Steelcase FY 1Q18 Earnings Call Notes

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. ”

Steelcase 4Q17 Earnings Call Notes

Steelcase’s (SCS) CEO James Keane on Q4 2017 Results

Decline in demand for traditional private offices and cubicles

“In the Americas, our project business remains strong with project order growth of 17% in the quarter compared to the prior year. Day-to-day business continues to be considerably softer likely because of the ongoing decline in demand for traditional private offices and open plan cubicles. Customers are shifting can use solutions like our Ology height-adjustable desk inline which delivered strong growth again this quarter.”

New workspaces

“We also believe our customers are looking for more than just trending offices, customers are trying to grow, but the job market is tight so they can’t just hire more people. They need to more fully engage their existing workforce and we know the workplace is strongly correlated with engagement. They want offices that up practically support creativity and innovation by helping their people do their best work. This would be genesis of our recently announced alliance with Microsoft. We’re going to be working together on a couple of fronts to solve the customer issues about how to integrate space and technology to unlock creativity and productivity of people. ”

Thoughts on international environment

“And if you go market-by-market I tell you that Middle East where we’re still feeling the pressures of oil prices. We have some of the larger countries in Western Europe where election concerns and issues in their own countries might be a factor. In the UK, yes our business has struggled and part of it has been because of Brexit, part of it is also things that we’ve addressed that were issues internally before. And I would say that some of the issues that we’re faced we’re hearing about in Western Europe might be related to things going out of the U.S. So there’s concern about exported balances and so on that any time there’s a destruction and a cause for people to lose confidence, we can see that show up in order pattern. So I can speculate that there might have been a factor there related to political and economic and stability, I can’t prove it, I can’t give you any examples for example of any particular customers who chose to pull back, I have many stories like that, which would give me more confidence that we were hearing specific like that. So we’re not hearing that, but we have – we wonder about the same thing you’re wondering about.”

David Sylvester

Growth overall but declines in some verticals

“Turning to vertical markets in the Americas, we experienced growth in six of the 10 vertical markets we track including five with double digit percentage growth rates. This growth was dampened by declines in the technical professional, education, healthcare and information technology sectors some of which reported strong order growth in the fourth quarter of the prior year.”

year over year strength

“Since June, we have talked about the year-over-year strength we were seeing in our pipeline of project activity in the Americas, which continues to reflect meaningful growth compared to this time last year as well as sequentially compared to the third quarter.”

Steelcase FY 2Q17 Earnings Call Notes

Steelcase’s (SCS) CEO James Keane on Q2 2017 Results

Stronger orders

“The good news for the Americas is that we had stronger orders in August and those have continued through the first three weeks of September. We are in the midst of annual dealer meetings and they have been quite enthusiastic about the new products we launched earlier this year. Orders for those products are gaining momentum and are doing better than we estimated. Dealers are also responding positively to the work we’ve done to address growing demand for informal spaces including better merchandising of our ancillary portfolio. At a broader level, our backlog of high confidence opportunities in the Americas has strengthened for the second half of the year. So, we’re expected to grow our topline third quarter.”

Not seeing anything that looks like a recession

“Yes, so, we’ve seen recessions before in our industry and they are characterized by significant and sustained drops in order patterns. And that’s not really what we’re seeing this time. And they are usually also characterized by economic news that’s somewhat profound. So, whether it was the banking crisis or it was the drop in the NASDAQ back in 2001, you can usually point to some external factor that’s profound and say there’s a connection there. Sometimes there’s a lag between when you see it and when we see our orders, but we’re not really seeing that kind of connection now.”

For the most part people see an economy stuck in neutral

“I was in Washington last week meeting with CEOs of a lot of our customers at a kind of a general CEO conference. And I had a lot of discussions about how people are seeing the economy. And the way I’d characterize it is that there’s a lot of uncertainty, but for the most part people see it as an economy that is stuck in neutral, just a very slow growth or no growth economy in the United States.”

It doesn’t feel like an economy that’s poised to grow quickly

“We all know what the Fed did this week. It is clear that they have an interest in raising interest rates, but decided not to again based on the economic news that they are seeing. So, I think everybody is looking at it the same way. It just doesn’t feel like it’s an economy that’s poised to grow quickly. But on the other hand there is not really anything that’s pushing it down. ”

David Sylvester

Performance in verticals

“From a vertical market perspective, some of the largest declines were in sectors that had strong double-digit percentage growth in the prior year; for example, federal government, financial services, technical professional and insurance services, or in sectors where you might expect a significant decline because of known headwinds like energy. But we also saw a significant decline in the information technology sector which was closer to flat in the second quarter of the prior year.”

Continue to closely monitor EMEA

“We continue to closely monitor the overall demand environment in EMEA as various headwinds continue to pressure consumer and business confidence raising concern that even a small shift in confidence could destabilize the already fragile environment.”

Notable decline in Germany

“Customer order backlog for EMEA ended the quarter down 7% compared to the prior year. The decline in orders during the current quarter was driven by continued weakness in the Middle East and Africa largely driven by low prices as well as the U.K. likely impacted by Brexit, but it’s also a market where we believe we should be doing better and have recently appointed new leadership. Germany also declined by a notable percentage compared to strength in the prior year. These declines were reduced by strong growth in Spain despite uncertainty related to recurring elections and France which is continuing to improve following the leadership changes we made a year ago.”

Larger project business has been coming back

“we’ve been talking about on the last several calls, more of the mid-sized projects or mid-size continuing orders has been okay or decent for the last three quarters. Larger project business has been an area of decline for us up until the most recent quarters. So, the current quarter that grew modestly versus a modest decline last year. And I think that’s linked to the improvement in the project pipeline that we started talking about in June.”