Steelcase FY 1Q18 Earnings Call Notes

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Jim Keane – President and Chief Executive Officer

Significant decline in large projects, but don’t see evidence of broader slowdown

“Our analysis of our orders reveals a significant decline in large projects and large customers, which is consistent with remarks of another public company in our industry. Yet we don’t see any evidence of a broader slowdown in the economy and our day-to-day orders did not see new declines this quarter. It’s possible ongoing questions about tax reform and tariffs may be causing some companies to pause before starting new projects. On the other hand, our conversations with the A&D community suggest that they are very busy and they are often a leading indicator of demand for our products. That gives us reason to believe this is a short-term blip although we feel better if we saw stronger growth in our pipeline for future project opportunities.”

Shift from cubicles to open seating

“Another consideration is the ongoing shift in large customer demand from legacy private office in cubical applications and towards more open-benching, share desking, and ancillary applications. We saw higher rate of the year-over-year decline in our legacy product lines during Q1 and faster growth in new products aimed at the new applications”

We’re fairly confident this isn’t macro

“I’d say first of all compared to previous times when we see orders fall like this, we can almost always in those previous times point to something going on in the economy and it’s more difficult this time. There is no question that if we look at core economic drivers around business capital spending overall and job growth and CEO confidence, these are the factors you have heard us talk about before Matt and those aren’t doing badly. I mean maybe they are off their peaks a little bit like CEO confidence was very strong just after the election and has come down a little bit since then, but it’s not bad. General state of the economy maybe is off a little bit in some sectors, but it’s not bad. So, compared to other softenings that we saw, where we did wonder if it’s related to the economy, at this time I don’t feel that. So, that gives me little bit more confidence that we are not feeling about something that’s quite so macr”

We are hearing some anecdotal stories of hesitation

“So, then as we think about it, we say well, what’s going on in our industry, what’s going on with our customers. It could be that some are just pausing, hesitating and we have some anecdotal stories around that. The customers are waiting to see what happens with healthcare reform for example. So, if you are in the healthcare industry, you might be curious about what’s going to happen as that gets unveiled and how does that shape your investments. If you are interested in growing and you need to hire workers in the U.S. you might be interested in immigration reform and how that might affect your business and whether you can invest in new facilities for that. If you are interested in spending some of your repatriated cash, you are interested in tax reform and how repatriation might play a role there as that could affect investments you might make in facility. So, we have heard anecdotal stories like that. Again, I can’t put my finger in any one of those factors and say that too, but we know those factors are out there.”

Could also be a shift away from old ways of working

“At the same time, even more micro related to our industry is this shift from the old ways of working in the legacy spaces people have to these new ways of working. And it could be also anecdotally we have evidence of this that some customers are saying, you know what I am going to slowdown my rate of reinvestment in the model that I have and prepare for a shift to this new model. And if that’s true, we would see pretty much what we are seeing. So, if that’s the case what you would expect to see is the reduction in demand for similar legacy business even as new projects are showing up in A&D firms and maybe we haven’t seen them yet, but they are out there. So that’s hypothesis we have and that could be what’s going on.”

Open floor plans also create the need for some quiet spaces

“as people move towards open plan there is also a counterforce which is that people are seeking privacy and they are seeking spaces they can create that are flexible as well as reconfigurable that can create rooms for people to – in which they meet or places where people can kind of get away and concentrate for a bit. And so we are seeing at the same time the shift away from the legacy towards more open mobile reconfigurable furniture. ”