Q1 2022 Steelcase Inc Earnings Call
And each of the past 5 months sequentially, our Q1, mockup requests and customer Rfps were 30% higher than Q4 and Grand Rapids based customer visits.
And in person and virtual approximately doubled.
In Munich, our customer visits were 50% higher than Q4.
Some of that global activity likely contributed to the increased order levels. We saw in Q1, which were up 25% sequentially compared to Q4 and 11% against the prior year and consolidated basis.
And a more macro level, especially in the U S. We're seeing similar positive signs design firms are busy as evidenced by continued increases and the architectural billings index nonresidential fixed investment and is now above pre pandemic levels and CEO outlook as measured by the business Roundtable is near an all time high.
Customer activity takes a few different forms right now.
A lot of it and probably most of it are projects that were in flight before or were on the drawing boards and were delayed because of COVID-19.
Those projects are getting restarted and the designs are often unchanged from what the customer would have done before COVID-19.
We also see some activities specifically related to the post COVID-19 workplace, including the emergence of the hybrid work experience and I wish I mean employees working from home as well as and the office.
We're seeing a new wave of interest by some customers to provide specific home specific office furniture applications for their employees to use at home.
These are not subsidy programs that employees can use for anything but rather the companies actually providing specific ergonomic solutions, which often include a tax share and height adjustable table.
In the post Covid office, we are seeing growing interest and privacy, which can include a return to private offices and some customers are just more options to employees to use when they need to do is downward or to join a video call and the office.
Our Orange box pods are a good example of the kinds of solutions and respond to this need and of course, our architectural walls portfolio and our wood furniture business have long supported private offices.
Many other customers have chosen to focus for now and getting the first few waves of employees back and the office and then taking some time to assess what works best as they experiment with hybrid work and then make the appropriate investments.
For our own experiences where they are likely to find challenges and we already have a strong portfolio of products ready to help.
We're also enhancing our portfolio with new products designed specifically to meet some of the new challenges created by hybrid collaborations.
Our Smith system education products business is also seeing strong demand signals as COVID-19 related stimulus money is beginning to be used throughout the U S to get schools ready for the fall.
Over the last year, we navigated through an unprecedented prices and we took a lot of unusual actions, including cutting our dividend and cutting pay it was really extraordinary and if you recall we took those actions at the very beginning of the prices in anticipation of what was coming.
Our businesses and recovery mode, now with strong cash flow and strong liquidity orders increasing over the prior year pipelines building and expectations for a profitable second quarter.
That's why our board of directors restored the dividend to its pre pandemic level and it's why we announced our intention to enter into an agreement to repurchase stock next week once our quarterly trading blackout lifts.
This past April we announced Sarah Armbruster will become our new CEO in October as I transition towards retirement and January <unk> announcement was very well received by our employees and our dealer partners and of course share my full support.
Sarah has been meeting with many steelcase customers and dealers over the past couple of months and I'd like to turn it over to her to share a few thoughts here.
Thanks, Jen and good morning, everyone.
<unk> revenue today, and I'm thrilled to have the opportunity to continue to work and has done over his tenure and lead steelcase and our next CEO beginning in October.
And then intentional over the past 60 day to spend even more time listening to our customers and dealers and to start to get on the road to be and our markets, which I wasn't able to do as much during the pandemic.
What I've observed is that many of our customers have a defined plan to return to the office and the physical changes needed to support that return are very clear.
And our facilities people are working on those changes and they are making progress toward a return to office call.
For other customers questions remain about exactly when and how to return and I believe this presents a great opportunity for us.
But what I heard very clearly consistent with Jim's remarks is that most companies expect to return to the office and a meaningful way now or in the coming months.
And whether they plan to return and a hybrid manner or to a traditional in person office with incurs and expectations, they're asking us for help IMAX.
Im excited about our ability to guide these customers and the near term as well as to serve them over time, if they arent ready to update their spaces right away.
I'm also optimistic about our growth potential and we remain centered on works and we continue to invest and translating our research based insights into products and applications that support the office health care environments, the classroom and work from home.
And I believe we are well positioned to capture growth with a strong leadership team aboard that supports investing and our growth and our balance sheet position to fund and needed investments.
Last year, while <unk>, leading our our corporate Covid response team and witnessed firsthand the resilience and the determination of steelcase employees around the world and now I E. Our employees focusing that same energy and passion on growth as our industry recovers.
Thanks, Sarah I think it's terrific to cirrhosis and time to listen and learn I did exactly the same thing before I became CEO and Mike Sarah and associates for many years.
As you would expect it confirms a lot of what you already know, but you also learn some new things you developed from new relationships and it gives you a way of testing some of your ideas about the future of the company.
She is also taking time to talk with many of you are major investors and analysts who follow the company.
I think this is a very exciting time and our industry probably the most exciting time in my career of work is changing and we're close as we're going to have to change to be more relevant.
Education and health care are changing and those customers are also investing for a new day ahead.
And so it gives us insights about work worker and workplace have never been more important and more interest and Ceos.
And it's also a time for us to build new capabilities and expand our offerings, we can respond more completely to those opportunities.
Sarah and I are working together and along with his leadership team. During this transition period to make sure. We're positioned for this next era. So now I will turn it over to Dave to cover the financials.
Thank you Jim and good morning, everyone. My comments today will start with details related to our first quarter results balance sheet and cash flow.
I will also provide some highlights related to our outlook for the second quarter and our targets for the back half of fiscal 2022.
Like last quarter I will focus largely on comparisons to the estimates we provided in March and sequential changes and our results as the year over year comparisons recovered and the earnings release.
Beginning with the comparison to our outlook first quarter revenue of $557 million within the middle of the range, we provided and the loss of 24 <unk> per share was better than the top end of our range by <unk>.
For revenue, we grew the top line by 9% organically compared to the prior year, which was impacted by government mandated shutdowns that negatively affected our ability to manufacture and fulfill orders.
We experienced stronger than expected order intake and the Americas. However, revenue was negatively impacted by the timing of requested delivery dates.
Which pushed out a little further than estimated and resulted in a higher than expected backlog at the end of the quarter.
EMEA order patterns were resilient and were also better than we expected while the other category, which includes the Asia Pacific region was negatively impacted by the significant pandemic impacts and India.
For earnings the favorability was due to better gross margins and lower than anticipated operating expenses.
To better gross margin performance was driven by strong cost controls and higher absorption of fixed costs linked to an increase and finished goods at the end of the quarter.
<unk> with our expectations, we experienced inflation net of pricing driven by steel and other commodities as well as continued challenges across our global supply chain, which led to higher logistics costs.
Our operations teams have done an outstanding job, maintaining our quality and service levels, while managing through these disruptions and controlling costs.
I will cover the ongoing inflationary pressures and more detail and I get to our outlook.
Operating expenses also contributed to our earnings favorability as they were a few million dollars lower than our estimate of $190 million to $195 million.
Primarily driven by project spending which didn't increase at the pace we estimated.
Regarding the sequential comparison of the first quarter results versus the fourth quarter revenue was approximately $120 million lower than the fourth quarter, which benefited from approximately $60 million of delayed shipments due to the cyber attack and Q3.
The remaining decrease was relatively consistent with normal seasonal patterns.
The operating loss of $32 million during Q1 compared to adjusted operating income of $8 million and Q4.
The $40 million sequential decrease in adjusted operating income was primarily due to the lower revenue.
Higher inflation net of pricing of approximately $8 million negatively impacted the sequential comparison, but was partially offset by the lower overhead spending and higher absorption of fixed costs I mentioned earlier.
As it relates to orders and the quarter overall, we were quite pleased with the order growth and Q1 and a return to more normal seasonal patterns.
Total orders grew sequentially by 25% compared to the fourth quarter, driven by 30% growth and the Americas and 22% growth in EMEA.
And the Americas smaller and midsized companies drove the sequential growth and orders, but we also saw a sequential double digit percentage increase in orders from our largest customers as a group.
Average weekly order levels strengthened over the course of the quarter driven by the Americas and reflected the reinstatement of delayed projects and other investments and the workplace as companies prepare for their employees to return to their offices.
The order strength in EMEA was broad based and grew 44% compared to last year, driven by France, the UK and Germany.
The other category grew 17% compared to last year, but was approximately flat compared to the fourth quarter as the impact of the ongoing pandemic and India offset broad based growth across most other markets in Asia Pacific and that design texts.
Turning to cash flow and the balance sheet, we used $93 million of cash and the first quarter, including the seasonal disbursements of accrued variable compensation and retirement plan contributions.
And ended the quarter with approximately $400 million and cash and $566 million and total liquidity.
Capital expenditures were $18 million and are expected to total between 65 and $75 million for the full year.
We returned $12 million to shareholders through the quarterly dividend payment of <unk> 10 per share and our board restored the dividend for the second quarter to the pre pandemic level of $14.05 per share.
Our capital policy targets to maintain a strong dividend through and earnings cycle periodically leveraging and earmark of our liquidity for cyclical protection when necessary.
At the onset of the pandemic and while ours and <unk> were reduced by approximately 50% across much of our salaried workforce, we paid <unk> <unk> per share followed by the last 4 quarters of <unk> 10 per share.
We also intend to enter into an agreement next week authorizing the repurchase of up to $15.50 million of our common stock.
These actions are consistent with our capital policy, which targets reinvestment to support growth a strong dividend and opportunistic share repurchases.
Moving to the outlook consolidated backlog at the start of the second quarter.
Totaled $624 million, which was 20% lower than the prior year, but 39% or approximately $175 million higher than at the start of the first quarter.
For the second quarter, we expect to report revenue within a range of $750 to $780 million.
And which represents a year over year organic decline of 8% to 11%.
But a sequential increase of 34% to 40% compared to the first quarter.
The year over year revenue decline is driven by the higher beginning backlog in the prior year due to the government mandated shutdowns during the first quarter.
Sequentially, we expect the increase in revenue to be driven by the strong backlog at the start of the quarter nor.
Normal business seasonality, which includes Smith system and other education projects that tend to ship during the summer months and the continuing improvement and order rates as companies continue returning to their offices and investing and their workplaces.
We expect to report earnings per share between 25 to 30.
For the second quarter, which takes into consideration and the expected revenue as well as our expectations of higher inflation net of pricing benefits of approximately $14 million compared to the prior year.
And approximately $4 million compared to the first quarter.
Operating expenses of $180 million to $185 million net of a projected $15 million gain from and expected land sale, reflecting a sequential increase to support product development and sales activity.
Interest costs and other non operating items that net to approximately $4 million of expense.
And and effective tax rate of 28%.
For the second half of fiscal 2022, we continue to target double digit revenue growth compared to fiscal 2021, as we expect a growing percentage of companies to reopen their offices over the coming months continued macroeconomic improvements and increased capital spending related to the workplace.
Based on current commodity cost projections, we expect year over year inflation on steel and other commodities net of pricing in the third quarter to be similar to the second quarter.
For the fourth quarter, we expect the benefits from our April price increase and our more recently announced August increase to offset more of the inflationary costs.
And closing the recovery has begun we.
We posted double digit order growth during Q1 and the increased pre sales activity. We began talking about over the last couple of quarters has strengthened.
We're projecting a solid second quarter, which we expect will offset the first quarter loss and were targeting double digit revenue growth and the second half of the fiscal year.
Inflationary pressures are significant but we moved quickly following our April price adjustment and announced the second price increase which will take effect in August.
Consistent with our confidence and the recovery of our revenue and earnings we restored our quarterly cash dividend to the pre pandemic level of $14.5 per share.
And lastly, our balance sheet remains very strong and provides significant capacity to support existing and new growth opportunities during the recovery.
From there I'll turn it over for questions.
Thank you.
And at this time I would like to remind everyone in order to ask a question. Please press Star then the number 1 and your telephone keypad and request that you limit yourself to 2 questions. So that we may answer as many questions as possible and the time frame you said gross wells for just a moment to compile the Q&A roster.
Your first question comes from the line.
Ben Garner some benchmark group your.
Your line is open.
Thank you and good morning, everybody.
Morning.
Maybe just to start can we talk about the <unk>.
Timing and the thought process.
Behind the dividend reinstatement and the share repurchase announcement.
Just as simple as orders are.
Conflicting and things are normalizing and the timing is right or is there any other.
Any other.
I guess longer term.
Thinking that went into the timing of it.
I think you've got it.
And is really that we were at this level of dividend before the crisis.
We had always believed that we could see ups and downs and the business normal kinds of recessions and recoveries and and not have to adjusted dividend.
Our strong balance sheet, Phil to support that.
Covid clearly was not anything normal.
And and the fact that people are no longer working and offices was even more profound for our industry and so we felt it was prudent at the time to reduce the dividend and we took lots of other actions of course to cut pay we cut board compensation, we cut hours, we had factories that were shut down for a variety of reasons.
And all the different today. So today, we are we are back to normal in many ways. Our orders are growing sequentially growing year over year, and we see plenty of signs that although we're not back to the level of cleaner act in terms of revenues and profits before COVID-19.
We're going to.
Characterize more of a normal recovery right now and so we thought it was the right time to reinstate the dividend.
And repurchase is something we do opportunistically and.
We have and be used 25 programs before and we expect we will continue to use them and this feels like a good time to have 1 and place.
So and doing both of them at the same time just reflects the fact that we think we're at that point moving on returned to more normal uses of our capital, including returning value to shareholders. David I know, if you want add anything to that no.
Thanks Robert.
Do you have a great and then.
Yes, I do I do that kind of leads into my next question and you sort of alluded to normalizing and I'm just curious your thoughts on what the potential is that we have sort.
Sort of a snap back to where we were pre pandemic.
And what could the timing of that look.
And look like I know, you've kind of reiterated your double digit growth.
Outlook for the second half, but I guess the question is how quickly can we return what are you guys seeing in terms of the types of furniture that people are ordering has is the office is going to look.
Very different or is it more likely that we just kind of return to the way business was prepay.
Pre pandemic.
Yes, so I think as we look out into the future. We expect it to return to the way things were pre pandemic and and in fact, I would say, there's reasons for optimism and longer view because.
We've never had this kind of interest before by Ceos and senior leaders in the workplace.
A big conversation right now and and and.
And companies are rethinking how they use their offices, how can we make these offices more effect and how can day.
And how can the office compete better against the idea of working from home. How can you have better privacy better concentration and better collaboration.
So there's lots of reasons to be optimistic about the long view in terms of the transition period between now and then.
There's a lot of uncertainty about that.
I think the things that would cause it to happen faster.
And would be the things that are happening right now so how quickly people feel and returned to normalcy and their everyday life will cause more confidence by businesses to return to offices quicker and more completely over these next few months secondly, how quickly customers can go through that process of welcoming people back and their office.
And how it's going deciding what they want to do and and placing those orders to upgrade their offices.
To be able to compete and 1 of the things that we've seen in fact, our offices and for many of our customers who've made investments in recent years, who have taken.
More progressive approaches to their offices, who had already embraced mobility and the workplace already embraced more flexible working arrangements with their employees.
They have a little less to do and some of the ones that have not made those investments and the office arguably have mortgages. So there could be.
And movement by some of those company per Se, we have to step up and.
And update our offices. So that's on the demand side on the other side of the equation as to some of the supply things, we're talking about making sure that we.
We have the supply chain and necessary to keep up with demand. We're doing everything we can do to do that a lot of our customers are facing challenges with their own construction projects related to labor availability and varies by market and there might be something that resolved as we get into September and October plus and these next few weeks is something we're still hearing about some of those could be some headwinds.
Our outlook considers all of those factors. It's a good question and I'd like the spirit of your question tubing because.
Our energy around here is to make sure that co Inc.
And we're ready to respond and recovery comes faster than we expected.
Perfect and I'm going to sneak 1 more and if I. If I can you mentioned small and medium sized businesses.
What about the dispersion in terms of geography, I mean are you.
We've got the kind of.
Return to office data Thats out there and it kind of shows some subsidies have come back a little faster than others or are you guys and a very similar.
Maidens and markets like New York, and La and San Francisco are maybe lagging the others and do you find.
Some of the other markets are I guess and encouraging indicator of booking com and some of those bigger cities.
Yes, I would say first of all I would say across the.
The southern price of the U S. Some of the Midwest regions.
And the return to office had already begun to happen more gradually earlier this year.
For a variety of reasons and the market stack and we're the most challenged if we think 2 and 3 months ago would have been the big cities.
New York, Chicago, and La San Francisco Whats happened over the last few weeks since we've seen cities like New York and now Chicago began to accelerate their return to the office.
And and that's happening in New York is actually showing a pretty good pace of return and you've probably seen some of that data.
Mark and Theresa.
And so right now and San Francisco, the tech sector and a lot of those companies made choices really many months ago not to bring people back until well into the later half of this year, even to next year and so San Francisco is lagging and.
And some of those markets in fact in place and moved out of those markets and it may be a longer period for its returning normal or may not return to normal for for quite some time. So San Francisco I think is the 1 that I would point to us and <unk>.
Most lagging city, but again, New York Chicago are beginning to show strong signs of return and yes.
We still see order growth in those cities, even like Toronto, or New York, San Francisco, India parts of India, and we still see orders haven't gone to zero and it is remarkable to see how the order patterns continue to reflect orders and those markets. Even though the offices are largely shut down which is I think telling too.
Some companies are readying themselves for the return of their employees. They are trying to get out and pay it in advance of the return of employees or they are accelerating the finishing of projects that may have started either before or during the pandemic.
We see similar things from Europe, and the way.
Some countries and ahead of others in terms of explanations and managing Covid rates and so you see.
Variances and thank you for the UK for example, and beginning to come back stronger now as the vaccination rates have climbed and their COVID-19 cases are the following.
Great.
And the sneak 1 more in.
And I apologize, but I got a quick follow up Jim you mentioned capacity constraints I think.
And you used.
Are you guys seeing increased lead times are the constraints on your end or are you just talking about.
Is it labor is it the supply chain is it what exactly are you referring to there.
Well I wouldn't preclude a supply chain constraints and capacity so that it's not really capacity, meaning like our factories and our ability to perform.
It can be the entire supply chain and and it can be kind of any pieces of the supply chain. So you could have 1 supplier, who maybe has the COVID-19 outbreak somewhere in the world and that could cause a challenge for us.
And the price of those parts go into.
And we've been dealing with <unk>, we've had some freight delays and as we've talked about with you guys over the last several months.
And have gone a little bit better and they are not quite as.
I'd say acute.
Acute as they were maybe 3 months ago, but they are still there and we see still deal with them from time to time, we had a factory in Malaysia that was shut down for a while and then move out.
To partially reopen.
We have a factory and putting and yes, we have some places around the world, where we're still dealing with COVID-19.
And then.
The steel sector the phone those those commodities are at price.
Challenges that can also have supply chain challenges. So I don't want to over standard, but it's something that we are watching and considering and of course managing to make sure that and minimize the effect. We have seen some increases and lead times on some products that are directly affected by that but I wouldn't say those lead times are up across the board.
Thanks, guys, Congrats and good luck going forward.
Thanks Shannon.
Okay.
Your next question comes from the line of CMC from Thompson Research Group. Your line is open.
Catherine and there may be on mute.
Sure.
Steven Ramsey your line is open.
And when we go to the next person and the queue and see if we can get it.
And again, if you would like to ask a question. Please press Star then the number 1 on your telephone keypad. Your next question comes from the line of Budd <unk>.
Some water conference and research your line is open.
Thank you and good morning.
First Jim Congratulations on your announced retirement and.
I know, we'll be talking to you before that happens, but just congratulation to share and congratulation on your appointment and best wishes and Ghansham.
I guess my first question share is to you because now that youre getting into the auto sheet.
A little bit about your conversations if you would.
With executives and what did you what surprised you.
What.
Maybe you can give michelle <unk>, 2 and what your loan.
Sure. Thanks, Mike.
So, yes, and it's been a great relative conversations and being able to re engagements with customers and design partners and our dealers too and.
And just getting back on their lines and what they're seeing and hearing and I think I think that consistent theme across all of those conversations has been changed change and the workplace and keep on thinking about how they can engage employees allow them to work and you raise and be effective and and bring them back to the office and I think that that change is something.
And that's always good for our industry and when we see Ceos and business leaders and gain.
And thinking about work and thinking about workspace I think that that tends to be and good opportunity for steelcase. So people are asking questions about how to bring people back effectively as Jim said some organizations may not have had the most up to date workstations before the pandemic. So I think they're now asking.
<unk> about how they need to catch up and what the future looks like.
We are definitely hearing interest and specific claims installation and so for example, how organizations that may have had a very open office floor planned before the pandemic, how they're now thinking about the best weighted to reintroduce different levels and privacy across their office space to accommodate different kinds of needs.
And are asking questions about hybrid collaboration and how that relates to integrate technologies for communications with physical space.
Enable people and the office to effectively work and collaborate with people who might be and another location. So.
And I. Thank all of these kinds of questions show, a really deep reflection on the part of our customers about how to support their employees and how do we engage their people.
And I believe that that's going to create tremendous opportunity for steelcase.
Okay.
It does sound and that sounds exciting and I'm sure none of US wanted to get to this level of strategic thought about youth.
We use the space quite this way, but we.
We didn't have any choice show and it really does sound like it's going to be a very new normal.
And I do have a few other questions on.
David for you inflation price you talk about 14 million and the second quarter I am not sure you sized it for the third if you count as your Crystal ball allows it do you think it peaks and the third quarter and then goes down and there is a price cost get positive and the fourth quarter or we're not quite there.
Based on current Est.
Estimates, which are coming from external indices.
And that we're using.
My comments were the net effect in Q3 would be similar to Q2. So let me break that down I think we will see higher inflation, we're projecting higher inflation and Q3 compared to Q2, but we're also projecting higher pricing benefits in Q3 versus Q2 and part because.
The April adjustment will be more fully in place, but also the August adjustments that we just announced earlier this month will be kicking in as well and by the fourth quarter again based on current external indices and projections, we would expect to offset more of the inflationary pressures so enough.
And let's call that and approximate push plus or minus on either side.
Gotcha and I am.
And going to sneak in 1 more if will be big.
You talked about school and.
And and a little bit about healthcare, but school or are we going to see the normal normal seasonality per Smith, I mean, we've got and.
And I'm not sure we know normal anymore, but.
And is the second quarter.
And where we peak or what do we do per SKU.
We can share with us so much money coming into that from the from the federal government.
Yes, so we are definitely relative to the same seasonality and the second quarter in terms of just the summer surge.
And that's really a factor of orders that we've already received and are executing against and so.
We believe that through and.
What is unclear right now is what exactly will happen with all this money and thats flowing.
And we are right now seeing very strong demand signals and some of that is converted already into orders and if there are some states that have moved and money.
From the federal government through their system and into the hands and people, who can make buying decisions and some of the orders, we're seeing already and some parts of the country are related to that and other parts of the country. It's going more slowly so it has to move through various approval levels.
It's possible, we don't know for sure, but it is possible that we could see and extension of the demand curve into the second half of the year more than we would normally see because once that money is there people are going to I think 1 and spend it but it's a little too early to know for sure, but that's what we're imagining.
Good news is of course, we have the capacity to handle our summer spike and so the demand continues to be in good shape.
Okay.
I know I'm, an old guy, but I got a little choked up when I heard everybody was back and the Opex I mean that.
And normally as normal as good and we're all looking forward to to a lifetime of a normal from now and.
So congratulations to you for navigating this Jim and and for your team across the across the globe. Thank you Barry Mike. Thanks, bite and we welcome you back anytime you're going to come for a visit.
It's been a fun week here in Grand Rapids yesterday, we had and ice cream social outside the window, where we're meeting and our employees gathered for that a couple of days earlier, we had the first gathering of people we've hired since before the pandemic. These are people that were all higher during the pandemic and they had not been together and really face to face. So we're able to bring those new and place together with members of our leadership team.
<unk> and <unk>.
And be outside and talk with each other and meet each other and it really I'm an old guy to buy them and I would tell you I feel and new energy when I'm together with some of these people who just joined our company are just people we haven't seen for a while so thanks for your comments.
And what <unk> is going to be in October this year, So I'm curious and see what what happens and they say theyre going to revert back to the June date, but October not a bad time to do this I think and we'll see how.
Sure.
I'm, sorry can you confirm it and we're looking forward and Neocon and October as you say different than normal but I.
I'll take it I'll take being able to gather again with people from the design community and our dealers and our customers.
Good talking to you and thank you. Thanks.
Thanks.
Your next question comes from the line of <unk> from Bahrenburg Capital. Your line is open.
Hey, guys. Good morning, Thanks for taking my question.
Hi, Robert.
So what is the hybrid workplace and is that of course, and Chris and the need for new products and kind of accommodate to the new type of office model. I guess can you talk about what kind of products. You are currently focusing on and Mark you kind of caters to this new space and how youre thinking of R&D expenses throughout the year.
Yes, so I'll give you a few examples.
First of all we think privacy is going to be a big deal for a lot of people depending on what their offices like before when they went home to work for a while they saw the benefit come from kind of unbroken and concentration.
<unk> to work without interruption.
And we've heard a lot of that from users that they want to come back to the office, but they don't want to lose that ability to concentrate.
And and some offices that haven't been updated for a long time might not offer enough of that they.
They might have high density benching applications for example.
And really be challenging for people, who are trying to concentrate for long periods of time. So we think that it could be a return to the kinds of products that we offer that might include might include private offices.
Which would involve wood furniture and architectural wells could be more and claims that are more on demand and people might just use when they need it and.
And again, that's something that.
Architectural walls can respond to and also products like <unk> that are therefore room booking.
And also and open plan products that can provide visual privacy and some acoustic privacy and we have a number of products operating our portfolio like protein, but we also have other products that are and development of respond to those inc.
That's why and privacy.
Theme I will talk about these collaborations so as Sarah mentioned when do people come back to their offices meetings aren't going to be the way they were before because it's likely that the.
And whereas in the past and medium 670 people everybody would be in the room now you find more and more than 1 or 2 people might be working from home that day.
Almost every meeting is going to be a hybrid collaboration and meeting and even people who choose to be and the office every day are going to be working and the new way because some of your colleagues might be working from home and then puts challenges and existing conference rooms, and they really have to setup for that how do you make sure that those people that are working remote or fully representative.
And the meeting and we have solutions already in our portfolio.
That has been there for many years, our media escaped us have our partnership with Microsoft that has provided products that we can offer to customers that help meet some of those inc.
And then finally ancillary spaces spaces that use.
Furniture thats more informal.
And people are continuing and the interest and those kinds of products, but they are really interested and how those price support we will work the real work of.
Of people meeting with each other and solving problems together.
Some of them together and making decisions together. So we believe it's going to be more focused on the real worksite of ancillary versus the kind of social side of ancillary. So those are 3 examples and there's many more but those are some of the wins that have emerged early.
And through our own experiences.
Great and it's really helpful and then.
And about small and medium businesses kind of driving orders and this quarter I guess, what kind of timeline and expectations for once a month and larger orders from the bigger firms to start coming in.
I think thats tied to cities opening and those companies getting back to the office. So I would imagine that's going to be a more meaningful part of our back half of the year and into the following year.
Got it and then last 1 from me and you kind of mentioned project spending as well didn't increase at the rate and you expected this quarter I believe.
Can you talk a bit and more about how to spend rates, you're seeing and do you expect them to be slower and the second quarter as well.
Well.
Provided guidance of.
100 and.
90 to 195 net of land gain.
Right so.
So the net was 180 to 185 and.
And last quarter. We also gave an indication of what we were targeting for the full fiscal year that we were in the kind of that same range of spending obviously, excluding land gain.
And we didn't see operating expenses and the back half of the year tracking above $200 million.
I think they tracked a little bit slower than we expected because we were.
Operating and a cautious way and we saw a pandemic surge and India and Europe has remained locked down for much of the of our first quarter spending pace a little bit cautiously.
But as we as our confidence continues to grow above the recovery I think youre going to see our spending increase to the level that we're projecting and Q2 before the land gain and then likely be at or around the same level plus or minus let's say single digit millions into the back half of the year.
Rudy was your question about our spending or is it about our customers project spending.
And so yes, it was more focused on the customer and assets.
Yes.
Customer perspective, this is where those leading indicators are so important to the customer visits.
Rfps Mark ups. These are all the kinds of activities. They are more connected with large customer activity and we consider all of the speaker sign.
It's a little hard for us to know exactly when those are going to turn into orders because the cycle.
Type of restarting the engine right now if this is a normal.
And part of the cycle, we would know exactly what that time period is from those kinds of activities to orders, but right now we can't be positive. So we're encouraged by the sequential growth was seen at hand and activity.
Thats really helpful. Thanks, a lot guys.
Yes.
Again for any questions. Please press Star then the number and 1 on your telephone keypad. Your next question is from Kathryn Thompson from TR and Cheeky you. Your line is open.
Alright, Thank you for taking my questions today and 1.
And follow up on the Inc.
EMEA.
Could you clarify that flipped and markets youre driving demand and <unk>, She talked about school and health care and prove me wrong.
But.
Other notable particular and market share driving demand in Europe.
Now if they come to my mind.
Looking across the table as well and it was pretty broad based geographically and across the end markets.
And it led by the U K.
Germany and France.
And led by the UK and part because UK was taking out a pretty deep hole.
They had a really rough time Dakota day variance.
And the aggressive shutdown and that really affected demand and and now that has improved significantly and we've seen a nice.
Return to a recovery there and the UK, but as Dave said, we're seeing it across really all the markets.
With only maybe a couple of exceptions.
And to Jim's point, if you recall last year, how COVID-19 move across the world starting in Asia, moving to Europe, and then to the U S.
For Europe, we were in the pandemic for much of our first quarter. So our order rates were depressed, but still 44% growth was pretty pretty resilient impressive.
Yes, Yes, and then just Steve could you quantify it.
Gross and Europe.
Year over year, the growth and orders was 44%.
And this quarters.
Alright.
And then looking at just as more of a supply chain question.
Yes.
And we look at a wide variety.
And.
Companies on the building products and.
And I was just the construction value chain and what we are hearing.
Theme is just.
Having key supplier of components and moving slowly suddenly better per lane deliveries.
And this is happening for you and and.
And does this contribute to your second half sales guy.
Yes, we are seeing those kinds of factors ourselves so we see it through upstream suppliers.
In the U S growth also kind of around the world, we see it through the challenges and moving.
Through the freight systems.
Painters over the wire, but also.
And freight.
Everything is just maxed out and has the next out for a while so we use those supply chains and we.
We're doing our best and manage through it but we have seen interruptions and some lead time increases because of it.
And as we think about our outlook for Q2, we've considered some of that and so our growth is hedged to and consideration of the supply chain challenges.
And we're hopeful that that will continue to resolve and some of it is also downstream.
Which may be a little different that the installation of furniture at the <unk>.
<unk> the construction projects themselves that has to be complete for us to be able to deliver for insured.
Please don't want the furniture and so at that point of and construction cycle. So if they are facing labor challenges on the job site and that can slow down and our shipments and solid on orders.
Hopeful and the us, though that as we get into September and.
Some of the forces related to unemployment begin to dissipate.
We will see people returning to the workplace and larger numbers and some of those factors will begin to normalize and also as COVID-19.
Improves hopefully and every week every month in the U S. In the rest of the Americas and around.
Around the world a lot of the supply challenges should also start to.
To be resolved.
I am hopeful that as we get past the second quarter into the third quarter, we start seeing some improvements.
Okay.
And last question on the supply chain.
And 1 and things. We're also seeing is that things are slowly getting a little bit better.
However, with shipping containers, and now youre going to have to compete against the.
And the Christmas Rush and shipping.
And you.
And we're seeing all sorts of companies and home depot and getting on ships and then others mitigation rebates and.
And I Wonder if you just have spaced on ships.
Any and patch with that holiday.
Sure.
Peak season and pack.
Your Europe and leadership.
And.
And what other factors have you done to mitigate this risk.
Yes, so I'd say first of all compared to lots of those other companies.
And our supply chain, they're largely regionalized, meaning the customers we serve in the United States are primarily served by products that are made and the Americas.
The first thing Mike if we don't have to ship as much over the water. That's good and then we have many components and products, they're made and multiple places around the world. So that gives us some flexibility so.
And so we're probably less vulnerable to that compared to other companies you might be thinking about.
That said, we still have some and and.
And we faced our own challenges and it can be a part or a mechanism that might be made and when part of the world.
1 of the challenges we face this year was the containers were coming over from Asia.
And we have product to export from the U S to customers in Asia. So it finished goods made in the U S shipping to Asia and.
And normally what you would think that there'd be no problem, finding those containers because ships.
And to go back empty rather than waiting to reload.
And there was actually a shortage of outbound containers from the U S. Asia. So I don't think we're going to see that again I think.
This was a very unusual situation and that was driven by the stimulus money as well as lots of other factors. So I think when we get through this we may face challenges, but I think they'll probably be different challenges and again I don't think theres vulnerable as a lot of other companies when it comes to this.
Okay, and then finally.
You touched on this a little bit and prepared commentary and then Q&A.
But when you're having conversations with your clients.
In terms and new office reported.
The big differences and the past is still income format and then also when you think about the types of chronic sales you were selling a lot of chairs and.
And locked down and wait for that.
Sure.
What is the margin profile of the types of products and being demand now how does that differ from what we saw in the height of dependent and thank you.
Yes, so I think the big differences in and people are thinking about offices is first of all.
Over the last several years, leading up to the pandemic. There was the segment of customers who are always trying to find a way to make their offices. The most efficient from a real estate perspective, which meant higher and higher levels of density and smaller offices more open benches.
And.
And I think as we as we've come through this pandemic, even with people largely vaccinated with Covid in remission.
We still have a new sensibility about density and the workplace.
I think people I think users are going to be more reluctant to sit in the kinds of highly dense environments that maybe were asked to sit and before and so.
That's 1 difference were seeing I don't want to exaggerate that because I don't think it's going to grow dramatically and the other direction, but I think some of the people that were pushing that through and extreme have some work to do to pull back on density.
And I also think as I said before that privacy is going to be a bigger factor I think collaboration is going to be in the forefront and put a lot of people are talking about because because what we've learned is that there are certain kinds of work that you can do from home day, a week a couple of days a week.
Mark it's tougher to do and by the way meetings and Salvi can also do from home. So it was straight up meetings, where people are just kind of reporting and on.
Giving updates on their projects or whatever that kind of work can be done from home.
2 collaboration where people are trying to.
<unk> used the same thinking developing products these require a different level of activity and so.
And if people are thinking about collaborative spaces, and not just thinking about meeting rooms, and the classic sense, but thinking about spaces.
Net or her for a more active meetings and our product like our flex product is really designed for that kind of work. So maybe a couple of examples in terms of the mix of product sales.
If there's a shift away from high density benches, I wouldn't say those who are the most profitable products before they are largely commoditized products and its hard to differentiate some of the products that are in demand like <unk>.
And we use technology products that Sarah mentioned and products that support use of technology and the office product side flex.
And you're all quite relevant.
<unk> remains relevant and so we haven't really seen and shifts in seating and in fact, you could say.
If anything to work from home surge, which will continue going forward for the interest and working from home causes people to value high performance seen to a greater degree because theres no share you said and as much as the Cherry you sit and at home if you're working from home all day long and Thats. It.
8 hours a day of sitting in that same share that's really unusual and and office. So people are beginning to understand the value of high performance ergonomic chairs and that we think will also be true we'll continue to be true and the office. So I don't see a major shift and the mix from a profitability perspective, and if there is any at all and actually enthusiastic about that.
Potential.
And these.
1 of the things, possibly streamline.
Richard Gere logically see more more of your products are being bought.
And.
And with an open format and we don't have Gen fighters and I'm happy to teams and as a possibility and for paying all the margins can be similar that you'd be buying more themes and the new offices is that.
Pleasure Helane thoughts on that assumption.
Well I think.
Our biggest competitor is.
<unk> of our existing products. So it's been offices don't change cusp.
Customers on products that they bought last year 5 years ago, and 10 years ago and it worked just fine and they don't wear out.
Very very high quality products that can be used for many many years. So I think the way to think about that as changes day, when our customers are going to change and they're realizing that it's time for them to step up and make investments because the nature of work is change expectations for the workplace have changed.
Challenges and attracting and retaining workers, which which you know probably from the article and you've seen that there is a lot of talk about employees looking to change employers and so theres going to be a battle for talent and this coming year I believe.
All of those things are our demand drivers for us much more than what people, sometimes think of which is office vacancies and where that's happening in the commercial.
Office space sector.
Those are important but it's change within the existing real estate footprint that is the primary driver.
So that's where I think the buying more products part will come and.
As customers look at their spaces.
Decided I believe that there is that they need to update those spaces.
And important demand driver for us.
Okay, great. Thank you very much.
Yes.
There are no further questions at this time.
I'll turn the call back over to you.
Thank you. So we wish you all a safe and enjoyable summer and we all continue to returning normal. Thank you all for joining the call today.
This concludes today's conference call you may now disconnect.
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