Q2 2022 Steelcase Inc Earnings Call
Section 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 to the most comparable GAAP measures and details regarding the risks associated with the use of forward looking statements are included in our earnings release.
We are incorporating by reference into this conference call. The text of our Safe Harbor statement included in the release following our prepared remarks, we will respond to questions from investors and analysts I will now turn the call over to our President and Chief Executive Officer, Jim Keane, Thanks, Mike and good morning, everyone I'm glad to be with you to share our update today.
Our second quarter orders grew 24% over prior year, and 12% sequentially versus the first quarter, reflecting the recovery, we discussed last quarter the <unk>.
Growth was broad based across all segments, including strong growth in every regional market in the Americas, our confidence in the recovery is supported by the fact, the sub parts of our business approaching or exceeding pre pandemic order levels.
Our second quarter order levels at Smith system Orange box today in Q were all higher than the same period in FY 'twenty before the pandemic.
Our EMEA and APAC regions were within 5% of those same FY 'twenty levels and in Asia Pacific that includes overcoming a large decline in India, where the pandemic impacts were quite significant.
The order strength sets up a strong revenue outlook for the third quarter.
Unfortunately, due to ongoing supply chain challenges, we were not able to ship everything we anticipated in the second quarter, which caused some of our revenue to shift out of the quarter.
90 days ago, we spoke to you about supply chain challenges, such as procuring raw materials logistics disruption and labor shortages at some suppliers.
And since then some of those issues have improved but others have lasted longer than we expected and new issues also arose.
Our teams have been resilient and are working diligently to overcome the challenges.
One of our suppliers have been late we've expedited logistics and run overtime to catch up.
When commodity sourcing has been difficult we found alternative supply sources, and sometimes change product materials.
As Ocean freight has become less reliable we've increased our safety stocks ordered earlier to allow for longer Port transit and we incurred airfreight, we needed to meet critical customer commitments. It's a long list of challenges, but we have seen minimal cancellations given that these disruptions are impacting our entire industry and of course other industries.
We are facing many of the same challenges.
We've also seen higher levels of commodity inflation in steel inflation has been extraordinary.
Last quarter, when we announced our second price increase of the year that some of these material costs were anticipated to decline, but if they didn't we'd need to consider another adjustment.
Since then the cost of steel and several other commodities have continued to increase and are expected to stay high for a longer time.
Therefore, we announced this week, an unprecedented third price increase which will begin to take effect in November.
When we spoke last time vaccines had just recently become widely available in the U S and many customers were planning return to office States immediately after labor day.
Since then vaccination rates plateaued and the Delta variant began to spread across the U S, which caused many companies to delay their plans.
Since many of our customers are quite eager to get their employees back to the office and in fact, many companies have established vaccine mandates in recent weeks.
The Biden administration recently announced federal mandates, we believe will provide a clearer path for our customers and their employees and is a real positive for our business.
As we look at some of the pre sales activity in the Americas during the second quarter, we had mixed signals.
Our in person customer visits were up but our pipeline of project opportunities and new Rfps were down a bit.
That might be because the delta very had pushed back returned to office plans for it could be the supply chain disruptions are a distraction.
As orders were very strong during the quarter and continued to be strong through the first three weeks in September and we have seen virtually no cancellation of existing orders, we continue to be optimistic.
We have more confidence now about how the workplace of the future will take shape, while theyre extremes, while there are extremes it either and the mainstream perspective is the office will remain the primary place for work because of the informal interactions critical productivity innovation and culture.
It's also clear that most companies will offer employees a hybrid work experience give me more permission for them to occasionally work from home or other locations those who don't will struggle to compete for talent.
For customers, who already modernize their workplaces this shift will happen naturally but for many other customers. Their office is not ready and hybrid will be hard.
They will need to update their allocation of individual and team spaces. They will need to shift from rigid fixed office architecture and furniture to more flexible solutions and they will need to integrate digital layers to every environment to support video conferencing.
We believe there is a lot of change coming to the office.
As we previously announced I'll be stepping down as CEO next month after more than seven years in this role and he'll be retiring in January of 2022. After 25 years with the company.
I'm really pleased we are seeing the post COVID-19 recovery picking up steam around the world and even here in the Americas, where order rates have been so strong it's a good time to be making the transition to Sarah armbruster.
I am pleased with so many things the people of Steelcase has done over my tenure here and even though these last 18 months have been so challenging I feel we are emerging from the crisis stronger than ever and more relevant than ever to our customers.
Our APAC business is growing again, and our EMEA business has made so much progress in terms of profitability and market presence over the last few years.
Our Americas business has expanded into new markets through successful acquisitions and has an updated product portfolio in the core.
I'm also proud of our ongoing commitment to ESG. We just released our 2021 impact report last week. So I won't go through it all here, except to highlight our commitment to reducing carbon emissions and the accountability, we set up to measure our progress against the goals.
I'm really optimistic about our future because of our trajectory we continue to learn and we continue to get better every year.
I'm also really optimistic because of Sarah who has the right experience skills and character to lead. This company next and Sarah has a terrific team of people with so much experience working together I'm excited to see what they do next so now I'd like to ask Sarah to make a few remarks as she prepares to take over as CEO.
Thanks, Jim and good morning, everyone. It's great to be with you today and I look forward to working more closely with the investment community when I step into the role of CEO.
There is a lot I could say about the future steelcase and why I'm optimistic.
Start by saying that we made the decision during the pandemic to continue to invest in new product development and I'm. So glad we did our teams have been developing products to help our customers create inspiring high performance basis, and we'll continue to watch more of these products throughout the coming months.
Customers tell us that they need furniture that is more flexible to support both focused work and working more collaboratively, allowing people to shift between work mode more seamlessly within the same space.
And our research has identified similar needs.
So as Jim mentioned, we believe companies will need to solve for this evolving concept of hybrid work.
Some people have wondered whether employees will work from home when they desire to do focus work and come to the office when they need to collaborate with their coworkers.
But that isn't how most of our days are scheduled we normally have a mixture of meeting collaborative sessions and focus time throughout each day, which is why companies need spaces in their office is designed to support all of those ways of working.
And while some companies are doing a good job of providing a range of spaces to their employees.
No better if possible, especially when trading hybrid work experience has.
Hybrid is a seismic shift in how work happens for many organizations.
So solving for hybrid is something we're very focused on and over the next few months, we plan to introduce new products that provide flexibility privacy and control.
These plans include a product line expansion that will provide even more flexibility and privacy for individuals by really focusing on rapidly evolving individual needs and expectations.
And we believe that this will be the only product collection available in the market that will cover the entire floor plan.
And I am, particularly excited about a new product that we will unveil next week. It truly represents 20 <unk> century design that leverages, new technology proprietary materials and patented components to meet the needs of employees today, whether they are working in the office or at home.
In addition to supporting product innovation as CEO I will continue to prioritize other new opportunities for growth.
Not have anything specific to announce today, but you can expect that we will maintain our focus on areas to expand our core office categories as well as in specific vertical markets, such as education, and healthcare and where we see geographic opportunities.
We're also likely to explore adjacent growth areas that leverage our capabilities and our strength.
Inorganic growth is clearly something that we'll consider but I believe there are many opportunities to grow organically as well.
Finally, Jim touched on our latest impact report and our focus on ESG.
One of the reasons I was attracted to steelcase 14 years ago with because protecting the environment treating people with dignity and having a culture of integrity, our commitments at steelcase take seriously.
We've been living that was core values for decades.
And making occasional adjustments as our business evolves, but those values have largely stood the test of time.
And I am committed to keep listening and learning because theres always room for improvement and I'm committed to building on our legacy of keeping people at the heart of everything we do.
I am proud to be part of the company committed to doing the right things and doing things right. We take these steps knowing our efforts towards building a healthy planet.
Porting and empowering healthy people and cultivating a healthy culture are critical to our success.
In closing we are hearing from Ceos around the world, who want to get their people back together and they don't feel Theyre current offices are ready for hybrid work.
I need that collaborative spark for innovation and they recognize that the talent, where it depends on strong cultures and supportive networks to help people learn and grow <unk>.
Companies are planning their returns and redesigning how they work and they want our help to create safe energizing spaces that support the new hybrid ways of working and we're already partnering with them to bring those ideas to life.
So thank you for your time today and once again I look forward to working with you in the future.
I would now like to turn it over to Dave to cover the financials.
Thank you Sarah and good morning, everyone. My comments today will include highlights related to our second quarter results, including comparisons to the outlook. We provided in June and sequential comparisons to the first quarter.
We will also cover the balance sheet and cash flow our outlook for the third quarter and our targets for the remainder of the year.
Compared to the outlook, we provided in June order growth of 24% was better than we expected and the favorable performance was broad based across most regions. However.
However, second quarter revenue of $725 million and earnings per share of <unk> 21.
We're below the estimated ranges we provided.
For revenue, we recorded an organic decline of 14% compared to the prior year driven by the higher beginning backlog in the prior year due to the government mandated shutdowns during the first quarter.
Our order intake throughout the second quarter was stronger than expected. However supply chain disruptions were significant during the quarter and delayed some expected shipments in the Americas until after the end of the quarter.
We estimate that this had an aggregate impact on second quarter revenue of at least $40 million and contributed to the strong backlog at the end of the quarter, which I will address in more detail when I cover our outlook.
For earnings we missed our targeted range due to the lower revenue and lower gross margins, partially offset by lower operating expenses compared to our projections.
Our gross margin performance was negatively impacted by inflation net of pricing benefits driven by steel and other commodities, which was approximately $20 million higher than the prior year and exceeded our expectations by approximately $6 million.
In addition, we experienced higher freight cost inefficiencies associated with the supply chain disruptions.
Operating expenses, which included a $15 million gain on the sale of land that was included in our guidance were $7 million below our estimated range due to lower sales activity the pace of spending supporting marketing and product development projects, a $2 million gain related to a small investment.
And favorable coli income.
Our teams continued to do a great job managing our costs, while prioritizing strategic investments supporting growth as we navigate through recovery.
Beyond these drivers we recognized $4 million of discreet tax benefits in the quarter driven by tax planning strategies.
Moving on to the sequential comparison of the second quarter results versus the first quarter.
Operating income increased by $66 million, driven by a $168 million increase in revenue and the $15 million gain on the sale of land, partially offset by higher inflation and other cost related to the supply chain disruptions.
The sequential increase in revenue was driven by the strong backlog at the beginning of the quarter and normal business seasonality, which includes Smith system and other education projects that tend to shift during the summer months.
While orders in the second quarter were 12% higher than the first quarter, which is better than typical seasonality the impact of that growth on our second quarter financial results was muted by the supply chain challenges I mentioned earlier.
The sequential comparison of gross margin was impacted by approximately $11 million of higher inflation net of pricing benefits in the second quarter, plus higher freight cost inefficiencies associated with the supply chain challenges.
And for operating expenses, they were relatively flat after adjusting for the land gain in the second quarter as increased costs related to selling activities marketing and product development were largely offset by lower variable compensation expense driven by the timing of expense recognition related to equity awards.
Regarding orders in the quarter, we continued to see strengthening demand trends within our order patterns during the quarter, which exceeded our expectations.
On an organic basis total orders grew 24% compared to the prior year and 12% sequentially compared to the first quarter with sequential growth of 10% in the Americas <unk>.
17% in EMEA and 20% in the other category.
In addition average weekly order trends improved throughout the quarter in the Americas and as Jim mentioned, several parts of our business approached or exceeded pre pandemic order levels.
As it relates to cash flow and the balance sheet, we ended the quarter with approximately $361 million in cash and $531 million in total liquidity.
Operating cash flow reflected a $39 million increase in working capital related to the sequential revenue growth.
Our semiannual interest payment of $12 million and receipt of an $8 million tax refund.
Investing activities included $17 million of proceeds from the land sale and $13 million of capital expenditures and we continue to expect capital expenditures to total between $140.0 million for the full year.
We returned $44 million to shareholders during the quarter through our quarterly dividend of $14 five per share and the repurchase of one 9 million shares under the <unk> program, we announced in June.
And through yesterday, we've repurchased an additional 0.6 million shares in September.
Moving to the outlook for the third quarter, we expect to report revenue within a range of $755 million to $785 million, which is approximately 4% to 8% higher than the revenue we reported in the second quarter.
And on an organic basis, approximately 20% to 25% higher than the prior year, which was negatively impacted by shipment delays of approximately $60 million due to a temporary global operations shutdown.
We expect the sequential and year over year increase in revenue to be impacted by the following additional factors.
First our consolidated backlog at the end of the second quarter was 22% higher than the prior year on an organic basis.
And 15% or approximately $90 million higher than at the end of the first quarter driven in part by the supply chain challenges, which pushed shipments that would have otherwise shipped in the second quarter into the third quarter.
Second we expect a modest sequential improvement in order levels in part due to seasonality.
But also because we expect more companies will plan for their employees to return to the office and continue investing in their workplaces.
Third we expect continued global supply chain disruptions to negatively impact our lead times and order fulfillment patterns at a level similar to the second quarter.
Thus our current backlog includes a higher than historical percentage of orders scheduled to ship beyond the third quarter.
And we expect this trend to persist until the broader supply chain challenges subside.
Taking this range of revenue into consideration, we expect to report earnings per share within a range of seven to 11.
For the third quarter of fiscal 'twenty two.
Which includes our expectations of inflation net of pricing benefits to increase sequentially from the second quarter by approximately $8 million, which equates to an expected year over year impact of approximately $28 million.
The persistence of supply chain challenges and related costs similar to the level, we experienced in the second quarter.
Operating expenses in the range of $195 million to $200 million, which includes higher investments in marketing and product development and increased sales activities.
Interest expense investment income and other income net of approximately $5 million.
And an effective tax rate of approximately 28%.
For the fourth quarter, we expect a growing percentage of companies will reopen their offices and will increase their capital spending related to their workplaces.
Thus, we continue to target double digit year over year revenue growth.
The year over year comparison will be impacted by the effects of our global operation shutdown in Q3 of the prior year.
Plus the supply chain challenges, we've been experiencing over the last couple of quarters could continue impacting our revenue conversion through the end of the year.
Regarding inflation I mentioned in the earnings release that it continued to increase throughout the second quarter driving us to announce a third price increase taking effect in November.
While the November adjustment is expected to result in a small benefit in the fourth quarter.
We expect higher yield from our April and August adjustments, which we expect will offset the projected sequential inflation.
Potentially resulting in a net sequential improvement between the third and fourth quarters.
We are also targeting fourth quarter operating expenses nonoperating items, and a tax rate to be similar to what we're projecting for the third quarter.
Thereafter, the prospects for fiscal 2023 includes the potential for improved demand from a broader reopening of offices.
<unk> benefits potentially offsetting current levels of inflation and.
In moderating supply chain challenges.
In closing supply chain challenges dampened our performance in the quarter due primarily to an unexpected pushout of shipments, but we are pleased with the recent order rates and remain confident in the recovery.
Inflationary pressures are continuing but we have taken decisive action through multiple price increases this fiscal year to mitigate the impacts.
And we are projecting double digit year over year revenue growth for the second half of the current year and believe the prospects for fiscal 2023 include continued improvement.
From there I will turn it over for questions.
Okay.
At this time I would like to remind everyone in order to.
To ask a question. Please press Star then the number one on your telephone keypad.
Possibly just a moment to compile the Q&A roster.
Your first question is from the line of Greg Burns from Sidoti <unk> Company. Your line is now open.
Good morning.
So I just wanted to kind of dig in a little bit on your commentary around orders because it sounded like the order trends remain strong, but you also have a little bit of.
Yes.
Bob.
The commentary around softening in some some metrics like pipeline and some other kind of leading indicators on demand. So.
But that doesn't seem to be kind of showing up in your order.
So how should we take that is that just on the margin you're starting to see a little bit of a slowdown in some of those areas and.
Something to monitor or is that something that maybe is.
Okay.
The bigger.
Headwind as we go forward.
Yes, I would say, we're not particularly concerned about it right now.
The.
Sharing in the spirit of transparency, because we've talked about.
He's kind of long leading indicators. So when we talk about customer projects. These are the appearance of new projects on the horizon. We may be are just beginning to engage on them. We track them. It's not a perfect metric relies a lot on and our sales organization entering those opportunities into our tracking tools our software so when we see them.
Rise and fall it could be a signal, but it could also sometimes just be the pace at which those are getting answered and as we mentioned in our sales organization and our dealers and our customers are really focused on orders that are already in house shipments that are already been scheduled.
Interruptions, we seen in our supply chain.
Cause our sales organization is really focused on that and how do we make sure that we're communicating with customers about when the orders are showing up and that can that can take the center some new project opportunity identification and entering so I'm not particularly concerned about it because there's so much noise in that system right now an imperfect metric.
As I said in person customer visits were up during the quarter. Some of that is probably because COVID-19 was with easing more people are willing to travel and visit us here.
So we saw that going in that direction.
Rfps were down slightly but we had a nice surge of rfps before so again, we're just sharing it in the interest of transparency and probably because with Delta rising.
We have our radar and we've been watching really carefully to see any sign at the rise of delta could cause a softening in the business.
I would actually expect that to show up first in orders where people decide to delay or defer.
Orders, but that Hasnt happened as hard as we can tell we've seen that sequential growth in orders continue and we've seen strong year over year growth in orders. So for now we're optimistic because that order growth is sustained but we wanted to be transparent with you Greg.
Okay. Thanks, and then in terms of.
Youre pricing increases.
What's the have you gotten any pushback from your customers is there a risk that the.
The continued increase in prices might dampen demand or.
Cause.
Orders to be delayed.
We haven't seen evidence of that of any orders being delayed or dampening of demand at this point I think.
But there is risk always silly.
Let me do a price increase we anticipate that we're going to have customers, who have very professional sourcing organizations, who have all the same data we have.
And they're going to push it pushed us our data versus their data to make sure that those price increases justified due to increases you're going to have that conversation twice three increases everyone's going to say wow, okay, what's going on so those conversations are.
Energetic, but we have a lot of facts on our side steel inflation has been a 150% since before Covid just as an example.
That's extraordinary.
Unprecedented as far as I can remember.
And.
And customers get that and they are seeing it across lots of other things that they buy software.
Those conversations I think are going to continue to take place and continue to we have to back these things up so again.
Again, we have the facts to back that up.
Okay, and then lastly.
Have you seen any improvement in India I know they were kind of the epicenter for the recent wave of Covid, but it seems to have improved have you seen any change in that market.
Yes.
That both from the supply side and the demand side, so the supply side as our own ability to fulfill orders and thats much better now we went through a very tough time in India. Our plans for shutdown, we really shifted our focus as Sarah said towards our people, making sure we're taking care of our people and in helping people access to vaccines and ventilators.
And all those sorts of things.
And.
And now in the last several weeks our factory has been ramping back up.
We're really now at a point, where we can fulfill more orders and we've received so we're no longer demand constrained.
On the supply side.
As you can imagine our customers were in that same space. It wasn't a lot of people, placing new orders, but it now we're seeing that demand build.
Specifically in India, we're seeing the pipeline build for <unk> orders.
Getting to the or.
Or opportunities coming to the part of the process, where they will convert from being wins to be actually orders that are entered and scheduled and.
And we expect that to continue to build up here in the next few weeks so that that in that in that case, we had a very good short term visibility that we should see a boost.
Okay, great. Thank you.
Yeah.
Your next question is from the line of <unk> Yang from Ehrenberg. Your line is now open.
Hey, guys. Thanks for taking my questions. So just wanted to revisit orders again, because clearly they were pretty strong this quarter.
I guess, you've talked about some orders and some areas of your business recovering back to pre pandemic levels.
I guess my question is how much further do you think order rates can expand in these areas of your business and I guess can we expect a lot more upside in the growth in orders from these areas considering that they are already pretty strong.
I hope so and I think so so first of all I'll talk about it geographically we have markets like Asia and EMEA were the sequential order growth was the strongest geographically and those markets are higher.
Teaming to show strong momentum.
I have not seen any sign of us hitting like a pizza and I think there is some pent up demand. So it's not just a matter of us getting back to the orders order rates, we saw in FY 'twenty, but we've got 18 months of less demand and so they are.
There is there is a pent up demand opportunity there so I'm not seeing any signs of that and when it comes to some of the acquisitions, We mentioned Blake.
Smith system, the closing Smith system and that business is primarily here in the Americas.
Is being fueled by a lot of the stimulus money and other money that aimed at helping build rebuild the infrastructure we have around K 12 education. So.
Is that money continues to flow and it's expected to continue to slow and be spent well into next year.
That business is being driven by not just the recovery from the pandemic, but it really that kind of spending.
When it comes to Orange box, we see a lot of demand building for Orange box products with one key products from Orange box had these pads pads that can be used for video conferences for telephone calls and even as kind of a.
A short.
Short term pain.
Private office like my office here at Steelcase has an orange box pad as people return to the to their offices. There is increased interest in having spaces, where you can get video conferencing with privacy or where you can have the kind of privacy you had when you work from home.
So we see a demand for our Orange box products again, it isn't just a recovery from the pandemic, but it's actually being fueled by some of these forces Christine.
And then finally was aimed Q A&P as a good strong business, we have a value creation plan, that's about it about addressing expanding distribution and products launching new products. We had a value creation plan that was intended to grow that business beyond where we were in FY 'twenty and so I think there is opportunity for its Keith Kinsey.
So beyond that.
Got it. Thank you and then my second question is on revenue guidance for the second half of the fiscal year.
Thank you <unk>.
Target double digit revenue growth, though but I guess, what gives you confidence that you won't encounter any additional supply chain impacts in Q3 and Q4.
While.
We expect that we will actually so we don't expect the supply chain problems to go away instantly and.
No. The way. This works you fix a few things and then something else Pops up.
The number of broad supply chain problems. We're facing is improving so we're not talking about steel or foam anymore or those are service systemic issues. We face we do face this challenge of Ocean freight and.
Logistics, which affect some of our pipelines.
And we would expect that to continue so the revenue.
Outlook that we're providing is already considering ongoing supply chain issues, if those issues were to improve.
A greater pace than we expect and we should do better than that but we already have figure that out as we provided our outlook.
Got it thank you.
Your next question is from the line of Steven Ramsey from Thompson Research Group. Your line is now open.
Hey, Good morning. This is actually Brian Biros on for Steven. Thank you for taking my questions I guess first.
Been around taking orders and thinking about kind of the delays in the supply chain challenges that you talked about throughout the call.
Does this incentivize customers to maybe place owners sooner to get ahead of things.
Not have to deal with Super long lead times, when actually one product or maybe.
No impact on the ordering timeline decisions I guess, just wondering what you guys are seeing on that.
Yes, it's a good question and we've had this discussion ourselves quite a bit because you do see that sometimes.
And then.
And just elaborate on your question you can imagine that as customers get used to longer lead times.
They start looking out and saying, okay, let's get these orders placed almost like reservations earlier than they normally would.
The delivery dates on their projects, so that kind of thing can happen.
And it probably is happening to some degree but so the question is to what degree how much of the order growth is due to that and I don't think it's as much as you might think because when we look when we break down our orders.
At most order growth, we're seeing in the fastest year over year growth and sequential growth is coming in Asia, and EMEA, where our supply chain challenges have been less severe.
So that would say that that's kind of real growth probably less affected by that by the longer lead times.
And when we look at our growth in areas like Smith system, that's fueled by the cares Act and other kinds of spending that's out there. So I don't think thats really driven by that change either so.
Regardless of how we look at it it seems as though the Americas.
Order growth would be the one that beat most effected by that but again, we don't see that.
And evidenced.
Frankly, what we see is the the.
A week or two before our price increase takes effect, we see a bit of a spike and then the next two weeks, we see an air pocket. So if you kind of step back from those four weeks you kind of feel like it might have pulled orders ahead for a couple of weeks, but we don't see strong evidence or really any significant evidence that it's being pulled forward more significantly because of.
Price increases that are out there.
Later, so you may wonder why can we just say no we're not seeing it anecdotally here in the Americas, we are hearing that some customers and architects and design firms and project management companies are advising their clients as you should get your order then because of these supply chain challenges that are affecting the whole industry.
So it comes up and it's probably there to some degree but again I don't think its fair to a significant degree.
Understood very helpful clarification there.
You touched on it and the response, there EMEA and supply chain teams to be better than the U S.
Revenue seemed like it was mostly U S related I guess can you just touch on the differences between.
What's going on in the U S versus EMEA is how is EMEA that much better on the supply chain and not having the the.
The delays that you're seeing in the U S side.
Yes. Good question. So when the issues were things like steel and foam they affected everyone globally. The steel issue really was a global issue.
The foam issues started in the Americas and this is really related to Covid. It was related to the hurricane that hit Texas that knocked out a lot of the chemicals that go into the phones, but once it hits.
U S supply chain.
The global market for phone was effected within a few weeks and so a phone became an issue everywhere. So those issues have gotten resolved in EMEA doesn't have that kind of issue. They are still facing issues with kind of global ocean freight, but they are less reliant on stack one supply chain in the Americas has been.
And then when we get into the details some of the issues in the Americas.
Primarily with finished goods suppliers, we have in the Americas four products are only sold in the Americas and there's only a few of those but the effect of two different product lines. So our Americas business has been more affected by that yes, thats, what I mean by we don't have any broad issues, we had a quarter ago and now down to kind of discrete kind of supplier by supplier issues. We just have less of that in EMEA.
And less of that in Asia.
In Asia, the issues have had been around Malaysia, our Malaysian plant, which was shut down.
During the quarter and is now open and running it was related to Malaysia suppliers to that factory, which are doing better today theyre not completely out of the woods, but they're doing better.
That's actually serves all of Asia, but also serves products, we sell in the Americas and EMEA and then the <unk> plant, which we talked about in India, which definitely had an effect on India, but not so much an effect across Asia. So each of those regions has its own supply chain and the Americas today, I think more effective by some of these discrete items related to.
<unk> suppliers.
Helpful. Thank you.
Again, if you wish to ask a question simply press Star then the number one on your telephone keypad.
Question is from the line of Budd <unk> from Warburg Research. Your line is now open.
Jim Good morning, Sean and David and Mike.
Jim Congratulations to you on Europe.
When your tenure and your retirement insurer best wishes to you on that.
Moving to the CEO role.
Thank you Budd Thanks Budd.
Yes.
I guess, I guess everybody's going to orders and I will let you were looking at a little bit into the third quarter can you kind of quantify what youre seeing in the third quarter I was interested David I think said order patient actually improved as the second quarter improved as improving into the third quarter.
Yes. The first three weeks of September have been actually quite strong.
And compared to the last three weeks in the second quarter or how does that.
Compared to prior year the growth rate versus prior year in the first three weeks. So I'm always a little hesitant to give three weeks of order patterns because its only three weeks, but the relative to the prior year. They grew more at a higher rate than we saw in.
In the second quarter.
So they kind of continued to strengthen into those first three weeks.
So better than 24% I mean, that's kind of a.
Good morning.
That's pretty encouraging.
And then you are looking at the gross margin for the third quarter. If my math is right. It's just quick can.
Can you kind of where you think gross margin will wind up in the third quarter based on current year, which are guidance implies shut in in the high Twenty's.
Well I gave you all the components.
And now familiar asking for the answer.
Sure why.
Why not.
I mean, there's so many variables Budd I mean, we have sequentially I'm going to Mike correct me, but I'm going to go through them again, we have similar levels of.
Cost inefficiencies related to the global let's say freight issues, we're dealing with.
We have increased pressure from inflation net of pricing, so it's going to be higher.
In the third quarter versus the second quarter, we'll have a little bit higher volume right, we're guiding to a little bit higher volume. So how does that all play out in the.
In the third quarter versus the second quarter, I guess I'm going to let.
You do your modeling.
But I think what youre going to find it.
As you model the gross margin shouldn't be dramatically different than what we saw in the second quarter.
Yes, that's kind of where I got you.
But who is interesting.
Did that.
Tried to go back and look at Americas gross margin I don't remember seeing a gross margin lower than that.
I mean is it.
It's.
A big concerning and so.
Am I wrong on that.
That's good for one good question I didn't go back yes, its very low, but when I look at how it's impacted by year over year inflation of $20 million and another $5 million of cost inefficiencies from all of the global supply chain issues.
There are some pretty big numbers.
Impacting and impacting the margin yes. There is a time thing here, where the inflation is hitting us hard in the third quarter. The price increases won't start to fully benefit us when they will start to benefit us right now, but they build over the next few quarters.
So we are in this trough, where the price increase impact or not.
Nearly as great as they will be eventually but inflation is hitting us right away.
That's why you're seeing the downward pressure on Americas margins.
Okay.
And.
Share repurchases I'm curious to see if you would kind of think where is that going to work through the year I know you gave us.
What you did in September so far but.
100, <unk> <unk>, where do you think that's going to.
So on a go for the year and how much more aggressive can you be under 25.
What do you think the stock price is going to do for the rest of Europe.
Is your question. So you know our approach is to be opportunistic with an intention to minimally offset dilution.
And we talked last quarter about our confidence in the recovery and it's been supported by the growth rate that we saw in order patterns.
This quarter. So we put the <unk> program in place last quarter really in some ways as an insurance policy if the market didn't buy into the recovery like we were seeing then.
We might be interested in buying some shares back in the <unk>.
<unk> did drift downwards, and so we ended up in that <unk> five program buying bancshares and it continued through yesterday.
Okay, I think Thats certainly helpful. Thank you and let me just handle with my questioning on ESG I did see that you released the new report last week.
Talk to us a little bit if you're worried about some of the differentiation <unk> seen in ESG.
And maybe I'll ask the Bobby work question kind of where is it going from here. We've seen obviously with what happened last summer we saw a lot of change by corporations <unk>, one particular thing.
Where does it go.
Well I think I think it is.
A new topic for a lot of companies and but as Sarah said. This is an old topic for steelcase. We've we haven't used the phrase ESG, so thats a fairly near term but.
Our commitment to the.
The way we play a role in the communities, where we do business has always been part of steelcase commitment to sustainability has always been part of Steelcase I think.
Where it's going.
Broadly and for US is when we think about sustainability.
We started a lot of our work around materials chemistry, and in reducing waste and that's still important.
But today a lot of our effort has shifted towards climate change and particularly thinking about carbon and being more mindful of the carbon dioxide and methane release to our own operations and now to the operations of our suppliers. So the shift is from early stage.
As of carbon which was maybe just about China become carbon neutral.
And carbon neutral for quite some time now towards adoption of science based targets, which are far more sophisticated and difficult frankly, and maybe less sexy, but it's really that's the real work of of addressing this issue globally is for companies to be embracing science based targets. It essentially means you got to think about your growth initiatives gross emissions from you.
Core operations gross emissions from your supply chain and gross emissions from the energy purchase so that could be the utility by energy from can you just imagine the math.
Involved in kind of figuring all that out but we've got a great team of people who have done just that we've made these commitments to those targets and a lot of other companies are starting to do that so I think that's one shift.
We're moving from the kind of light sustainability initiatives.
With.
Yeah.
That may be more and more symbolic and emotional and the path towards things that are much more about science and engineering and that frankly, so we're right on that I think we're leaders in that and I'm really proud of the efforts there.
It's clearly a rising topic across society and across every business.
It's true steelcase as well every company, including Steelcase has room to get better.
Hi.
We really re energize aircrafts around that last year, we set goals around how we think about hiring people. How do we think about being mindful that if people are getting equal opportunities for promotions in development and measuring that lots of different ways and it's actually part of executive compensation. This year.
Our our progress against those goals. So that's a big difference in the past typically ESG was not part of executive compensation. If it was it was kind of broadly and ESG targets.
Now it's zeroing in more R&D.
And again I think steelcase is a leader.
And there are other companies doing this but.
It's a rising force and it is going to continue during <unk> tenure.
Quite she brought up in her comments I think every CEO and every CEO of steelcase is going to have to.
We continue to make progress along all of those fronts.
To that.
Okay. Thanks Budd.
So broader adoption symbolic too.
Engineering, and science space executive compensation kind of the basic skus and getting back to the supplier base I remember when when lean was becoming a big topic in going back into the supplier base is a big issue for how do you. How do you can't leave or are you able to get back into your supplier base one on ESG.
Climate change issues.
Alright, Thats, a really good question, but because.
The top 100 companies in the World are all over this so if I go to any of the top 100 or even in the top 500 companies who might be suppliers to us theyre ready for those questions have already been asked those questions by their customers and so when we ask them about their.
Carbon data or material chemistry data.
They've got it Budd.
But the rest of the supply base, which is frankly, most of the supply base and as probably most of the carbon generated.
Not really ready for this and it's a very difficult process for them. We're often the first one is asking this question and so they have to take a big breath, Okay, where do we even start how do we figure out what our carbon footprint is.
How are we going to make comments about reducing that and it's interesting you bring this up because I had a conversation recently with one of our largest customers who is CEO is really committed to that particular problem. How do we get past the fortune 500, and think about the next thousand 5000 companies what are the tools and processes that we need to put in place.
And his business is actually in the business of doing things like that so it was very interested in talking with us about our experiences and we're going to continue to have those conversations in fact, our people and his people are collaborating.
Some of the things we've learned to help him and his business develops some of those tools and I won't be more specific about it but that's the next step is a big next frontier getting these mid size part of Americas supply chain ready to mix.
Net income for commitments.
Yes, I think that's kind of the iceberg issue. It's just it's so.
That's actually brilliance.
It's exciting if we can get.
If we can find a way to do that so thank you for that answer and drug again best wishes to you and to share and to add to the team for third.
<unk> third quarter and beyond.
Thank you bought excellent thanks.
There are no further questions at this time, Mr. Kim I turn the call back over to you.
Thank you so at a personal level I would like to thank all of you our shareholders and analysts who cover our company on behalf of our shareholders for your interest in our company today and over the years.
I've known some of you for more than 20 years and I've enjoyed our conversations and your ideas about how we can be better. Thank you for being part of steelcase.
Yeah.
This concludes today's conference call you may now disconnect.
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Yes.
Okay.
Okay.
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