And your telephone keypad.
Please star one on your telephone keypad.
Your first question comes from Mike back at.
Private Investor Your line is open.
Good morning, I'm now with low water challenges from thank you for taking my questions on Mexico for.
And our best wishes to everybody there all of you and your families and the entire steelcase family and it has been quite a year and bill.
And about this time last year I guess, you would share you said, Jim and the impact was low.
Becoming an unmistakably clear and you also congratulations for navigating this.
Period.
Many of the quarter for our June quarter growth.
Come up with $660 million for liquidity and pretty much no net debt.
And with revenues down abated, so so that's that.
And incredible performance.
Mike My first and overriding Questionary goes for the future Joan you addressed it with and a.
Broad sense talking about the office for.
For a few second quarter is still distorted by the pandemic. What can you tell US you will and I think people and the business Roundtable, what can you tell us some of your conversations with Ceos about what they are thinking about the way. The offers will look from here.
If it is a hybrid office, it's kind of it's got to effect the way.
The spaces are utilized and what products are there. So maybe you could give us some color as to what youre thinking of whats from.
The products will look like for the future and for those new world.
Sure and first of all thank you for your time.
And comments and I also wish the same for you and your family.
So CEO, they're super engaged on this topic and unite.
I have a tendency of classic business Roundtable Congresses and others recently.
For this topic is that net to be and the agenda and suddenly it's on the agenda everyone's talking about it.
And others, where there's been panels for together that even though I'm proud of the group its other Ceos, there and kind of given our or talk about how they see the office changing so I'm excited about that I think.
I'd have to say that at all change in January and if you go back for September October November.
We were having conversations with clients we had done our research we had lots of share and people are interested but they're interesting and kind of I'd say, a curiosity and sort of a way they werent really going to do anything right now but share it willing to sit down and talk about it and learn something we came back from the holidays in January and the Americas.
And and everything had changed.
Suddenly the debt.
And customers. They wanted to have these conversations and thats continuing to build through January into February and and now its projects actual projects that they have so I think thats the first.
<unk> shipped I've seen and I think that happened.
Because the Ceos I think Ceos came back and it's funny and I think the period is pretty weak and every time I would talk to.
And it seemed like every time I talk to the head of real estate and one of our clients.
Net person had just come out of the Ceo's office for the CEO is asking what are we going to do about what's our office and I'll look like.
So I think theres a lot of energy ramping up and we'll see as we're talking about is let's start with how differentiated the organized they start with how are we going to get our people back together, we need to get people re energize.
And we've done a great job getting through work from home, but this does not listen I would want to do going forward.
And we need every advantage for them to get our people back together. So we hear that a lot sales also recognized debt.
Our view into their own organizations as much narrower today and number of people that you get a chance to interact with and video calls and so on and is much smaller than what you get when you want and going into your space volume from one needed to another.
And so getting a sense of what's happening and organization is much tougher.
So I think theres a lot of interest paid Ceos and this topic.
And and.
And these days when I asked the DHS and talking it's and immediate SMA faithful.
Faithful together the meeting with two or three of their people and I've been doing those calls almost on a weekly basis. So there's a lot of that going on in terms of how the office is going to look we have strong ideas about that so we think for example debt for some people working from home.
Had a home office. This is maybe for more senior executives, who have dedicated home offices or they've got a spare bedroom you have enough room, where they've actually been able to go into a room and close the door. They got the benefit of privacy and uninterrupted concentration and as they come back for the office. They are not going to accept going back into an environment, where they can't find that we're somehow it.
Less effective and supporting that kind of work. So I think office is going to have to be better and supporting consultative work, providing for places where people can go with their enclaves for pods or for new kinds of furniture and to provide.
Yes.
Less distraction and less interruption.
And thats going to be an important aspect of it secondly, we think that teen spaces Hefting accepted heavily meeting it's going to include remote participant and therefore access to video conferencing and and Thats not just about the technology. It's the Brady together of the digital and the physical how does the physical space has to be reconfigured to support video commerce.
<unk> is kind of a given and any meeting for.
The second example, and maybe I'll end with flexibility, we've all done and that we all have to learn how to be more resilient and our business models and that includes.
And relocate and and the physical environment of the office.
Having furniture and architecture Thats more reconfigurable evenly configurable as I said earlier by the users and south products like flex, which you've seen before.
We think those are going to be very relevant and the post COVID-19 workplace.
Thanks for your question, but.
Okay.
Thank you.
And you've got this relationship with Microsoft.
And do we watch the industry go to benching over the last couple of years, where there was less some private space. So what youre, saying is this is really going to require a significant change and the way that that the office has been borrowed for the last really for the last 15 years that Mike.
Understanding that correct.
Yes, I think it's going to be a new era I really do I think.
This last year is going to changes all forever and the way, we think about how we work and.
And we need to take the best things, we learned from the last year and things that work better and bring those back to the office and then we have to we also have to see the things we miss the most like the value of collaboration and interaction with our colleagues and make sure that the office is stepping up and handling that you mentioned the Microsoft relationship.
And a dialogue and trying to help the digital tools get better but they also are.
Recognizing the opportunities that we have to make those tools work better in the context of physical meetings, where people are physically together as well as connecting remotely and.
And we continue to have a great working relationship with Microsoft for class a number of fronts. The surface hub product that is founded on our Rome product.
Great examples of price that we see having increasing relevance in this post COVID-19 world and by the way Microsoft recently published their own research about.
Their experiences and what they've learned over last year about how work is changing and I encourage you all to per check that out because a lot of the principles and there are quite consistent with the things that we've been seeing and and we've been sharing a lot of our research back and forth for Microsoft.
David in your comments, you referenced Smith system, and the educational market, which you've been doing.
And what's going on and that vector with some with so much stimulus money being legislated for schools debt.
We are apparently haven't seen spent some can you share are you seeing or what percentage of the backlog is now is now for.
And for education or can you disclose that.
I don't know the specifics percentage, but I will share that.
Customer visits related to education has really been tremendous.
Our teams have been doing them virtually and physically we've had a number of people from around the region that it drove in.
To talk about education, and I think that has do with for the.
And the need for classrooms to change and the belief that a lot of the stimulus money, that's going to end up and state and local government is going to be directed towards the future.
Okay.
Sorry about that and we have bought.
Dogs.
Classic work from home.
Yes.
Thus excited and we're all excited.
And the great precisely Mark one of the hallmarks for Steelcase was there was the fact that you did invest while still falling and you're on and I think if I.
We have the numbers right.
<unk>.
For the head count lower than when we grew revenue from what can you tell us about what youre investing and where we.
We see it and the financials and could you just and people cost.
Yes.
You're exactly right, but I mean, we talk about that comparison.
And it internally as well for recalling debt during the financial crisis because of what we saw in front of us because of the changes we saw that were going to impact for workplace, we chose to stay invested and a number of new products as.
And as well as feet on the street as we navigated through that crisis, and we came out strong.
Gaining share and the industry for the better part of three or four years that every quarter, but pretty consistently.
And we see the same possibilities in front of US now there is a tremendous amount of change we think thats in front of the workplace and that's part of.
It contributed to how we navigated through the day.
Last year, we did reduce our head count, but we did not reduce it at the level that we likely would have if we didn't see the changes in front of US we've stayed invested and the number of new product initiatives that we think are very relevant for the post COVID-19 world.
And the workplace. So we're pretty excited for things to get started because we have a lot to talk about and we have a lot of products behind those those.
And those ideas.
Okay.
For more from a China sales and an 11% improvement and orders and stuff.
Fourth quarter is that for AAM.
Is that a harbinger for the rest of the world and they are coming out of SaaS growth.
And faster.
And <unk> faster than the rest of the world what are we seeing.
And does that.
And Asia overall Asia businesses doing quite well it's not.
And it's different in every country in Asia of course.
Everybody is going through something India is leased.
Leasing challenges with the coronavirus, but it felt like for China.
They went through a pretty dramatic shutdown at the very beginning of the crisis.
People don't back and their offices without the kind of second and third waves that we've seen in western countries. So that the China recovery has been more gradual and sustained.
And we continue to serve a lot of.
James headquartered companies that are global companies today and are continuing to growth and thats really where that growth is coming from <unk>.
I think part of it is the fact that day, they werent touches dramatically in the last few months, but also the work of our teams and building those relationships.
Also encouraged by some of the growth, we're seeing and other markets again.
And again some of them Mike based on local economies, but it's also just based on our team's doing a good job developing relationship with customers and and winning business from a net of one and the past and Thats.
That's been true kind of broadly across the region.
Okay, I have a bunch of other questions, but I will see that I just wanted to talk a little bit about the dividend and then I'll cede the floor to others and so what's the.
You did cut the dividend you've increased it a little bit what's the outlook for dividend growth.
And thoughts about acquisitions.
And the opportunities showing up and this period.
So I can't really comment on the future of the dividend.
The decision the board takes each quarter based on our financial performance, but.
As you know.
And important part of how we return value to shareholders has been low.
And part of our history and continues to be important way to return value.
We were at $14.05 per quarter before the pandemic the board chose to go to seven.
And at the start of the pandemic for a.
A year ago, and part I think because at the same time, we were cutting salaries across much of the global workforce by about 50%. So we cut the dividend by.
And by 50%, we certainly had the balanced and our liquidity.
Curious at $14 five for <unk>.
And another couple of quarters, while we evaluated how depot long.
Pandemic was going to we were going to be in it.
And then.
When we reinstated salaries at the same time also brought the dividend back to the level that we've been tracking average is 10.
Per quarter, and the acquisition front before the pandemic, we were becoming more acquisitive because we were focused more I would say on growth across our business and we were looking for acquisitions that we thought could bolt on to an existing growth strategy and help accelerate that initiative.
And I wouldn't say, we took the year off completely we still had some conversations about some targets that we were looking at.
But certainly as things start to ease up we're getting back into that world of looking at ways to accelerate some of our growth ideas and acquisitions are low.
Likely to be part of that go forward.
And I think we are in the net.
Thank you very much and I'll cede the floor to others. Thank you.
Thanks Robert.
And your next question comes from Steven Ramsey from Jr. James Your line is open.
Hey, good morning.
I wanted to think about the near term context Q for Q1.
And with the high and low end of the guide.
And to think through how much of.
The near term guidance is driven by demand.
Challenges and ramping up for supply chain challenges clearly youre not the only one with the supply chain issues, but.
I'm trying to think about if you're losing any sales for.
Sure.
For the supply chain issues or are they mostly sales deferrals.
Yes.
That you're seeing already and how that plays into the guidance.
Yes. This is David also serve maybe generally add a few comments.
First of all I'd remind you that when we have had.
We didn't quantify this because it's not we don't believe it's anywhere near that level of magnitude, but there are a number of supply chain disruptions. We are managing through so we felt like is certainly possible that we could feel some of that and.
And our revenue, where we could see either lead times push out or potentially not be able to fulfill every single order with us.
And the expected delivery day, so theres, a little bit of that contemplated in the guide what we're really doing is we're managing through.
The supply chain challenges leveraging every means possible, including things like air freight.
And procurement of materials outside of our normal course, which means we're buying on the spot market and.
And incurring higher costs in order to meet.
Our delivery commitments to our customers in order to sustain that level of business. So I don't I don't feel like were putting any business at risk.
We're actually spending money to protect that business and continue to serve our customers as they expect.
To be served.
I think what you are feeling and the and the absolute level of the revenue guide for Q1 is that we're just at the bottom.
We're seeing typical seasonality Q1 is typically a little softer than that and Q4 and we don't have any any benefit like we head into the fourth quarter were $60 million of revenue was shifted from Q3 to Q4. So I think youre just feeling the fact that we're at the bottom right now it's possible that we could see some quick <unk>.
Shipment orders.
Come in and are related to return to the office for those customers that are thinking about getting back into the office and the spring early summer they might have a quick shipment requests accelerates some some changes and their offices beforehand.
But without any significant evidence of that and our existing order patterns, it's kind of hard to build that into our Q1 guide.
Yes, I would agree with all that I think we're seeing a slightly longer lead times and that can cause you to lose some business without even though you are leading it and it really tells you too long, but I don't think we are at that point and I think part of it is because of this.
This combination of.
The softness and demand because of the seasonality plus the softness and demand because offices are still largely closed and you've made a lot of activity going on but that hasn't converted into shipments so our activity levels and our factories are down because of demand.
And when navigating through the supply chain issues, which would be a bigger deal. If we were at normal volumes.
Does we're at and lower volumes, we're able to manage through it so far.
Okay.
Great that's that's.
That's helpful and then thinking about the back half guide and the general stepping up.
Demand for <unk>.
<unk>.
And that you're calling out for Q1 into Q2.
Is there a general thought net.
If there is continual stepping up from Q3 into Q4 and kind of going forward.
How do you see that.
Playing out and maybe helpful context within this.
And our companies investing in their offices before and workers return or and these conversations with customers how many of them are.
Thanks, Chris and we will invest in our office products after workers come back and we get a sense of how we want our offices to work that.
Okay I'll take the first part and then take the second part on the first part of your question.
Planned it is really more of a continued improvement in demand across the back half of the year and into the following year is what we would expect to continue.
But we also have conversations with our operations organization to be ready for more significant steps and demand because that is also possible. It really depends on the level of investment companies want to make and advance of their return to the office or how fast they go about thinking of the changes.
And.
I'll, let Jim take it from there.
Yes, I would say.
A fair number of customers to habits, and default strategy kind of a wait and see strategy, let's get people back we'll see how it goes and then we'll take some actions.
Now I'll say that was kind of and a simple answer that was.
More true a few months ago and then it is today because today I think a lot of those customers and saying, yes, we want to wait and see but before we bring people back and want to make sure that we're not walking into something thats not safe. So steelcase can you help us with that and leave that services that we offer that allow the global you can go into a client side, even as the <unk> and we can see.
The areas that are going to be and issue and we can offer suggestions for them to make short term modifications and make sure. They are not bringing people back into situations center over weekends, and so on and Osha recently has issued some guidelines about safe workplaces and so.
And I say, a few months ago people were kind of guessing and let's say for Whatsapp Facebook now, it's mark lock and light because of the Osha guidelines. So we help them by looking at that and there might and in some cases, there's changes that clients choose to make before they come back into the workplace.
I think for others.
And for really all of them they'll bring people back and the realized and safety and efficiency and productivity. So these meetings don't seem to be the same as before keep complaining about things they weren't complaining about before expectations are going to be higher.
We expect that there'll be another wave of that kind of work where we are.
Lions are cognizant and saying we're back for a few weeks now and this is what we're learning and what can you help us gather information about what we're learning and those first few weeks and then and then and our hope is that we can fast track that work and we can convert it into solutions and recommendations and orders and shipments.
And for those clients.
Got a few others that have work debt really is not related to coming back or not coming back for any of that it was project work. There was on the drawing board before some of that work was supposed to happen last year, but it was put on hold.
And reaffirming that they wanted to do the project as they plan to remain thanks for making tweaks to the project based on Covid.
For significant changes that's a lot of the work that's going on right now are projects that were already planned or it could be triggered by lease terminations for there were already planning and doing of the stack of their space or relocating from one place to another where they they were building a building and now it's time to move in and so we're seeing a lot of work.
And in that phase.
Coming back to the office space.
Does that help.
Very helpful. Yes. Thank you for the color does that does it for me.
You bet.
And again, if anybody would like to ask a question. Please press star one on your telephone keypad.
And with my Star one on your telephone Keypad. Your next question comes from Robert Reuben Garner from benchmark. Your line is open.
Thank you and good morning, everybody.
Revenue.
So.
Maybe to start on the gross margin line.
Obviously, you didn't give.
And specific guidance for that but you can kind of back into a rough level and I think for 26, 27% range in Q1, and then I think.
And thats right that that jumps pretty materially from Q1 to Q2 back into the low 30% range.
How do we think about what the gross margin line might look like as we move into the back half of the year.
And when some of these costs subside and you get year over year.
Revenue growth again, I mean I think.
Like I said, it looks like Youre getting back to where you were kind of back and 19 and 20 already.
In the second quarter, even with some some cost pressures.
Pressures are there mix or other cost savings that are helping you guys get back to that sort of level. So quickly.
Well remember in Q2, we always have a sequential benefit of.
Summer seasonality from the education business and from Smith system, and it's not that those margins are.
Dramatically higher than the average of the business its debt, we do two thirds of Smiths systems typical years shift and the summer months. So we have a tremendously high throughput and the summer which helps our gross margins.
What you should expect and the back half of the year is that it.
At least if inflation behaves the way many are predicting that it will go up more and the summer and then start to come back down and Thats about the fall time period, our third quarter is when we would expect and our pricing benefits from the April adjustment to start covering some of the inflation. So we feel like that.
And would come out of the picture. We are also hopeful that the supply chain challenges that we're navigating and incurring incremental costs for will be more in the rearview mirror than in front of us by the third quarter. So it's really a and.
Absorption.
<unk>.
Thing and the back half of the year, depending on the level of volume that you model for us.
And the back half of the year is going to drive the gross margin percentage mostly.
And we're not we're not guiding to a specific double digit growth rate largely because we don't know we feel confident about the recovery starting in the back half of the year with for all the reasons Jim mentioned in his remarks.
But and that.
Share with you what kind of operating expense level that we're targeting for the back half of the year at $200 million or less per per quarter. So hopefully that helps you.
Build your models based on the revenue growth.
Wanted to.
For the company.
And that that does and just a clarification on that.
Operating expense kind of level I mean is there are certain and.
And revenue growth rate, where we're and youre going to have to spend more than the 200 million and in other words and ramps faster than than you're expecting and you're growing say north of 12.
20% I mean are you still is that still the right way to look and operating expenses or is that based on sort of a low double digit type.
Recovery.
Well I mean at some level of course, it would kick in.
And if it's growing.
Really significantly we would have likely higher profits and higher variable compensation expense that runs through operating expenses. So yes. There is there is no ceiling absolute ceiling and the $200 million, but relative to the double digit growth that we're modeling we see a couple hundred million dollars of operating expense.
And the and the back half for the year per quarter, Okay, a reasonable estimate I'll add to that when we do our budgeting for this year as you can imagine.
We've looked at every single spend every single initiative and we had a strong bias towards shorter payback investments since it can bring and the cash register sooner rather than later.
Left a bunch of great investments wait.
Waiting and that next year for <unk>.
And volume starts to pick up so if volume were to pick up and we're going to run this business and we're going to make sure we don't Miss those opportunities.
We have a lot of great ideas and it doesn't mean, we're going to spend materially more than what day to say, but we're also not locked into a budget for the whole year based on where we are right now if we see business picking up we'll probably spend into that.
To unlock some and potential of those projects.
Every investors and be happy about that.
Got it and then one more for me.
<unk>.
Comments about EMEA.
And obviously pretty confident and the back half of the year.
And is the vast majority of that driven by the Americas and the other category and you're sort of assuming that EMEA and slower or are you assuming kind of the same result.
For EMEA and as you move into the back half of your fiscal year as well with the vaccine.
And taking hold over there.
Yes, I think Thats Directionally correct I think the optimism you hear a lot of the remarks, you hear from US talking today about activity is related to the Americas business.
And Asia business is doing quite well as I said and I expect it to continue to do quite well and it doesn't have a good year this year.
But they're not they're not having a bounce off the kind of trough that the Americas and EMEA have to bounce off of so we're really encouraged by.
The signals, we're seeing and the Americas demand patterns right now when it comes to EMEA, It's really hard to say I don't want to paint and overly negative picture and I will.
Look up this morning too.
Text message from our EMEA leadership Abbado sequential increase cash just in the last couple of days so.
They need businesses is definitely operating and we're winning business and shipping business and.
But if you step back from the day to day order pattern and so what's happening and it might have a macro level, we know that those economies.
And going to struggle for a while all the economists are saying that it's going to EMEA is likely to come out of the recession later.
The stimulus packages and were approved recently are probably not going to start seeing expense for six months or so and so it could be a while before the EMEA core economies are being seen as robust and Meanwhile, from a coronavirus perspective, as the lockdowns are getting tougher and not easier, France and back into a relatively strict black.
Down, Germany, and a relatively strict lockdown and those are real.
Two of the growth engines for EMEA, So we're being cautious right now and.
I don't have a strong point of view about the second half of the year, but.
We will have works out and maybe next quarter.
Great. Thank you and good luck.
Thank you and true.
And if anybody else would like to ask a question. Please press star one on your telephone keypad and done that with these star one on your total.
Thank you Pat.
At this time I have no further questions in queue I turn the call back over to Mr. Keith for closing remarks.
And we're looking forward to this year ahead.
And the call I just want to encourage you all to stay safe and out of the woods, yet debt Youre vaccines if.
If you can and when they are available and I'm really looking forward to being able to see you guys again face to face and hope we can do that sometime this year. So thank you for joining the call today and thank you Vinicius for Steelcase and have a great day. Thank you.
Thank you everyone for joining us today. This will conclude today's conference call you may now disconnect.