Steelcase, Inc. Q1 FY2025 earnings call

• Strategy update: Over a year since Investor Day, progress in workplace transformation, diversification, profitability improvement, and using business for good. - New product launches: Expanded Ocular collection with Ocular View co-developed with Logitech, Orangebox Campers & Dens solution, and new chapter in collaboration with Frank Lloyd Wright Foundation. - Profitability: First quarter results showed strong earnings growth despite slightly lower revenue, with adjusted earnings per share up 78%, eight consecutive quarters of gross margin improvement, and cost reduction initiatives like distribution center closures and production line optimization. - Segment performance: Americas had gross margin improvement; International had adjusted operating income up $7M vs prior year. - Sustainability: Committed to reach net zero by 2050, working with science-based targets initiative and publishing transition plan.

The Americas segment had another good quarter due to gross margin improvement. The International segment posted adjusted operating income of $2 million, which was a $7 million improvement versus the prior year. Overall order growth remained strong for the third consecutive quarter with 8% order growth in Q1, where the Americas were up 10% and International had 2% growth. The Americas' improvement was driven by strong growth from large companies, while orders also grew across other customer segments including education at the start of the peak season.

• Second quarter revenue expected to be within $850 million to $875 million, reflecting 1% to 4% organic growth year-over-year. - Adjusted earnings per share expected between $0.36 and $0.40. - Fiscal 2025 full year targets of 1% to 5% organic revenue growth and adjusted earnings per share of $0.85 to $1 reaffirmed, with increased confidence to potentially reach the higher end of the EPS range assuming stable macroeconomic and geopolitical environments.

Q: Good morning, everybody. Congrats on the strong start to the year. Can you talk about what drove the improvements on a year-over-year basis in gross margin and how to think about that gross margin line as the year progresses?

A: Yes. Like I said a second ago, a number of factors including remaining pricing benefits from actions that we took last year that are posting some year-over-year benefits, strong operational performance as well was a contributing factor and really across many fronts in the plants. I think we also might have had a tad of favorable business mix in the quarter, but everything was moving in the right direction in the first quarter for us. And with the second quarter and the strength of our education business, we get such a terrific absorption of our overhead and fixed costs, because we ship so much product in that short three-months period that we expect our gross margins and the strength year-over-year to continue into the second quarter.

Q: Good morning. At your Analyst Day, you laid out a midterm target of $50 million in savings, mostly around the cost of goods line. How far along are you in the progress towards that goal?

A: I would say mid to early innings on it, Greg. We accomplished a number of improvements that we feel really good about, teams worked really hard on and they're driving year-over-year benefits. The challenge is, as we have some offsetting other factors, so we're not seeing the net improvement that we would like to see yet. They are also in the midst of launching a number of additional initiatives. You've read about some of them periodically. You'll read about some of them in the Q when we file that tomorrow. We give more color in the Q behind some of the restructuring activities that we're taking. We feel pretty good about it. We just have had some other challenges that have dampened the net impact of gross margin improvement. We're still seeing year-over-year benefits in gross margin, which is, of course, in part due to the actions and activities that the ops team is driving, but we're hoping to see more significant net improvements outside of pricing, net of inflation and benefits from volume growth and business mix shifts. So, I'd say we're in the early to mid innings on that and have gains in front of us yet.

Q: Good morning, and thank you for taking my question. First of all, I would just want to say, Budd apologizes for not being able to make it to the call today. He's on the road and was not able to dial in, but wanted to congratulate you guys on the great margins and the progress you guys have seen there. I had a question sort of about how customers are thinking about redesigning their offices for hybrid work, about things like, space per employee and spend per employee? And how has that been changing when we compare what's going on today versus pre-COVID?

A: Well, one thing we've seen with respect to space per employee and, again, I don't -- I can't give you really precise data, but I can't think of a number of clients right off the top of my head who have been thinking about somewhat increasing space for employee. I think a couple years ago, that was driven more in the immediate aftermath of the pandemic by people not wanting to be quite so close together. But I think since then, it's really reflected in evolution and how we think about how people work and creating ancillary spaces, creating social spaces and more informal spaces, adding solutions like Ocular View or Orangebox Campers & Dens into their floorplate to provide different levels of privacy, technology support, et cetera. So, while I can't give you an exact metric, I would be willing to bet that, that space per employee number is at least stable, if not potentially increasing a bit in some organizations.

Q: Good morning, everyone. This is Chris White calling in for Steve, and thanks for taking my questions. I wanted to follow-up on a return-to-office question. It seems like that's been the major topic for the past couple of years. But now, based on recent results and the conversational tone at NeoCon, it was less about return to office and more about the hybrid models. There, you mentioned the Ocular collection to open the call. So, my question is, do you think that return-to-office chapter is over? And are we now instead focused on kind of implementing the hybrid model instead of -- seen as highly valued in our company spending to make them functional and attractive?

A: Hi, Chris. It's Sara. So, great question, and here's how I would think about that. As we think about return to -- I'll separate return-to-office from the hybrid model, because if you think about it, back in February of 2020, before the pandemic, there were a few organizations that were strictly 100% in the office then, right? We work with a lot of clients where people, especially white collar employees, had some degree of flexibility, had different models. So, I think in some ways, the pandemic has really just accelerated or pushed forward a trend that was already happening. So, I think hybrid was something that we were focused on even before the pandemic. We really doubled down on hybrid and our investments and solutions to support hybrid work during the pandemic. And I think those are the things that we've been launching and will continue to come to market. And we hope to kind of reap the benefits of having the right solutions for the moment. So, I think we definitely still see lots of organizations thinking about and working on what hybrid means for them. And those decisions -- as they make those decisions and evolve that thinking, we believe will continue to drive demand for our solution. With respect to return-to-office in terms of just simply, like, getting people back for -- back to the office at all, I don't think we're anywhere near done. I would describe the progress that we've seen or the evolution we've seen in terms of organizations, taking steps or taking more significant steps to really define how their organizations are going to work, we've seen that happening, and I think we continue to see that happening. And again, I was at an event with a group of CEOs two weeks ago and was seeking to one individual, again, a Fortune 100 company who shared with me that, like, that very day, they had announced that they were moving from four days a week, to five days a week, right? And I do hear stories like that, or they're going from three days a week to four days a week. So, I think it's a -- I'll say, a steady march. It's not a sprint, but it's a steady march. And I expect we'll continue to see organizations moving back toward a significant amount of in-person week, not a 100%, but in-person work still matters, and the spaces in which people come together to do that work still matter. So, we still believe that's likely to be what's in front of us.