Steelcase, Inc. Q2 FY2025 earnings call

Transformation: Steelcase is focused on understanding changing work realities, with Gallup data showing hybrid working preference. Strong win rate and market share gains in Americas. Customers transforming workplaces, e.g., large customer reinventing meeting spaces. ### Diversification: Education segment led growth with Smith System up 18% YOY, supporting K-12 school districts. Progress in healthcare, SMB, and consumer segments. ### Profitability: Second quarter had 2% organic revenue growth, adjusted EPS $0.39 (+26% YOY for ninth consecutive quarter). Gross margin improved, driven by operational performance and cost reduction initiatives like moving production lines and closing a distribution center. ### Use of business as a force for good: Published annual impact report, employees volunteered over 62,000 hours since 2021, working on carbon footprint reduction and sustainable packaging with 40% recycled content in packaging.

Americas delivered $13 million of adjusted operating income improvement over the prior year and drove 3% organic revenue growth. The International segment adjusted operating results improved by $2.4 million versus the prior year due to efforts to reduce cost structure and enhance competitiveness in a soft demand environment.

Q3 Outlook: Expected revenue range $785 million to $810 million (1%-5% organic growth YOY). Adjusted earnings expected $0.21 to $0.25 per share. ### Fiscal 2025: Continue to have confidence in potentially achieving higher end of adjusted EPS targets, but factors like timing of project orders with large corporate customers and ERP system cutover could impact results.

Risks: Timing of project orders with large corporate customers in Americas could differ from projection. Anticipated ERP system cutover next fiscal year may cause customers/dealers to request shipments earlier or later, affecting Q4/Q1 business flow.

Q: Could you just talk about a little bit more about your commentary around corporate orders picking up in the second half, maybe what are you seeing in terms of maybe some of your pipeline metrics that gives you confidence in that outlook?

A: Yes. When looking at Q2, related to largest corporate customers, sales team is wired for global service. Leadership is confident in pipeline, though orders expected in quarter didn't come in as scheduled, pushing timing to back half of year.

Q: And then, in terms of OpEx for the quarter came in pretty significantly lower than I guess you were guiding for going in. Could you just talk about maybe what drove that? And are those the permanent cuts that you're making or maybe temporary variable cuts that might come back in?

A: I think if you take OpEx and you add back the gain net of the variable compensation, you'd see that our OpEx was pretty close in line. Make sure you're adding back the net gain shown in the release in the reconciliation of GAAP to non-GAAP.

Q: Wanted to think about the FY'25 range and maybe even beyond that for your midterm targets. How much flexibility do you have to land in these ranges based on your cost and efficiency moves versus solely just orders and volumes coming through?

A: It's balanced between cost/efficiency moves and order/volume. Have work to complete for additional margin improvements and ERP cutover readiness, but biggest variable is timing of orders related to large corporate customers.

Q: Does the strong win rates and share gains in Americas point to incrementally rising win rates? Or would you describe it more as steady?

A: Win rates are pretty high, running higher than previous years, resulting in market share gains as per industry info from BIFMA.

Q: On the expected large corporate rebound in the second half, maybe can you give a flavor for how that business looks? Does it reflect kind of the general trend of improvement that you've seen in project business over the past half year to year? Or is the flavor of what those wins could look like? Is it different than what we've seen?

A: Project business grew in quarter YOY, continuing business down. Large corporate ahead YTD, could have had pull forward business into Q1 from customers migrating to recent price lists. Project activity rebuilding, but continuing business off a bit influenced large corporate trajectory.

Q: Wondering if you could kind of touch on some of the growth drivers that you're seeing outside of large corporates, just given that that you still grew orders in the Americas despite some of that near term pressure, you mentioned education, any of the others doing particularly well, and kind of what, what do you think is driving that? How much runway do you have to go there?

A: Growth drivers include health, education, SMB, and government. Education has modernization opportunity, healthcare needs modernizing, team competing well in government. Invested in capabilities, innovation, and solutions relevant to clients' needs in these segments.

Q: Our survey of the dealers had a nice balance recently in the last couple of months, it's had pretty strong numbers out west, just given how concentrated technology, the technology industry is out there and how kind of depressed that markets been. I was wondering, if you had any color there and any other verticals that jump out to you as being opportunities or potential areas of risk in the coming quarters would be great?

A: Tech starting to wake up, with companies like Amazon expecting more in-office days. Activity levels improving on West Coast. Dealers seeing mid/near term outlook improving. In international, sectors have opportunity, investing more in education in APAC and Europe, healthcare more challenging in international.

Q: I just wanted to follow up on the success that you guys are having with government education and the healthcare markets. When you look at these, well, first of all, do you think that there's evidence that you guys are gaining share in this area, in these areas? Then secondly, how big a part of the business, do you see this getting over the next several years?

A: Don't get data by vertical market across industry. At Investor Day, showed mix of Americas business by vertical, large corporate historically over 50%, but may be less post-pandemic. These diversified markets have nice growth potential and are a meaningful component of the business. ### And is there a similar opportunity that you guys see on the horizon for international?

A: Some sectors have opportunity, investing more in education in APAC and Europe, healthcare more challenging in international, focusing on winning larger share of large corporate business in Europe where win rates are improving.