Q4 2022 Steelcase Inc Earnings Call
Good morning, My name is Rob and I'll be your conference operator today.
At this time I would like to welcome everyone to the Steelcase fourth quarter and fiscal 2022 conference call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star one.
Mr. O'meara you may begin your conference.
Thank you Rob and good morning, everyone. Thank you for joining us for the recap of our fourth quarter fiscal 2022 financial results here with me today are Sarah Armbruster, our President and Chief Executive Officer, and Dave Sylvester, Our senior Vice President and Chief Financial Officer, our fourth quarter earnings release, which crossed the wires yesterday is accessible on our website.
The conference call is being webcast and this webcast is a copywriter production of Steelcase, Inc. A replay of this webcast will be posted to IR steelcase com later today.
Our discussion today may include references to non-GAAP financial measures and forward looking statements reconciliations 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, and we are incorporating by reference into this conference call. The text of our Safe Harbor statement included in the release.
Following our prepared remarks, we will respond to questions from investors and analysts I will now turn the call over to our President and Chief Executive Officer, Sarah Armbruster.
Thanks, Mike and good morning, everyone I'm happy to share that our orders grew strongly again this quarter, which was a continuation of the strength in our second and third quarter, but like so many other companies we continue to be impacted by a significant number of supply chain challenges and inflationary costs.
As you saw in our earnings release, we expect much of this pressure to continue into our first quarter, which Dave will cover in more depth, but I want to affirm we are starting to see the positive effects of actions we've taken in fiscal 'twenty, two and believe they will drive improved results in fiscal 'twenty three.
Our fourth quarter orders growth of 27% was broad based across all segments, including at all of our main geographic markets and across most of the vertical markets.
For the quarter for our entire company, we're within 10% of pre pandemic levels.
Orders for Smiths system, <unk>, and Orange box, along with our Asia Pacific region exceeded the same period in fiscal 'twenty.
As I mentioned last quarter. These businesses have been key parts of our growth strategy and I'm proud that we've been able to drive that growth.
I also want to highlight our financial performance in EMEA, which finished the year with over $3 million of operating income.
She is an improvement of $18 million versus the adjusted loss, we posted last year.
Our strategy in EMEA is to drive strong topline growth, while improving our gross margins and operating expense leverage and our team has done a great job executing against that strategy over the past year.
So while we've seen momentum that is fueling our progress we're experiencing for friction too.
Supply chain challenges that persisted and continue to lengthen the time to convert orders to shipment and drive additional costs during.
During the fourth quarter, we made additional adjustments in our supply chain, which included increasing our inventory levels switching certain suppliers and in sourcing production.
And recently, we've seen improvements in our performance as a result of these adjustments.
Over the past five weeks, we've achieved a higher level of on time deliveries and a lower need for overtime and freight expediting.
In addition, our order and project pipeline have not experienced any significant cancellation levels.
We're also seeing positive signs in the market.
This past week I was in Washington D C meeting with customers.
About their plans to implement hybrid models that includes substantial presence in the office with a growing number of already having taken this step.
Similarly.
As I talk with business leaders, who come to visit our Grand Rapids, Workspaces or other CEO he'll leaders more broadly they resoundingly continued to express a broad desire to reshape.
If their culture and that includes changing their spaces and bringing employees together in person.
Our most recent research fastest with 87% of respondents in our latest global report, indicating they will go back or are already back in here.
We're still seeing companies make a variety of <unk>.
Choices about the role of the office and their future workplace plans.
Bob some aspect of hybrid work, so that remains an incredible opportunity for steelcase to lead the industry with insights about new ways of working and with.
People thrive.
Yeah.
The office from others research as well in January for example, the Harvard Business review published in <unk>.
The impact of hybrid work Unreal.
Let's say demand.
Their results reveal workers are seeking less density.
When they work in the office and because companies are most likely to see peak attendance in the middle of the week. They do not believe there is much of an opportunity to shrink their footprint across.
Another positive development according to CBRE data.
The U S office real estate market reported the first positive net absorption.
Since the start of the pandemic.
This means more space was occupied and vacated during the fourth quarter of calendar year 2021.
We were also emboldened by the overall higher level of leasing activity that CBRE reported.
2% of the Q4 total leasing activity.
And this is the highest ratio since the pandemic started.
New furniture projects.
So the old cases.
Navigating the current challenges and we see positive market signals, which reinforces and on being the leader in health.
Being companies navigate the new era.
Also placing strong emphasis.
Such as expanding our reach to customers.
Building on the success of our education business.
More people work better at home through our consumer retail efforts.
Developing innovative products to support hybrid work continues to be a core part of our growth plans.
Okay.
Earlier. This week for example, we began taking orders for our new flex personal spaces testing solution.
We received consistently positive feedback since the introduction at Neocon last fall customer as the floor plan layout that is different from the traditional grid style and the control that less provide users within that footprint to address the changing dynamics of that.
Post pandemic world.
The breadth of our Americas' ancillary partners for this collection of products grew faster.
After that our overall average during the past year.
We're seeing customer solve for the needs of hybrid.
Good work by adding areas for socializing and collaborating adjacent space.
Faces that support focus and opportunities to rejuvenate.
And based on additions like on the Q T that orange box.
As we look to further.
To grow our retail business in the coming months, we expect to expand on our existing E Commerce program with best buy.
Hi, Beth.
<unk> will now stopped some of our top selling skus with the goal of creating a times and providing in store pickup.
Our Smith system business had an outstanding year with revenue growth of 50%.
Smith system business benefited this year from U S government stimulus available.
With a K through 12 schools, but also drove growth from both the success of new products and a strong focus on customer experience, which included the decision to carry higher.
Chris.
<unk>.
Joined with companies like Ford.
Xerox GE.
To reduce carbon emissions by at least 50% by 2030 as part of the U S.
Department of Energy's better climate challenge.
We were also named among the top.
For working with our suppliers to Cascade carbon measurement and environmental action down our supply chain.
So aside we took action and joined the valuable 500, a decision that builds on our work with G III ICT and supportive inclusive workplaces.
The valuable 500 clubs indicates our commitment to innovate for disability inclusion.
And we received two notable acquisitions this quarter first steelcase was named a world's most admired company by Fortune magazine for the 16th time.
And second Steelcase again earned a 100% score on the human rights campaign's corporate equality index and the designation of being a best place to work for LGBTQ equality.
We believe these recognitions are evidence of the strong culture and values that have been in place at steelcase for many decades.
I'd like to offer my special thanks to the employees of Steelcase, who live these values every day and who have persevered through a challenging year.
Despite some of the headwinds were experiencing market signals about returning to the office and implementing a hybrid approach are very strong. We believe we have many reasons to be optimistic and we look forward to continuing to implement our strategy and drive higher revenue and earnings in fiscal 2023.
With that I'd now like to turn it over to Dave to review the financial results and our fiscal 2023 targets.
Thank you Sarah and good morning, everyone. Today, I will cover our fourth quarter results share a few summary remarks about the fiscal year.
Provide some color about our outlook for the first quarter and targets for fiscal 2023.
Before I begin I would like to reiterate with Sirius.
We have been and are continuing to navigate through a variety of challenges, including continued pandemic related disruptions extraordinary inflation and a broad number of supply chain issues, which remain significant headwinds through the fourth quarter.
We are proud of the way we are navigating these challenges and increasing our resilience as a business and due to these actions. We believe our financial performance is nearing an inflection point.
As a result, we are optimistic about the future of the business and specifically our prospects for significant earnings improvement in fiscal 2023.
Moving to the fourth quarter results compared to the outlook, we provided in December revenues.
Third $53 million was in the middle of the range, we shared and the loss per share of <unk> was close to our estimate of approximately breakeven.
Order growth of 27% was better than expected, but as I mentioned inflationary pressure and some supply chain disruptions remains significant.
Which drove higher than expected inflation, inbound and outbound freight and labor costs.
For revenue, we grew 12% organically compared to the prior year with growth across all segments.
Fly chain disruptions continue to cause extended lead times delayed shipments.
Other adjustments to delivery schedule during the quarter, which coupled with the strong order growth.
Further increased our backlog compared to the prior year.
As Youll recall revenue in the fourth quarter of the prior year benefited from shipment delays of approximately $60 million due to a temporary operation shutdown in the third quarter.
Excluding this impact our year over year organic revenue growth would have been approximately 22%.
Earnings for the fourth quarter were slightly lower than our breakeven outlook due to lower gross margins, which were impacted by higher than expected inflation net of pricing benefits.
An increase in our provisions for future warranty claims in the Americas.
And supply chain disruption costs.
Compared to the prior year higher net inflation and approximately $9 million of higher freight and labor costs and inefficiencies associated with the supply chain disruptions in the Americas.
In total these had the effect of reducing our current quarter earnings by approximately <unk> 15 per share.
Moving to the sequential comparison of the fourth quarter results versus the third quarter operating income of $2 million in the fourth quarter represented a sequential decrease of $14 million driven by lower gross margin and higher operating expenses offset in part by the benefits of higher revenue.
Gross margin was negatively impacted by higher freight and labor costs associated with the supply chain disruptions.
Warranty charges in the Americas and other operating costs.
Partially offset by the benefit of higher revenue and lower net inflation due to our pricing actions.
Operating expenses increased $7 million in the fourth quarter compared to the third quarter, which included a $4 million credit related to variable compensation expense.
The remaining increase was driven by higher investments in marketing product development and sales in the fourth quarter.
Regarding orders in the quarter, we posted year over year organic quarter growth of 27%, which was above expectations and included 29% growth in the Americas, 28% growth in EMEA.
9% growth in the other category.
The growth in the Americas, and EMEA was broad based with growth in every regional market and particular strength at both Smith system and <unk> Q.
Fourth quarter orders in the Americas, and EMEA were within approximately 10% of pre pandemic fiscal 2020 levels.
And for the second quarter in a row orders in the Asia Pacific region within the other category exceeded fiscal 2020 levels.
On a sequential basis total orders declined 12%, which is slightly less than our typical seasonal patterns.
As it relates to cash flow and the balance sheet, we ended the quarter with $201 million in cash and $369 million in total liquidity upper.
Operating cash flow included an increased inventory.
To adjust to extend.
The supplier lead times, especially for our long distance supply chains as well as prepare for the strong summer seasonality of Smiths system.
Operating cash flow also included the payment of our semiannual interest payment of $12 million.
Investing activities included $15 million of capital expenditures, which totaled $61 million for the full year.
And we returned $17 million to shareholders during the quarter through our quarterly dividend by <unk> <unk> per share.
Before I get into fiscal 2023, I would like to first make a few comments about fiscal 2022.
The levels of inflation net of pricing benefits and supply chain disruption costs and had a significant impact on our financial performance.
We estimate the impact of these items on the full year approximated $110 million and has the effect of decreasing our earnings.
Despite approximately <unk> 50 per share.
We've taken decisive pricing actions, which include implementing three price increases in fiscal 2022 and recently.
We are announcing a fourth increase which will be effective in April .
In addition, we continue to make adjustments in our supply chains and operations aimed at improving our resilience reliability and profitability.
Despite these significant challenges we are pleased with our performance in fiscal 2022 and.
30% growth in the other category, our EMEA segment achieved $3 million of operating income which room.
$10 million.
Compared to the adjusted operating loss in the prior year and is evidence that our.
Strategies to increase profitability in that segment are working.
Our recent acquisitions are diversifying our product portfolio and Brian .
Broadening our market coverage and on a combined basis Smith system, <unk> and Orange box achieved approximately 50% revenue.
Growth in fiscal 'twenty, two compared to the prior year and drove solid operating income performance.
We have maintained tight spending controls by minimizing discretionary spending and delaying noncritical investments.
And then Sarah mentioned, we stayed focused on executing our strategy during a challenging year and we're excited about recent and upcoming product launches.
For these reasons, we remain confident in our business strategies and our outlook for the future.
Therefore, which we detailed in our earnings release.
As it relates to revenue we are targeting organic revenue growth between 15 and 20% for fiscal 'twenty three.
Driven by our strong beginning backlog the implementation of our pricing actions and increased demand as more companies return to their offices and invest in their workspaces.
While supply chain conditions remain difficult to predict we have begun to see stabilization and modest improvement in our operational performance based on the adjustments we've made.
And our targets reflect some which we believe should improve the time it takes to convert orders to shipments.
For earnings.
We are targeting.
250 to 70 <unk> per share driven by the higher pricing actions and then.
True freight and labor efficiency as our operational our targets also reflect increased operating expenses driven by investments in our workforce, including variable compensation investments and growth strategies product development projects higher variable selling costs.
Hence some normalization of previously deferred run the business costs.
Regarding the balance sheet. We are also targeting higher liquidity levels driven by free cash flows in a range of $115 million to $135 million, including U S income tax recoveries.
Approximately $33 million and capital expenditures of.
About $70 million to $80 million for the year.
While our targets for next fiscal year reflect significant year over year improvements in revenue and earnings we expect supply chain disruptions and inflationary pressures to continue into fiscal 'twenty three.
These factors coupled with typically low seasonal demand patterns in the first quarter are impacting our outlook for the first quarter and we are projecting to record a loss of 15 to 20 per share, which compares to a loss of 24.
Per share in the prior year.
For the second quarter, we are targeting earnings that would more than offset the first quarter loss driven by seasonally higher revenue and higher pricing benefits.
Also because some of you have asked about the potential impacts of the conflict in Ukraine, and the related sanctions against Russia.
And our decision will the entities I will share that Russia is not a material part of our business and we are not aware of any significant tier one or tier two supply chain exposure from either country.
However, we're closely watching the developments in that region and monitoring for any broader impacts.
Additional details on our outlook for the first quarter and targets for the full year are provided in the earnings release.
In closing supply chain disruptions and commodity cost inflation continued to be significant and negatively impacted our financial results in the fourth quarter.
We remain pleased with our order rates and the strong performance of our EMEA segment.
And our recently acquired businesses, which provides evidence that our strategies are working.
We expect to see benefits from our pricing actions improved operational performance from the actions we've taken to address the supply chain disruptions and a broader return to office.
To deliver our targeted levels of revenue.
And earnings growth in fiscal 2023.
From there I will turn it over for questions.
At this time I would like to remind everyone in order to ask a question press Star and then I'm just a moment to compile the Q&A Ross Sir.
Okay.
And your first question comes from the line of Greg Burns from Sidoti and company. Your line is open.
Good morning.
Just when we look.
Well it could be.
The guidance for Opex for next year, that's a pretty big step up in your quarterly run rates maybe.
Could you just outline some of the areas some of the growth areas that you're investing in and how flexible are those plans.
<unk> kind of gross margin realization.
It doesn't occur as you'd expect because it looks like based on the guidance you expect.
Pretty.
Healthy recovery in the gross margin to support that those spending plans. Thank you.
Sure Greg I mean, first I'll say that as you can imagine we've pushed as much of the incremental discretionary investments toward the back half of the year as possible to take into consideration.
Contingency that youre referencing around gross margin improvement and let's say the overall economic environment playing out in a positive way.
But broadly the increase in operating expenses is a little bit more than half driven by merits healthcare variable compensation, which was very low this year as you can imagine given our overall financial performance driven by the end by the significant improvement in profitability, you will see higher variable compensation.
And then the other half or a little less.
Less than half is driven by investments in our growth strategies and product development projects.
Your variable selling costs and there is some normalization as I said in my remarks.
Some of the deferred.
Run the business costs like travel and entertainment contracted services et cetera, but we're also very carefully watching those costs.
And really bringing them back at low levels in the first half of the year and then I would say moderate levels in the second half of the year.
Okay, and then looking at the.
Gross margin for the EMEA segment this quarter.
Up until this point it hasn't really been as impacted as the Americas segment, but it was down.
Year over year down.
Pretty significantly sequentially on basically.
That revenue so can you just.
Talk about what <unk>.
Driving that and kind of what your outlook is for the gross margins in EMEA.
Yes, I mean, we really saw I would say significant more significant impacts and we'd seen all year on the supply chain disruption front, they incurred more significant can airfreight than they had been incurring and pad.
Labour inefficiencies is as well.
And also we.
We're not net in the hole from an inflationary perspective, we're now at least covering.
The inflation costs with our pricing actions, but we are not getting margin on it yet so thats a year over year drag on our gross margin.
And then lastly, some of the mix of the business or the projects that were quoted earlier in the year.
And then subsequently ordered those don't have the new pricing on it so that that had an effect on your overall gross margins as well.
To add to that Mike just looking forward I think Greg asked.
As far as gross margins in EMEA, I think youll see them improving as you would expect to see the entire business margins are improving because they will have even incremental pricing benefits, we anticipate their supply chain disruptions will.
We will settle down as well and we're expecting growth in EMEA for next year.
Okay, great. Thank you.
Your next question comes from the line of Reuben Garner from benchmark. Your line is open.
Thank you good morning, everybody.
Sure.
So.
Sir in the prepared remarks.
In the release, you talked about stronger demand from kind of office transfer.
Transformation, that's something we've been talking about over the last couple of years are you guys starting to see any.
Changes are signs in what's actually being ordered.
That kind of reinsurance you that that at least the demand we've seen in the last six to nine months. It is less about what was pent up and more about.
The changing of the office for the future or is it more.
Conversations indicate and some of these surveys indicate that going forward youll start to see that kind of demand kick in.
Yes, it's a great question. So so I would say two things first you're right that as we have that talking about for the past couple of quarters. There is.
Backlog in the system and orders that customers had twice that are what I would describe it.
Being more typical or traditional office solution. So we're still seeing some of that in fulfilling those orders as they come in but I would absolutely say that more and more of the conversations we're having with customers and the things that theyre looking to order as they developed that office for a plant to support their employees. So so the big things that we're seeing are strong demand for it.
Collaboration solutions, both in person collaboration installations as well as solutions that can support hybrid virtual collaboration. We're also seeing quite a bit of increased interest in new ways to deploy privacy.
On the floor plate, whether thats privacy in terms of fully enclosed spaces like an orange box pod or whether that's what I would describe as more lightweight privacy like like screens are movable boundaries and lots of different solutions that we're bringing to market in between like flex personal phases, and then lastly, there is definitely an increased interest.
Among customers in social spaces, so thinking about yes.
Moreover, last past years more informal spaces.
The kinds of things that we've really tried to add to our portfolio through our ancillary partners since youre acquisitions, like <unk> Bay, and I would say that Q.
Q2, or three years ago, there were some customers who saw.
Those kinds of spaces is perhaps a bit of a thrill or not not really kind of towards to getting work done in the office, but I would say the tenure of those conversations has really changed and people. I think are organizations are much more likely to see important business and cultural and organizational value.
And those kinds of solutions.
Great that's very helpful.
And then a couple of questions on the guidance.
So the 15% to 20% revenue growth for the full year, how much of that is.
Volume versus.
Price flowing through from increases that you announced.
The last year and then it's a part of that question.
You guys got a lot of backlog built up.
Do you have the capacity to grow.
Faster than your guidance if the demand is there as the year moves along or are you kind of tapped out and Youre pretty this is you have.
A lot of visibility that this volume growth because of where the backlog sits.
Okay moving.
<unk> I'll take the first part and then come back to the second part.
The 15% to 20% growth I mean, one way to think about it. This is a little over simplified but you can think about it in four buckets.
<unk> the growth one is what you remarked the strong beginning backlog as a contributor to our 15% to 20% growth.
Another bucket is the pricing benefits that we.
The actions that we've taken and the incremental benefits that we anticipate next year that we disclosed them.
In the release.
The third is simply the run rate of our business has been improving demand patterns have been strengthening throughout the year. So we're naturally going to lap.
As your comps in the first half of fiscal 2003, so that will contribute to growth and then the last bucket is increased demand driven by return to office and companies getting back to investing more normally in their work environments. So they're not equal.
Exactly equal those four buckets, but theyre not dramatically different.
Neither.
On the capacity related question.
Really boils down to supply chain disruptions.
And if we if those can continue to let's see stabilize and our actions continue to.
To improve our ability to navigate them.
If they get better then we definitely would have capacity.
To deal with additional growth.
And I would say in some parts of the world, It's a little different than in other other parts of the world. The supply chain disruptions have been our most significant rate power in the Americas, we're getting a little bit more challenging.
EMEA.
In Asia.
It's kind of on and off in a little spotty, but generally I would say we have capacity.
Our capacity constraints would be predominantly in the Americas and hopefully we will continue to see improvements.
Which will allow us to take advantage of incremental demand that sits there.
Okay, and Thats, a good segue into the lab.
Question I have got to be EMEA supply chain issues that maybe started to creep up and your outlook.
For that segment.
How much.
I know you guys have a facility in Germany <unk> seen in the news inflation is starting to take off there.
How do you I guess, how confident are you guys that youll be able to kind of offset those increases with with pricing actions. How similar do you think it could look to the Americas over the course of last year or could it be better because.
Various reasons that you guys, maybe you can control.
Well so far so good in EMEA I would say I mean, when I look at the migration rates are moving our customers to these new price adjustments.
<unk> been pretty good our sales teams have done a terrific job.
We're not dealing with one or two or three but now for price adjustments and in the quarter I commented earlier that for EMEA. Our pricing is now offsetting inflation. So I would say so far so good and I don't see any reason why we won't be able to continue.
To implement pricing to cover our increased inflationary costs.
That alone on all of our competitors are experiencing the same thing and when we look at.
Who's done what levels of price increases were not kind of on an island all by herself the whole industry is experiencing significant commodity cost increases and therefore layering in incremental pricing.
Okay.
I'm going to sneak one more in if you don't mind, it's just a clarification so Dave the $110 million that you referenced for FY 'twenty two does that.
Number match up with the target or the outlook for pricing net of inflation of 120 to 140 in FY 'twenty three in other words, you're you're guiding to kind of getting all of that back this year at least in dollar terms.
Yes, it's really.
Two things on the 110, one component is the inflation net of pricing.
That's roughly 80 plus million dollars and the other component is the supply chain disruption cost that's the other $25 million to $30 million.
And then 120 to 140 that we guided on net pricing benefits is just related to <unk>.
What we expect on the net inflationary environment.
Okay. Thanks, guys. Good luck.
The new year.
Thanks.
Your next question comes from the line of Steven Ramsey from Thompson Research Group. Your line is open.
Hi, good morning.
Wanted to make sure I understood can you clarify the free cash flow guidance again, and how much working capital benefit.
It is included in that free cash flow guide and then maybe to fall. The Capex guidance can you share the nature of that Capex.
Yes.
Yes.
In my remarks with free cash flow guide is.
115 to $1 35 in the first one that includes the <unk>.
<unk> $33 million recovery from the IRS for U S income tax receivable.
And the other to your question about working capital improvement we have.
Modeled in some improvement in working capital.
Into that free cash flow, but not entirely.
Back to normal I mean, if you did any kind of analysis on our days of.
Inventory.
For pre pandemic versus today.
We're kind of quickly identify that we have somewhere north of $100 million of incremental inventories both between raw materials and finished goods.
Our higher than normal because of despite chain disruptions us carrying buffer levels of inventory and carrying frankly higher finished goods.
Because of the supply chain disruptions, either we're bringing in finished goods component parts earlier for the summer seasonality of Smiths system than we otherwise would or we're sitting on a number of incomplete projects or projects that are complete, but our customer sites aren't ready for delivery.
So we would imagine some of that coming back and being improved.
Over the course of fiscal 2023, but not all of it.
It could be better than that but we just we don't know how to really think about the supply chain disruptions with accuracy. So we've tried to be conservative and imagine some level of improvement.
<unk>.
On the Capex, it's really normal breakdown, there isn't any significant capacity.
Additions or any let's say significant new facilities. So it really breaks down between product development manufacturing.
Advanced technologies and manufacturing some replacement equipment of course, our facilities, we invest significantly in our in our showrooms and facilities around the world, but nothing significant on its own is included in the estimated guidance of $70 million to $80 million for next year.
Okay. Good color and then on the other profitability.
Better than the other segments in Q4, not a common sight, but a good thing do you think in the next one to three years that this segment remains.
Lower profitability higher growth segment.
And then in the near term.
Our higher restrictions in the Asia Pacific region for Covid.
Is that changing the growth profile in the near term or just a lower quarter already reflects this.
Well on the first part of your question I mean, I hope so I mean I.
I hope that there continues to be significant growth prospects in that region, we certainly see it.
In markets like India, and China of course, but also.
In other parts of Southeast Asia, we've done quite well recently and see pretty significant growth prospects. So I think.
To the extent that growth in the market there plays into our strategy.
We will continue to invest in pursuit of that growth. So you could you could expect to see.
Mid to low single digit gross margin or operating margins.
Let's say over the mid to.
Longer term as long as the growth prospects are are in front of us like we imagine.
On the near term.
Over a very short period of time, we went from having our China manufacturing facility fully open so partially close to fully closed to reopen and Thats Im talking about over a course of about a week.
So it's a bit volatile over there, but we have no.
Current cases of Covid and the manufacturing facility.
The government has allowed us to reopen and operate fully and so im optimistic that we will be able to navigate the current environment and experienced dramatic disruption it's possible that the first quarter could be impacted more significantly if we're if we're closed again.
Our supply chain.
That we rely on in China has disrupted more significantly than we are.
But we're optimistic at this point that it's relatively short term and hopefully predominantly will be contained in the quarter.
Great and then last quick question for me and maybe this was discussed on the net pricing guide for FY 'twenty three.
This reflect any benefit from the upcoming price increase you recently announced in the quarter and then how much of the net guide reflects inflation moderating through the year.
Yes, Stephen this is Mike, yes, so that the most recently announced price increase will start to take effect in April with some customers and so we will see some benefit.
Next fiscal year from that.
We're imagining it will phase in like our historical patterns largely so we'll get some benefit next year and of course, even more in FY 'twenty four.
As far as.
Net deflation or any moderation.
Hard of course for us to predict so as we kind of put our guidance together were mostly assuming some level of stabilization and inflation were not predicting necessarily huge increases from here of course, we are lapping still in the first quarter lower inflation levels. So we will have inflation pressure earlier in the year, but we don't necessarily have.
Our view that we're going to see a lot of deflation in those estimates when you double click on the total inflation, we have seen steel prices come down a little bit over the last few months and external indices are projecting it to continue to come down.
Those into those projections has been wrong in the past more than they've been right. So, but we don't have any better information on steel.
Projected steel pricing, so we do leverage those external projections.
But the non steel commodities.
In energy fuel health care wages were really continuing to experience inflation. So in total I think we will continue to see or feel aggregate inflation next year.
Okay helpful. Thank you.
Your next question comes from the line of Rudy Yang from Darrin Berg. Your line is open.
Hey, guys. Thanks for taking my question.
So I think you discussed.
A portion of the increased costs. This quarter was producing more airfreight usage than expected just given that question quite capacity continues to be constrained.
So just given that I guess would fulfilling orders as quickly as possible be our top priority or would you consider selectively delaying orders in order to kind of preserve.
Profitability.
Well, we definitely take the second approach and look very carefully whether or not our customers can absorb.
A delay or whether or not we need to meet the commitments and when we need to meet commitments. We do everything we can to infect midterm.
The airfreight and airfreight that we had in the quarter and I'll give you just a little color more color on that.
We had a tremendous amount of inventory that was on the water in the port that anchor and even offloaded from shifts that was sitting.
In long Beach as an example.
In December we imagined we would get access to we were told several times, we were scheduled to be able to get it and that of course, just kept getting delayed and delayed and delayed which unfortunately caused us to do some more air freight than we were anticipating.
But we always we do have a very I would say tight toll gate.
The teams have to go through in order to evaluate whether or not we will.
Are pretty component parts in order to meet customer demand.
Got it and then so.
For price increases now I think you mentioned unit prices are collectively up in the double digits I guess, how does that compare with the rest of the industry and obviously you mentioned that the sustain that ensures a whole I've also been doing but would you feel comfortable if you have to keep your prices at a premium over the rest of your peers.
Well I mean, when we look at what our competitors have done.
Over the last 12 months 16 months from a pricing perspective.
He takes pricing at different levels at different times, but when you look at it on a trailing 12 or 15 months basis.
The industry is pretty much consistent and I think it's because everybody is dealing with the same commodity cost inflation.
A lot of us leverage I'm sure the same suppliers.
So I think the industry is largely.
In a similar place based on the information that we see now we can't we can't see every competitor, but public companies.
One of the larger ones and certainly the larger ones.
We have information about their levels of price increases and so we track that of course.
Great. Thanks, so much.
Securities.
Your next question comes from the line of.
But <unk> from water Tower research your line is open.
Good morning, and thank you for taking my question.
Yes.
<unk> had one major question, we choose shrunk.
My head around the improving.
Interesting how long.
That will shift.
I think.
Just reflecting that what happened is people were how we saw how they are.
Yes, Adam.
Come up to what's been bumpy.
And I'm sure getting residential.
I wonder whether or not.
Similar thing.
Outreach as well as people will have.
Greg can drop in shell being back on the offense to associates with minimal actually come back to the hybrid work.
Is there a significant amount of reflex that needs to be done anything in half for China.
Talking about the future of work and the way that the occupancy will be.
Continuing productive maybe we also change.
Moving opportunities may be.
And so when they come back.
The cycle going for longer than you might imagine.
Something rational and we understand.
Yes. So great question. So this is Sarah and I think a couple of things that.
I would say in response to that I would say absolutely I think organizations are realizing that their offices need to earn the commute right. So the office needs to provide things.
In a better way that can be provided at home to attract people to the workplace. So yes. Similar organizations are taking the approach of mandating people back to the office, but I think where we've seen more success. Among our customers is when customers really think hard about what is it in the workspace and the overall employee experience that we're really encouraged and attract people.
Back to the Opex.
I think secondly, I think youre, absolutely right that as people are in the office. Some organizations are seeing at this stage is that works for them before.
Not necessarily going to be the kinds of spaces that work for them going forward and many organizations that I talk to business leaders are thinking about this at the moment.
To use all of the change in all of the things that had been an upheaval to really shift the culture of the organization and to sort of make those course corrections to take the organization forward in a way that they think will best support.
The business outcomes are striving for and as part of that they are absolutely looking at their spaces and looking at what kinds of installations.
<unk> allows us to achieve that and I think we see that this goes back a bit to the question. We've been asked before I mean, we absolutely see that in some of what we would call. Our forward looking indicators. So as we think about the kind of map activity were seeing as we think about the kinds of pilots and tests that customers are doing.
Our primarily markups and pilots that are looking at new kinds of solutions and testing new ideas to us to help them not only refresh their space, but in some cases really transform their space to attract attract their organizations back to the workplace.
Sure.
I think you've seen for the last five months.
<unk> grown more until we can change.
Certainly the better position.
1000.
Larger companies.
Predominantly.
Okay.
The larger companies or <unk>.
Okay.
Thank you Ron.
Corporation as a whole.
Yes.
Thank you.
Would you perhaps might be on that from the.
Congratulations with executives from Ceos.
Yes.
I'll answer that question with what they've made the anecdotal evidence that I would say that the kind of people I talk to whether it's an anti <unk>.
Travel or whether it's your customer visits to Grand Rapids.
Certainly that includes.
Leaders of large fortune 1000 types of organizations, but it includes a lot of other.
Organizations I mean, certainly we know that the big multinational corporations are an important part of our business. So we serve a wide range of businesses and industries of all sizes and I would say that that all of those conversations whether youre talking about the fortune 50 or or the smaller enterprise that's down the street leaders are asking these questions and they really are.
Thank you that attraction and retention of talent.
Thinking about how they position the organization for success kind of in this post pandemic world.
I would definitely say the kinds of interest the kinds of needs the kinds of solutions that I've been describing I think I think customers of all types and all sizes that we interact with our or asking about those things and looking to evolve their workspaces.
Okay.
Okay.
Thank you.
The interest rate environment.
With more questions any commentary on your best firing finish there when that might have meaningful unusual.
Which might change meaningfully in the retail arena.
Yeah.
Im not going to get into detail on the specifics of that side that I would definitely say that.
We know that even while people come back to their offices and adapting hybrid block model there will be parts of the week and parts are there.
<unk> experienced that are going to happen from other places like our home. So I think we feel very we feel very strong about the opportunity. We think we have with partnerships like best buy and other things that we are doing or are.
Our working out of the retail space to allow a much broader reach of the consumer segment to have access to great steelcase products to support them just as well in their home environments as we hope they're supportive of their office environment. So I think that.
I think we continue to believe that there is that there is a market demand for those kinds of solutions and with the right partnerships and approaches we could tap into that.
Are you seeing much funding.
For Q2 by the Corporation.
Hey, Joe.
Yeah, we're seeing a net so we work certainly with many organizations that have created a funded program or provided a stipend to allow their employees to purchase things like an ergonomic pasture for their home.
Certainly we've also seen some organizations take a different approach and not provide that sites and as you might expect the programs that come with funding for the employees tend to be far more successful in terms of the uptake.
And then the ones that don't but we're ready to support our customers and those programs regardless of the route they choose.
Okay.
One of them with the kidney problems last year.
Is it sooner than that.
Thank you.
With some planning.
I think we are targeting the 15th or the 18th I can't remember, if it's a friday or Monday, but its middle of April .
Okay. Thank you very much congratulations on navigating it.
Incremental time.
Contributions.
Thanks Pat.
And there are no further questions at this time, Missouri, Richard I turn the call back over to you.
Great well. Thank you all for joining today, we appreciate your interest in Steelcase and I Hope you have a great day.
This concludes today's conference call you may now disconnect.
Yeah.
Okay.
Okay.
Okay.
Yes.
Yes.
Okay.
Uh huh.
Yes.
Yes.
Okay.