Q2 2023 Steelcase Inc Earnings Call
First our strategy remains centered on work and that includes leading the hybrid work transformation.
We remain committed to helping people create places that work better because we believe people will continue to come together in person to imagine in Chicago and to achieve even if the patterns that shape, where and how they work continue to change.
Our investments in innovation have led to new editions to the steelcase portfolio, such as our new architectural product ever wall.
And acquisitions like Orange box for car Bay, and most recently hotan demonstrate our commitment to leading the hybrid work transformation.
We're seeing early positives from the Alcon acquisition as our teams are responding to the strong sales activity in the professional services sector and we're starting to realize cost benefits from our shared purchasing power.
And partnerships with technology companies like Microsoft Zoom restaurant, and others, along with our own innovations are also core to our strategy and investment mix as we help our customers solve for the hybrid transformation.
And we believe our strategy is working.
<unk> from the increased market share as I mentioned, a minute ago, our customer interactions indicate that we're well positioned to be successful in our core business, which serves large leading organizations.
And there's been some very recently released data points, which show an uptick in the return to office level in many cities in the U S.
But the reality is some companies have paused their investment as they define their own workplace strategies or way their choices in a volatile macroeconomic environment.
So lagging return to office that so many companies are facing primarily in the Americas, along with the possibility of a recession are likely contributing to slower decision making.
We've begun to see the impact of that slow down on our incoming order volume level in the Americas, and we believe others in our industry are feeling not seeing downward pressure.
Despite the positive trends I just mentioned this last quarter, our order volume was down 8% and our Americas core business, meaning our Americas segment, excluding the recent acquisitions and our own dealers.
And at the same time inflationary pressures persist and remain significant.
Supply chain disruptions also continue to impact our profitability.
We've taken actions to address those challenges, but there's still substantial factors.
And we've been sharing with you over the past several quarters, we've been making trade offs to mitigate the impact of these headwinds such as holding back on portions of our spending plans.
For example, we've slowed our rate of planned spending increases in both the Americas and Asia Pacific and will continue to drive fitness throughout every part of our business and region to enhance our profitability.
We're also committed to sustaining investments in our future by right sizing our core business in the Americas and corporate functions.
This move will position us to organize more fully around our plan to reinvest for growth and to diversify our revenue, while we're meaning more profitable at current levels of volume.
So we're taking actions to reduce our planned spending levels and this unfortunately will require a reduction in our current head count.
I also expect to communicate additional detail in the future regarding how we intend to evolve our operational model to drive greater efficiency and resiliency.
Even with these reductions in planned spending we remain appropriately invested in our core business and we do believe companies will continue to look to steelcase since they re imagine their workplaces.
And invest in the hybrid solutions, they need to grow and innovate.
Our continued focus on investing to support growth through reading the hybrid work transformation appropriately scaling our core business and increasing our fitness compliments the opportunities we see to add more diversity to the markets and customers, we serve and that's another key element of our strategy.
Our Ames business is one example of how we're already executing our focus to serve small and midsized customers.
<unk> revenue grew 50% this quarter against the prior year by meeting the unique needs of this customer set.
Over the past quarter, we've improved our speed of delivery through enhancements to our operational model and created an improved customer experience through new digital tools that will allow us to better reach and serve this segment.
Our education business also continues to flourish.
This system had the highest quarterly revenue in its history this quarter growing by more than 50% over the prior year.
And finally, our retail business revenue grew 17% versus prior year, and we continue to allocate increased investments to this business to drive more significant growth.
One final area of our strategy that remains our key focus is our commitment to ESG.
This quarter, we continued our series of global educational Webinars for suppliers to encourage them to set science based carbon targets aimed to consider sustainability improvements in the packaging of incoming parts.
We also published our first chemical ingredient declare labels for two of our products to demonstrate our commitment to material health and transparency.
In addition to that environmental progress I'm excited to share we've been recognized by Ford twice.
Being one of America's best employers for women and as a best employer for new graduates.
And steelcase with again honored by the Civic 50, as one of the most community minded companies in the nation.
This is our third year in a row on the civic 50 list and we're pleased to be again named amongst so many other great organizations, making a difference in their business and their communities.
In closing despite the economic hurdles facing our industry I'm proud of the way we've navigated the challenges over these past 18 months, we've taken aggressive actions to achieve our targets during the first half of the year and we're seeing success on multiple fronts as we execute our strategy.
We're making the necessary adjustments to prioritize our investments and rightsize, our business and we believe that will lead to improved profitability and more diversified growth opportunities in the future.
So with that I'll turn it over to Dave to review the financial results and our outlook more deeply.
Thank you Sarah good morning, everyone.
My comments today will provide some color around our second quarter results, including comparisons to the outlook we provided in June .
I'll also cover the balance sheet and cash flow.
For the third quarter and our targets for the remainder of the fiscal year.
Beginning with the comparison to the outlook we provided in June 2nd quarter revenue was slightly below the range while earnings were better than we expected.
For revenue we.
Grew 20% organically compared to the prior year with double digit growth across all segments.
We estimate the pricing benefits represented approximately one half of the growth.
Q2 order growth was below our expectations in the Americas and negatively impacted our revenue within the quarter.
In addition, the euro continued to weaken against the U S dollar.
Bolted in approximately $5 million of additional unfavorable currency translation effects compared to our estimates.
Despite our lower than expected revenue our earnings for the second quarter exceeded the range we forecasted in June .
Our better performance was driven by the Americas and included higher benefits from our pricing actions, a favorable inventory adjustment and timing of some operating expenses in.
In addition, we recorded a non operating gain on the sale of our remaining investment in an unconsolidated affiliate.
Inflation continues to be significant and over the last six quarters aggregates to $270 million.
For the first time since fiscal 2021, our year over year pricing benefits exceeded inflation this quarter.
Over the coming quarters, we expect inflationary pressures to remain but we anticipate the benefits from our pricing actions, including the surcharge will continue to accumulate more fully offset the cumulative inflationary costs we've incurred.
EMEA posted an operating loss of $6 $8 million in the quarter, which was below our expectations.
Revenue was impacted by project slippage is and our operating results were also impacted by accelerating inflation and some inefficiencies in our operations.
In response to the higher inflation EMEA announced a 5% price increase in September that will be effective in October .
As it relates to cash flow and the balance sheet, we ended the quarter with $52 million in cash and $214 million in total liquidity.
We deployed approximately $220 million of cash in the second quarter, which was funded by $61 million of adjusted EBITDA in the quarter of <unk>.
$64 million reduction in cash balances.
$79 million of net borrowings under our credit facility and $8 million of proceeds from the sale of our remaining investment in our non consolidated affiliates.
The uses of cash included the acquisition of <unk> for $105 million, which was net of adjustments related to customer deposits in working capital beyond.
Beyond Helicon, working capital increased by $69 million, driven by receivables and the sequential revenue growth in Q2.
We also funded capital expenditures of $15 million dividends of $17 million, and our semiannual bond and bond interest of $12 million.
We are now expecting capital expenditures to total between 50 and $60 million for the full year.
Moving to orders, we saw second quarter order growth of 5% as compared to the prior year, which was driven by 7% growth in the Americas and 4% growth in EMEA.
In the Americas pricing drove approximately 14% growth.
More than offset an estimated decline in volume of approximately 7%.
In EMEA. The increase was also driven by pricing with volume being flat versus prior year.
The 8% decline in the other category, which was also a combination of pricing and volume was driven by Asia Pacific, which experienced weakness across all markets, except India.
Pre sales activity remains positive.
General near term sentiment for many of our sales leaders and dealers recent opportunity creation in most markets was higher compared to prior year.
Our win rates in the Americas were strong in Q2 and customer visits to Grand Rapids are almost fully booked through the end of the calendar year.
However orders in our Americas core business seem to reflect the softening in demand patterns in the second quarter compared to the last several quarters.
And this appears consistent with the latest industry data published by this month for June and July .
In addition, during the first three weeks of September our orders have declined by approximately 20% versus the prior year.
It's possible the slowdown.
Sorry, it's possible the slow return to office trend in the U S could be having an impact.
It's also possible that reduce CEO confidence is impacting capital spending in our sector.
Decision makers have a lot to deal with at the moment and they are also facing a lot of near term uncertainty.
Inflation and supply chain disruptions are impacting almost every industry labor challenges are impacting productivity on many fronts rising interest rates are pressuring the outlook for GDP growth.
And the geopolitical unrest remains concerning.
As a result, we are planning to implement additional actions in the third quarter, which target further reduction of our planned level of spending.
These actions targeted approximately $20 million of annualized spending.
And they are expected to include the elimination of up to 180 salaried positions across the Americas core business and corporate functions.
These reductions are approximate 8% of the related salaried workforce.
And we will bring the cumulative reduction compared to pre pandemic levels in fiscal 'twenty.
Approximately 20%.
We expect most of these reductions will be implemented during the third quarter and result in restructuring costs of approximately $8 million.
These actions along with some re prioritization of our remaining resources will help us remain invested in our most important strategic initiatives and provide some additional protection in the event of continued uncertainty and impact on our demand environment.
In light of these trends, we also adjusted our dividend this quarter in order to strengthen our liquidity profile and support a higher allocation of capital to Reinvestments in the business in pursuit of our longer term strategy.
Moving to the outlook consolidated backlog of approximately $946 million at the end of the second quarter was 38% higher than prior year and continued to include a higher than normal percentage of orders expected to ship beyond the next quarter.
As a result, we expect to report revenue within the range of $825 million to $850 million.
Which represents year over year organic growth of 12% to 15% and includes 10% driven by pricing.
Okay.
Excluding restructuring costs and amortization of purchased intangible assets, we expect to report adjusted earnings per share of between 17% to 21 for the third quarter.
In addition to the projected range of revenue the earnings estimate reflects the following projections.
We expect gross margin of between 29.0 to 29, 5% driven by pricing benefits net of inflation of approximately $55 million when compared to the prior year.
Sequentially unfavorable business mix due to the summer strength of Smiths system.
And lower manufacturing efficiency due to decreased production volume in the third quarter.
We also expect operating expenses of $215 million to $220 million, which includes $7 million of amortization expense related to purchased intangible assets.
And an expected $7 million gain on the sale of an underutilized facility and adjacent land.
As well as some prior to prioritize investments in marketing and product development higher spending in a few corporate functions and continued investments in our employees.
Lastly, we expect interest expense and other non operating items to net to approximately $5 million of expense.
And we are projecting an effective tax rate of approximately 27%.
For the fourth quarter, depending on the level of volume, we expect sequentially improved gross margin due to accumulating benefits from our pricing actions.
And operating expenses of between $215 million to $220 million.
We continue to work towards our full year targets, but given the uncertainty in the demand environment. We are not able to provide an update regarding the achievability of our targets at this time.
In summary, we're doing everything we can to drive profitability, while protecting our investments and our most important strategic initiatives.
Fiscal 'twenty three has been an extraordinary challenge and that's saying a lot. Following the initial impact of the pandemic in fiscal 'twenty, one and the beginning of supply chain disruptions and accelerating inflation in fiscal 'twenty two.
But we're managing through it and we're gaining share while continuing to invest in our longer term strategy from there I'll turn it over for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We will pause for just a moment to compile the Q&A roster.
Yeah.
Your first question comes from the line of Reuben Garner your line is open.
Thank you good morning, everybody.
Good morning.
Maybe if we could start with.
Maybe elaborating on the thought process on the cuts to turbos.
And corporate.
Head count as well as the dividend.
It sounds like some of the you've got mixed signals some of the pipeline activity remains robust, but recently demand trends or not.
Were you mentioned to be in.
Can you walk us through.
<unk>.
Yes.
How you came to the decision to make those.
Take those actions.
Is there any.
Risk that.
Some of the order weakness is more driven by pull forward.
With your pricing actions kind of mid late.
Summer and will you be able to kind of handle a ramp back up if this was a temporary slowdown for whatever reason.
Well, you've got a lot of a lot of questions in that single question. There Reuben So let me try to break it down.
If you refer back to March when we communicated our targets for the fiscal year.
And the revenue growth that we were pursuing.
And underlying assumption was continuing improvement in our overall order patterns.
And we believe that would be linked to continued improvement in return to office and increased demand.
To support the hybrid transformation of work and Thats played out.
It has been improving we have seen improved demand, but it's not tracking at the level that we originally planned.
And what we see right now is increased uncertainty on the horizon.
I mean, it's no secret that there are dark clouds related to the economy.
And other factors and therefore, we felt it was prudent to.
Take some action now I will tell you that we spent a lot of time balancing the level of action we should take.
Because we are gaining market share and we do see clients continuing to move toward returning to the office in making investments. So we did not want to jeopardize our ability to continue to gain market share, but we felt it appropriate to adjust given that it wasn't playing out as we had initially planned.
Okay.
And then my next question I will try to be a little bit more concise.
But price cost.
The price cost tailwind that you've got for the remainder of the year can you talk about where price cost stands today relative to <unk>.
The pandemic levels, how far behind are you still.
And kind of catching up from.
Some of the inflation and then what kind of risk is there.
On the pricing front, if there is this volume.
At the slowdown in volume continues.
To the back half of the year, what kind of competitive risks to pricing and bids do you see that could kind of put that gross margin trajectory at risk.
Maybe Mike can handle the first part and then I'll comment on the second part yes sure.
So obviously inflation has been extraordinary.
Now there is really no signs of any relief on the inflationary front. So we quantified so far we've accumulative till we experienced $270 million.
Of inflationary cost over the last six quarters, which is really when this all started to ramp up.
Pricing actions, obviously take time to become implemented until.
We've started to make a dent in that.
But we're still quite a bit in the hall over the next few quarters, we should because of the timing assuming inflation levels, which is sort of our best estimate at this point, we would expect to start to offset that more slowly but even in another couple of quarters will still be behind cumulative we even though we will start to post some good year over year.
Tailwind improvement, so, but we're going to.
We need to continue the pricing actions in order to kind of make up for the whole or in.
Even though we will start to see some benefits on a year over year basis.
Yes, Reuben in on the second part of your question related to the competitive dynamics in a lower volume scenario.
Just to remind you that we are in a lower volume scenario today.
The industry has not recovered.
Pre pandemic levels of volume and in fact, we're significantly still significantly behind.
And yet the industry overall the dynamics of competitiveness.
I would say reasonable.
And I think thats largely driven by the fact that we're all dealing with the same levels of inflationary pressures.
And are working with the same suppliers and our and our products have the same material content.
I imagine everyone is feeling the same pressure that we're feeling.
And we'll see what happens in the future, but so far it's remained like it has in the past a competitive environment, but not an unreasonably competitive environment.
Okay, Thanks, and last one for me.
There's a comment in the release that.
As I've mentioned.
Your strategy is unchanged, but.
You talked about diversification I was wondering if you could kind of elaborate on what that.
I mean going forward.
Sure happy to so so you're correct. So we have not shifted our strategy, but remember our strategy as we have communicated it has had a couple of components to it. So one of those guarantees to continue to focus on leading the hybrid work transformation. So this is our core business with your typical big corporate cash.
<unk>, which is so important to us and we've been successful as Dave mentioned, we've got nice win rates were gaining share. So we will continue to invest in that hybrid work transformation for the typical kind of corporate customers.
The diversification is an acknowledgement of the fact that we've also seen really nice traction in growth and we've been investing in and we will continue to invest in other opportunities whether that be health care, whether that be in the mid market business model that we're building around <unk> or things like consumer or retailer healthcare. So those are the parts of our business that we want to.
Make sure we continue to invest in and we continue to grow because we see some really nice market opportunity some really great potential to grow and we believe that.
<unk>.
Can you to bring the kinds of solutions to market that will allow us to be successful. So Joe I would say, what we're doing both and we wanted to make sure. We take a balanced approach both to continuing to focus on our core corporate market, but also make sure that we are explicitly.
<unk> and supporting these other areas that will allow us in total to have a more diversified.
Set of markets and customers that we serve.
And so I noticed that last question if I could quickly follow up so are those.
Organic investments I mean with the cuts that you're making are you also reallocated.
Resources or is this.
Potential for M&A and some of these areas.
How are you doing.
Well I think certainly you've seen historically that those have been areas that in some cases, we've used M&A to drive with the acquisition of Smith system to really expand our education business. So I think we've always said that that acquisition what is the right opportunity and we think it fits our strategy that is.
Is part of what we look at so so there may certainly be and things like that again in the future, but Youre also right Tim mentioned reallocation of resources, where we see growth, where we see EBIT market opportunity, where we see a lot of nice tailwind in terms of market opportunities are and some of those other segments, So where we have the ability to.
<unk> increased investment relatively speaking or shifts resources that might be working on the core business to help accelerate.
Some of our initiatives in those other areas, we are pursuing those opportunities as well.
Great. Thanks, guys. Good luck going forward.
Thanks drew.
Your next question comes from the line of Budd <unk>. Your line is open.
Good morning.
Chip, Mike Congratulations on managing the profitability.
And the work that you've done on that I know these are very challenging times.
I just wanted to go back David you talked you used the phrase on the visage I'll.
Call it fully booked for the balance of the year for visits to Grand Rapids.
I'm curious can you give us maybe a little bit more color on that activity.
In terms of how that compares to last year and maybe several other quarters that you had.
Sequentially.
Give us some feel for what you're seeing in terms of the sales activity I know the order activity is modestly disappointing at least through the first three weeks of this quarter.
It's actually at or above FY 'twenty levels, we are.
I mean were essentially fully booked and at the end of FY 'twenty, we were pretty full but.
Entirely full and we are squeezing in a lot of.
Even shorter day trips to accommodate customer requests to come see us.
So.
Right now if you wanted to come to Grand Rapids, we would either have to bump somebody.
For the end of the calendar year, we would either have to bump somebody or look for and hope for a cancellation and we're just not seeing a lot of that so the interest level and the activity level is remains quite high.
And can you give us some color as to the kind of customers Youre seeing are these.
Traditional steelcase customers or the fortune 1000.
They do they will reflect the diversification efforts that <unk> highlighted in her.
The written language, Andrew a few moments ago in terms of the markets you're trying to serve.
Yeah, we've been actually been really pleased with the diversity of the kinds of customers that have come to visit and I should mention as well that we have not we have not changed our criteria or a threshold in terms of who.
We want to welcome Ms guests to the organization. So we have been able to see some really I think.
Really exciting clients with really exciting opportunities I mean, just the other day, we had a group that I've spent some time with that represented a parochial K through 12 School district that was looking to make big investments to sort of transform learning across their facilities and they were terrific group, but we're also seeing.
Big Fortune 1000 kind of decline and we're seeing a lot of mid market activity. We've actually recently invested in more of a mid market showroom and some new tools here on campus too.
Help support those customers if they choose to make a visit many don't.
For those who do we want to be able to show them.
It's possible that help them think about their workspaces. So so we really haven't seen a pretty diverse.
Of customers as well as I would say a number of a number of customers and customer visits to our customers yet settled so clients. We havent worked with in the past that you are maybe thinking differently or asking new kinds of questions since the pandemic and our.
Excited to talk to steelcase and explore the possibilities when maybe they haven't in the past so it's been quite a mix.
And just if I can just finish on that particular issue the sales cycle for these new diversification markets.
I know there are various.
The sales cycles for showing the markets that you serve but how do you. How do you look at that and that maybe I know, it's a fuzzy question, but I think it's an important one to get an idea of of how soon we could expect maybe some of those diversification efforts.
Wind up in orders in the lineup.
Sales and shipments.
Well, maybe I'll start with a thought on that and maybe Dave or Mike can chime in and add more beds.
But I think one of the things that we've really tried to acknowledge as we've invested in these different markets is to make sure. We clearly have an understanding of what the dynamics of the nature of those markets are so for example that mid market that we're pursuing with our investments in ink and Q that type of customer is typically a customer who launched the process to be quick and simple.
This is the kind of customer who might call and say look I need 20 chairs in 'twenty desks and I want them in two weeks right. So very different sales cycle and dynamic that is much faster on average than you might see for a fortune 1000 kind of company operating in a very different way. So so a lot of our investments have been.
Durbin and just that and say how can we make sure. We can respond and we can drive a faster sales cycle for the kinds of customers to want to move quickly and likewise for the customers who are more deliberate tenant and are planning a much more significant project construction, where the process naturally might take longer we of course know how to support them as well so.
So we're really trying to be conscious of those differences in design, what we're doing to support them.
Okay.
On the on that.
The first three weeks of this quarter is there any more color you can give us.
It reflect geographical disparities I know the <unk> issue. The return to office issue is one that is confusing a lot of people. These days and the subject of a lot of conversation in written Inc.
And all of the media.
But is there any when you are looking at that sales compared net order comparison is there a color as to what the source of that weakness might be.
I'll start that answer with a qualitative comment and then we can try to answer that with maybe some quantitative data as well.
It's interesting that you asked that question because last week and this week between the two weeks we've had all of our American dealers here in Grand Rapids to reconnect in person and to talk about new products, new opportunities really come together.
To work as a team on how Indians all these opportunities and I really tried to kind of push on that as I anecdotally talk to our dealers from all over the Americas. So every part of the U S.
Plus Latin America, Canada, Saturday night, and I would say overall the sentiment was quite positive. It was really hard to kind of poke on dealers from a particular part of the country or a particular region.
You know that expressed a sentiment that was quite different so so while we know that geographically you see different dynamics, perhaps in big cities than you might in Rural America.
Qualitatively as I spent the last few weeks with with our dealers.
There was a lot of positivity certainly questions about a potential recession certainly questions about some of the challenges.
Challenges, we all face, but it was hard to it was hard to discern a geographic difference.
In those conversations.
Yes. Thank you could draw any conclusion from three weeks of order patterns, It's a pretty short period of time and it is still.
The longer end of the tail following our significant price increase in surcharge that we put into effect in the middle of July but there could be some impact that's continuing to linger.
It's just really hard to tell but because it was down 20% and because we saw unit volume decline in our order patterns in Q2 in total and the Americas core business, we felt it was.
<unk> to share that information with you.
I understand and we thank you for that.
$55 million guided benefit.
Price over cost could you give us kind of what you think the pieces of that would be in terms of incremental inflation and incremental price realization.
Yes, but it's about $75 million of pricing and about $20 million of inflation on a year over year basis versus the third quarter last year.
So that $75 million includes at the effect of the 6% surcharge effective surcharge is that right because that's a better than we saw in the second quarter right.
That's correct yes.
Yes, yes, it's the July price increase becoming more fully implemented and the surcharge.
And how do you think that breaks out for the rest of the year then.
And how long will it take to recover the 270 or the cumulative inflation, but it will be more than 270 by the time you cover it.
Yes, depending on volume in the fourth quarter it could be a little higher because those things will continue to become more more implemented.
We don't have a full view on how long it will take us to recover the $2 70, but it will still be behind as of the end of the fourth yeah slightly into next year.
Okay.
The $20 million spending that reflects the 180 up to the 180 positions that youre going to be cutting is that is that annual savings David.
Yes, great.
Andy.
It's a targeted annual savings of $20 million, which could include up to 180 salaried positions that are eliminated.
And then those salaried positions, it's pretty core in Americas, how does that break out.
Between those two.
It's the Americas kind of core business and corporate functions, so by quarter business I mean.
At Smith system that AAM Q not e-commerce, it's kind of.
Large company large city core business of that.
That we have.
Steelcase.
Okay.
Personal and corporate.
How does that breakout corporate versus corporate function versus.
Americas.
Yes.
I don't know that I have that breakdown.
A large part of corporate is allocated to the Americas anyway.
But as far as the corporate functions that includes all of the corporate functions of HR IP operations finance facilities et cetera.
Got it.
CRA stated that you are pleased with how corn you that you've owned it since early June .
How does that how is that performing versus your expectations financially.
So far so good.
They're dealing with what we're dealing with supply chain disruption and inflation and they are working through a significant backlog that we acquired.
There is a tremendous amount of enthusiasm excitement about joining the steelcase.
Family our dealers are excited about the sales organization feels good about we've received positive feedback from A&D.
As well so we're feeling very good out of the gate of the acquisition of outcome.
Okay, and if I heard you right you said the operating expense.
The expectation for the fourth quarter is the same as it is for the third quarter is that correct $2 15 to $2 20.
Yeah, I think that's right. We just don't I don't have another projected.
Gain on the facility.
Sales for the fourth quarter.
That will include the amortization of the 7 million, yes, Joe.
What.
And it should include some of the reduction on the operating expense right from the.
Yes.
Okay. So I'm just curious as to what.
What additional initially.
Essentially we are replacing the land game that we have in Q3 were replacing in Q4 with the benefits associated with the reduction.
Okay Alright.
The debt is up higher because of the acquisition of Alcon and what is the.
The.
Debt to trailing adjusted EBITDA, which that which that metric.
For the.
Your debt.
And between two and three <unk> our trailing adjusted.
EBITDA, our trailing four quarter metric is about 150 $160 million.
Our total debt is.
In.
$550 million range right now we borrowed to fund the acquisition of <unk>, but we also borrowed because we have a significant amount of incremental inventory.
In response to supply chain disruptions that we have.
I hope that we will continue to see improvement in the supply chain disruption and then our operations team will be able to continue to.
Coal inventory levels back to a more normal level.
If that happens.
Our earnings.
Our earnings trajectory remains relatively consistent or better than what we did in the second quarter, then I think youll see that.
Credit facility paid off by the end of the year.
But that's the goal at the end of the year, that's kind of where I was going and your metric does that include the coli impact is reducing net debt.
Yes.
Yes, actually I wasn't including totally.
Net that would obviously be smaller.
Okay Yeah.
Thank you.
Finally from me I'm sure the dividend issue was a major comp conversation on the board so far.
Ill go back to the philosophy of what you think you you raised it because you thought things were going to get better faster.
Brought it back down.
What's the what's the issue now or how do you how does the board view that.
Well I think.
The board and the management team continues to operate under our long standing capital policy of operating relatively conservatively.
On balance sheet liquidity to run the business and we allocate earnings to paying a healthy dividend and with the depletion of our liquidity because of some of the acquisitions some of the investments in inventory and other factors, we it's not where we would like nor our earnings projected.
Yes.
High end of the targets that we communicated at the beginning of the year. So we felt it was appropriate to consider an adjustment.
And the board was onboard with that and we reduced it back to the level that we were at.
I don't know six quarters ago.
Before we raised it to $14.05.
Yes.
Well again, congratulations on managing the profitability aspect of it.
<unk>.
Our best wishes on the balance of this year and for the years. After thank you.
Thanks, Brian .
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Your next question comes from the line of Steven Ramsey Your line is open.
Yes.
Good morning.
Wanted to start with the sales guidance being approximately 100 million or so lower than the backlog.
<unk> said you would be shipping more.
Beyond Q3, I guess what are the drivers of later shipping dates at this point and is there any light in the tunnel that this would change in the next few months.
It's mostly customers.
That are driving it so its.
<unk>.
We had a lot of large pull forward of orders in advance of the price increase and surcharge.
And so we have scheduled backlog that's scheduled out beyond 90 days.
That has been the case for the last couple of quarters I would say, it's influenced by the number of price increases we've put in place, but also influenced by supply chain disruptions.
Those are not getting worse.
But theyre not getting significantly better.
So we still have some extended lead times across all of our product categories of course, but in some cases, we have extended lead times, but it's mostly the customer requested delivery dates that's driving that.
The scheduling to backlog.
Okay, and then on the sentiment being positive but orders declining.
You talked about some pull forward effect driving the orders, but maybe can you weigh those out just a little bit more specific about being positive yet orders coming down and if you expect that to drive it.
So a better orders in the next couple of months.
Well I mean, I think the sentiment is tied to.
The customer visit activity other pre sales activities being relatively good and the fact that returned to office continues to improve in almost every city around the U S and other parts of the world that have been lagging. So I think everybody is feeling.
Okay or better the dark clouds of the.
On the horizon related to the economy.
Has people concerned.
So it's possible that that could be having some sort of.
Impact on the order patterns right now or it's also possible that it just could be extended pull forward effect and things will get back to.
Growing at a decent rate in the weeks and months quarters to come.
It's so hard to tell right now the uncertainty level is very high and maybe the other thing I'd add to that which again is something we see that unfortunately, we can't really quantify for you is that while there is tremendous pre sales activity and a lot of positive sentiment. There are certainly clients, who are just starting to dip their toe in the water now so for them Act.
<unk> means a pilot or test or something on a smaller scale, which will generate the same level of order volume that a full scale renovation of project was that I think our hope certainly is that customers who are now becoming active in starting to pilot and test to try things that those activities will be successful in those will lead to moment.
And within those clients, so that new line from the pilots.
Pursuing a much larger scale project or transformation of their space. So that may be another dynamic that is influencing.
Admittedly on the surface looks like a disconnect between the sentiment and the actual level of orders that we're seeing right now.
Okay helpful. And then last one for me on Smith system's clearly a major driver seasonally in Q2 and strong results again can you compare for Smith, particularly the units total sales and margins versus pre pandemic levels.
And then if you think longer term about capturing the full opportunity in the education vertical.
Smith enough to do that or would you be open to acquiring to get bigger in the education vertical.
Yes, I'll stop short of providing a lot of detail on our specific business like Smith system, but I will tell you that relative to the value creation plans that we put together.
When we made that acquisition they are tracking nicely. The other thing too that's important to note is while they do have a very strong summer and exceptionally strong summer period for obvious reasons schools are closed and one in one classroom should be renovated largely during that time period that team has done a terrific job driving.
Business in the other three quarters.
It's still overweight to the summer, but it's.
Actually very nice business in the balance of the of the year as far as yours.
Question about is it enough I mean, they continue to perform very very well and they've made great decisions.
About being in the right position to support.
The growth that has been in the industry. So they've gained nice share.
Whether or not we do another acquisition I would say I wouldn't rule it out but I wouldn't also declare that it's absolutely necessary for us to continue to be successful.
Okay helpful. Thank you.
There are no further questions at this time, Ms Armbruster, I turn the call back over to you.
Great well I just wanted to thank you all for joining US today. We appreciate your interest in Steelcase and hope you have a great day.
This concludes today's conference call you may now disconnect.
Yeah.
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