Steelcase Inc.

Good morning. My name is Patricia and I will be your conference operator today. At this time, I would like to welcome everyone to the Steelcase first quarter fiscal 2020 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Omnira, you may begin your conference.

Thank you, Patricia. Good morning, everyone. Thank you for joining us for the recap of our first quarter fiscal 2022 financial results. Here with me today are Jim Keen, our President and Chief Executive Officer, Dave Sylvester, our Senior Vice President and Chief Financial Officer, and Sarah Armbruster, our Executive Vice President. Our first quarter earnings release, which crossed the wires yesterday, is accessible on our website. This conference call is being webcast, and this webcast is a copyrighted production of Steelcase Inc. A replay of this webcast will be posted to ir.steelcase.com later today. Our discussions today may include references to non-GAAP financial measures and forward-looking statements. Reconciliations to the most comparable GAAP measures and details regarding the risks associated with the use of forward-looking statements are included in our earnings release. and we are incorporating by reference into this conference call the text of our safe harbor statement included in the release. Following our prepared remarks, we will respond to questions from investors and analysts. I will now turn the call over to our President and Chief Executive Officer, Jim Keene. Thanks, Mike, and good morning, everyone.

It's good to be with you today. We're speaking to you from our Grand Rapids offices, which are fully open, and it's great to see people coming together again. As of this week, our employees in Michigan no longer have to wear masks and we have no distancing restrictions. So we're fully back to normal. In fact, on average, over the first two weeks in June, our in-office attendance in Grand Rapids was at 85% of our normal levels. Customers are also visiting again, and we can feel a renewed energy as they tour our campus and they interact with our people and engage with our spaces. Our EPS for the first quarter was a little better than we expected because of continued strong spending controls, especially in the Americas and EMEA. Despite several supply chain challenges, including material supply for items like steel and foam, labor challenges, logistical constraints, our first quarter revenue finished in line with our expectations. I want to thank our teams around the world for the work they did to control costs and to fulfill our customer commitments. Inflation had a modest impact on our gross margins in the first quarter, and we expect the impact to increase more significantly over the next couple quarters. We're offsetting some of the inflation through ongoing cost reduction initiatives, but when the levels of increase are this high and this broad, we have no choice but to swiftly implement price increases, which we did in April, and we recently announced an additional increase for August. It will take some time for those increases to take full effect, so we expect inflation, net of price increases, to be a larger headwind in the second and third quarters. There are some commodities, like steel, where prices are expected to retreat from their peaks later this year, and we consider that when setting our price increase levels. If these prices do not return to more normal levels, we'll consider future price increases. On our call last quarter, I referenced how we had seen an increase in pre-sales activity levels, and over the past 90 days, we've continued to see even higher levels. In the Americas, our pipeline of customer projects has increased in each of the past five months. Sequentially, our Q1 mock-up requests and customer RFPs were 30% higher than Q4, and Grand Rapids-based customer visits, both in-person and virtual, approximately doubled. In Munich, our customer visits were 50% higher than Q4. Some of that global activity likely contributed to the increased order levels we saw in Q1, which were up 25% sequentially compared to Q4 and 11% against the prior year on a consolidated basis. At a more macro level, especially in the U.S., we're seeing similar positive signs. Design firms are busy, as evidenced by continued increases in the Architectural Billings Index Non-residential fixed investment is now above pre pandemic levels and CEO outlook as measured by the business round table is near an all time high. Customer activity takes a few different forms right now. A lot of it, and probably most of it, are projects that were in flight before or were on the drawing boards and were delayed because of COVID. Those projects are getting restarted. And the designs are often unchanged from what the customer would have done before COVID. We also see some activities specifically related to the post COVID workplace, including the emergence of the hybrid work experience, by which I mean employees working from home as well as in the office. We're seeing a new wave of interest by some customers to provide specific home specific office furniture applications for their employees to use at home. These are not subsidy programs that employees can use for anything, but rather the companies actually providing specific ergonomic solutions, which often include a task chair and height adjustable table. In the post COVID office, we are seeing growing interest in privacy, which can include a return to private offices for some customers or just more options for employees to use when they need to do heads down work or to join a video call while in the office. Our orange box pods are a good example of the kinds of solutions that respond to this need. And of course, our architectural walls portfolio and our wood furniture business have long supported private offices. Many other customers have chosen to focus for now on getting the first few waves of employees back in the office and then taking some time to assess what works best as they experiment with high bid work and then make the appropriate investments. We know from our own experiences where they are likely to find challenges, and we already have a strong portfolio of products ready to help. We're also enhancing our portfolio with new products designed specifically to meet some of the new challenges created by hybrid collaboration. Our Smith System Education Products business is also seeing strong demand signals as COVID-related stimulus money is beginning to be used throughout the US to get schools ready for the fall. Over the last year, We navigated through an unprecedented crisis and we took a lot of unusual actions, including cutting our dividend and cutting pay. It was really extraordinary. And if you recall, we took those actions at the very beginning of the crisis in anticipation of what was coming. Our business is in recovery mode now with strong cashflow and strong liquidity, orders increasing over the prior year, pipelines building, and expectations for a profitable second quarter. That's why our Board of Directors restored the dividend to its pre-pandemic level, and it's why we announced our intention to enter into an agreement to repurchase stock next week once our quarterly trading blackout lifts. This past April, we announced Sarah Armbruster will become our new CEO in October as I transition toward retirement in January. Sarah's announcement was very well received by our employees and our dealer partners, and of course, she has my full support. Sarah has been meeting with many Steelcase customers and dealers over the past couple of months, and I'd like to turn it over to her to share a few thoughts. Sarah?

Thanks, Jim, and good morning, everyone. It's great to be with you today, and I'm thrilled to have the opportunity to continue the work Jim has done over his tenure and lead Steelcase as our next CEO beginning in October. I've been intentional over the past 60 days to spend even more time listening to our customers and dealers. and to start to get on the road to be in our market, which I wasn't able to do as much during the pandemic. What I've observed is that many of our customers have a defined plan to return to the office and the physical changes needed to support that return are very clear. Their facilities people are working on those changes and they're making progress toward a return to office goal. For other customers, questions remain about exactly when and how to return. And I believe this presents a great opportunity for us. But what I heard very clearly, consistent with Jim's remarks, is that most companies expect to return to the office in a meaningful way now or in the coming months. And whether they plan to return in a hybrid manner or to a traditional in-person office with in-person expectations, they're asking us for help. I'm excited about our ability to guide these customers in the near term, as well as to serve them over time if they aren't ready to update their spaces right away. I'm also optimistic about our growth potential. We remain centered on work, and we continue to invest in translating our research-based insights into products and applications that support the office, healthcare environments, the classroom, and work from home. And I believe we're well-positioned to capture growth. with a strong leadership team, a board that supports investing in our growth, and a balance sheet positioned to fund the needed investments. Last year, while I was leading our corporate COVID response team, I witnessed firsthand the resilience and the determination of Steelcase employees around the world. And now I see our employees focusing that same energy and passion on growth as our industry recovers.

Thanks, Sarah. I think it's terrific that Sarah's taking time to listen and learn. I did exactly the same thing before I became CEO. And like Sarah, I'd been at Stillcase for many years. As you'd expect, it confirms a lot of what you already know, but you also learn some new things. You develop some new relationships and it gives you a way of testing some of your ideas about the future of the company. She's also taking time to talk with many of you, our major investors and analysts who follow the company. I think this is a very exciting time in our industry, probably the most exciting time in my career. Work is changing and workplaces are going to have to change to be more relevant. Education and healthcare are changing, and those customers are also investing for a new day ahead. And Steelcase's insights about work, worker, and workplace have never been more important and of more interest to CEOs. It's also a time for us to build new capabilities and expand our offerings so we can respond more completely to those opportunities.

sarah and i are working together and along with the still case leadership team during this transition period to make sure we're positioned for this next era so now let's turn it over to dave to cover the financials thank you jim and good morning everyone my comments today will start with details related to our first quarter results balance sheet and cash flow i will also provide some highlights related to our outlook for the second quarter and our targets for the back half of fiscal 2022. like last quarter I will focus largely on comparisons to the estimates we provided in March and sequential changes in our results as the year-over-year comparisons were covered in the earnings release. Beginning with a comparison to our outlook, first quarter revenue of $557 million was in the middle of the range we provided, and the loss of $0.24 per share was better than the top end of our range by $0.03. We grew the top line by 9% organically compared to the prior year, which was impacted by government mandated shutdowns that negatively affected our ability to manufacture and fulfill orders. We experienced stronger than expected order intake in the Americas. However, revenue was negatively impacted by the timing of requested delivery dates, which pushed out a little further than estimated, and resulted in a higher than expected backlog at the end of the quarter. EMEA's order patterns were resilient and were also better than we expected, while the other category, which includes the Asia Pacific region, was negatively impacted by the significant pandemic impacts in India. For earnings, the favorability was due to better gross margins and lower than anticipated operating expenses. The better gross margin performance was driven by strong cost controls and higher absorption of fixed costs linked to an increase in finished goods at the end of the quarter. Consistent with our expectations, we experienced inflation net of pricing driven by steel and other commodities, as well as continued challenges across our global supply chain, which led to higher logistics costs. Our operations teams have done an outstanding job maintaining our quality and service levels while managing through these disruptions and controlling costs. I will cover the ongoing inflationary pressures in more detail when I get to our outlook. Operating expenses also contributed to our earnings favorability as they were a few million dollars lower than our estimate of $190 to $195 million, primarily driven by project spending, which didn't increase at the pace we estimated. Regarding the sequential comparison of the first quarter results versus the fourth quarter, revenue was approximately $120 million lower than the fourth quarter, which benefited from approximately $60 million of delayed shipments due to the cyber attack in Q3. The remaining decrease was relatively consistent with normal seasonal patterns. The operating loss of $32 million during Q1 compared to adjusted operating income of $8 million in Q4. The $40 million sequential decrease in adjusted operating income was primarily due to the lower revenue. Higher inflation net of pricing of approximately $8 million negatively impacted the sequential comparison, but was partially offset by the lower overhead spending and higher absorption of fixed costs I mentioned earlier. As it relates to orders in the quarter, Overall, we were quite pleased with the order growth in Q1 and a return to more normal seasonal patterns. Total orders grew sequentially by 25% compared to the fourth quarter, driven by 30% growth in the Americas and 22% growth in EMEA. In the Americas, smaller and mid-sized companies drove the sequential growth in orders, but we also saw a sequential double-digit percentage increase in orders from our largest customers as a group. Average weekly order levels strengthened over the course of the quarter driven by the Americas and reflected the reinstatement of delayed projects and other investments in the workplace as companies prepare for their employees to return to their offices. The order strength in EMEA was broad-based and grew 44% compared to last year, driven by France, the UK, and Germany. The other category grew 17% compared to last year, but was approximately flat compared to the fourth quarter, as the impact of the ongoing pandemic in India offset broad-based growth across most other markets in Asia Pacific and at DesignTex. Turning to cash flow in the balance sheet, we used $93 million of cash in the first quarter, including the seasonal disbursements of accrued variable compensation and retirement plan contributions, and ended the quarter with approximately $400 million in cash and $566 million in total liquidity. Capital expenditures were $18 million and are expected to total between $65 and $75 million for the full year. We returned $12 million to shareholders through the quarterly dividend payment of 10 cents per share, and our Board restored the dividend for the second quarter to the pre-pandemic level of 14.5 cents per share. Our capital policy targets to maintain a strong dividend through an earnings cycle, periodically leveraging an earmark of our liquidity for cyclical protection when necessary. At the onset of the pandemic, and while hours and pay were reduced by approximately 50% across much of our salaried workforce, we paid $0.07 per share, followed by the last four quarters of $0.10 per share. We also intend to enter into an agreement next week authorizing the repurchase of up to $50 million of our common stock. These actions are consistent with our capital policy, which targets reinvestment to support growth, a strong dividend, and opportunistic share repurchases. Moving to the outlook, consolidated backlog at the start of the second quarter totaled $624 million, which was 20% lower than the prior year, but 39% or approximately $175 million higher than at the start of the first quarter. For the second quarter, we expect to report revenue within a range of $750 to $780 million, which represents a year-over-year organic decline of 8% to 11%, but a sequential increase of 34% to 40% compared to the first quarter. The year-over-year revenue decline is driven by the higher beginning backlog in the prior year due to the government-mandated shutdowns during the first quarter. Sequentially, we expect the increase in revenue to be driven by the strong backlog at the start of the quarter, normal business seasonality, which includes Smith's system and other education projects that tend to shift during the summer months, and the continuing improvement in order rates as companies continue returning to their offices and investing in their workplaces. We expect to report earnings per share between 25 to 30 cents for the second quarter, which takes into consideration the expected revenue, as well as our expectations of higher inflation net of pricing benefits of approximately $14 million compared to the prior year, or approximately $4 million compared to the first quarter. Operating expenses of $180 to $185 million net of a projected $15 million gain from an expected land sale, reflecting a sequential increase to support product development and sales activity. Interest costs and other non-operating items that net to approximately $4 million of expense and an effective tax rate of 28%. For the second half of fiscal 2022, we continue to target double-digit revenue growth compared to fiscal 2021, as we expect a growing percentage of companies to reopen their offices over the coming months, continued macroeconomic improvements, and increased capital spending related to the workplace. Based on current commodity cost projections, we expect year-over-year inflation on steel and other commodities net of pricing in the third quarter to be similar to the second quarter. For the fourth quarter, we expect the benefits from our April price increase and our more recently announced August increase to offset more of the inflationary costs. In closing, the recovery has begun. We posted double-digit order growth during Q1, and the increased pre-sales activity we began talking about over the last couple of quarters has strengthened. We're projecting a solid second quarter, which we expect will offset the first quarter loss and we're targeting double-digit revenue growth in the second half of the fiscal year. Inflationary pressures are significant, but we moved quickly following our April price adjustment and announced a second price increase, which will take effect in August. Consistent with our confidence in the recovery of our revenue and earnings, we restored our quarterly cash dividend to the pre-pandemic level of 14.5 cents per share. And lastly, Our balance sheet remains very strong and provides significant capacity to support existing and new growth opportunities during the recovery. From there, I'll turn it over for questions.

Thank you. And at this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We will request that you limit yourself to two questions so that we may answer as many questions as possible in the time permitted. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ruben Garner from Benchmark Group. Your line is open.

Thank you. Good morning, everybody. Good morning. Maybe just to start, can we talk about the timing and the thought process behind the dividend reinstatement and the share repurchase announcement? I mean, is it just as simple as, you know, orders are inflecting and things are normalizing and, you know, the timing's right? Or is there any other, I guess, longer-term thinking that went into the timing of it?

I think you've got it. It is really that we were at this level of dividend before the crisis. We had always believed that we can see ups and downs in the business, normal kinds of recessions and recoveries and not have to adjust the dividend. We have a strong balance sheet to be able to support that. COVID clearly was not anything normal. And the fact that people were no longer working in offices was even more profound for our industry. And so we felt it was prudent at the time to reduce the dividend. And we took lots of other actions, of course, too. We cut pay. We cut board compensation. We cut hours. We had factories that were shut down for a variety of reasons. And all that's different today. So, you know, today we are back to normal in many ways. Our orders are growing sequentially, growing year over year. And we see plenty of signs that although we're not back to the levels we were at in terms of revenues and profits before COVID, We're going to what I would characterize as more of a normal recovery right now. And so we thought it was the right time to reinstate the dividend. And repurchases are something we do opportunistically, and we have used 10b-5 programs before, and we expect we would continue to use them, and this feels like a good time to have one in place. And doing both of them at the same time just reflects the fact that we think we're at that point where we want to return to more normal uses of our capital, including returning value to shareholders. Dave, I don't know if you want to add anything to that. Nope. Thanks, Ruben.

Do you have another question? Yeah, I do, I do. That kind of leads into my next question, and you sort of alluded to normalizing. I'm just curious your thoughts on what the potential is that we have sort of a snapback to where we were pre-pandemic. What could the timing of that look like? I know you've kind of reiterated your double-digit growth outlook for the second half, but I guess the question is kind of how quickly can we return? What are you guys seeing in terms of the types of furniture that people are ordering? Is the office going to look very different, or is it more likely that we just kind of return to the way business was pre-pandemic?

Yeah, so I think as we look out into the future, we expect it to return to the way things were pre-pandemic. And in fact, I'd say there's reasons for optimism in one review, because we've never had this kind of interest before by CEOs and senior leaders in work, worker workplace. I mean, that is a very big conversation right now. And companies are rethinking how they use their offices. How can we make these offices more effective? How can they How can the office compete better against the idea of working from home? How can you have better privacy, better concentration, better collaboration? So there's lots of reasons to be really optimistic about the long view. In terms of the transition period between now and then, there's a lot of uncertainty about that. I think the things that would cause it to happen faster would be the things that are happening right now. So how quickly people feel a return to normalcy in their everyday life will cause more confidence by businesses to return to offices quicker and more completely over these next few months. Secondly, how quickly customers can go through that process of welcoming people back in their office, assessing how it's going, deciding what they want to do, and then placing those orders to upgrade their offices to be able to compete. You know, one of the things that we've seen is that our offices and for many of our customers who have made investments in recent years who have taken more progressive approaches to their offices who had already embraced mobility in the workplace, already embraced more flexible working arrangements with their employees. They have a little less to do, and some of the ones that have not made those investments in the office arguably have more to do. So there could be a movement by some of those companies to say, you know, we have to step up and update our offices. So that's on the demand side. On the other side of the equation is just some of the supply things we were talking about, you know, making sure that We have the supply chains necessary to keep up with demand. We're doing everything we can do to do that. A lot of our customers are facing challenges with their own construction projects related to labor availability. That varies by market. And that might be something that resolves as we get into September and October. But for these next few weeks, that's something we're still hearing about. So some of those could be some headwinds, but our outlook considers all those factors. It's a good question. I like the spirit of your question too, Ruben, because... Our energy around here is to make sure that we're ready to respond if the recovery comes faster than we expect.

Perfect. And I'm going to sneak one more in if I can. You mentioned small and medium-sized businesses. What about the dispersion in terms of geography? I mean, we've got the kind of return to office data that's out there, and it kind of shows some cities have come back a little faster than others. Are you guys seeing a very similar cadence in markets like New York and L.A. and San Francisco, or maybe lagging the others? And do you find that some of the other markets are, I guess, an encouraging indicator of what can come in some of those bigger cities?

Yeah, I'd say, first of all, I'd say across the southern parts of the U.S., some of the Midwest regions, the return to office had already begun to happen more gradually earlier this year for a variety of reasons. And the markets that were the most challenged, if we think two or three months ago, would have been the big cities, you know, New York, Chicago, L.A., San Francisco. What's happened over the last few weeks is we've seen cities like New York and now Chicago begin to accelerate their return to the office. And that's happening. New York is actually showing a pretty good pace of return, and you've probably seen some of that data. Market is notoriously the slowest right now in San Francisco. The tech sector, a lot of those companies made choices really many months ago not to bring people back until well into the later half of this year, even into next year. And so San Francisco is lagging. In some of those markets, in fact, employees have moved out of those markets, and it may be a longer period for its return to normal, or it may not return to normal for quite some time. So San Francisco, I think, is the one that I would point to as the most lagging city. But again, New York, Chicago are beginning to show strong signs of return.

And yet we still see order growth in those cities. So even like Toronto or New York, San Francisco, India, parts of India, we still see orders haven't gone to zero. It is remarkable to see how the order patterns continue to reflect orders in those markets, even though the offices are largely shut down, which is, I think, telling to how some companies are readying themselves for the return of their employees. They're trying to get out in advance of the return of employees, or they're accelerating the finishing of projects that may have started either before or during the pandemic.

We see similar things in Europe, by the way. So some countries have been ahead of others in terms of vaccinations and managing COVID rates. And so you see variances. It's nice to see the UK, for example, beginning to come back stronger now as the vaccination rates have climbed and their COVID cases have fallen.

Great. I said, I want to speak one more and I apologize, but I got a quick follow up. Jim, you mentioned capacity constraints, I think was was the word you used. Are you guys seeing increased lead times or the constraints on your end? Or are you just talking about? Are they? Is it labor? Is it is it the supply chain? Is it? What exactly are you referring to there?

Well, I would refer to it as supply chain constraints more than capacity. So it's not really capacity, meaning like our factories and our ability to perform. It can be the entire supply chain, and it can be kind of any piece of the supply chain. So you could have one supplier who maybe has a COVID outbreak somewhere in the world, and that could cause a challenge for us in the products those parts go into. We've been dealing with freight. We've had some freight delays, as we've talked about with you guys over the last several months. Those have gotten a little better. They're not quite as, I'd say, acute as they were maybe three months ago, but they're still there. And we still deal with them from time to time. We had a factory in Malaysia that was shut down for a while and then was allowed to partially reopen. We have a factory in Pune, India. So we have some places around the world where we're still dealing with COVID. And then, you know, the steel sector, the foam, those those commodities have price challenges but can also have supply chain challenges. So I don't want to overstate it, but it's something that we are watching and considering and, of course, managing to make sure that we minimize the effect. We have seen some increases in lead times on some products that are directly affected by that, but I wouldn't say those lead times are up across the board.

Thanks, guys. Congrats and good luck going forward.

Thanks, Roland.

Your next question comes from the line of Steve Ramsey from Thomson Research Group. Your line is open. Stephen Ramsey, your line is open.

Maybe we go to the next person in the queue and see if we can get her.

Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Bud Bogoch from Water Towers Research. Your line is open.

Thank you. Good morning. First, Jim, congratulations on your announced retirement and congratulations I know we'll be talking to you before that happens, but just congratulations to Sarah. Congratulations on your appointment and best wishes. I guess my first question, Sarah, is to you because now that you're getting into the hot seat, talk a little bit about your conversations, if you would, with executives and what surprised you and maybe you can give us a kernel or two of what you learned.

Sure. Thanks, Bud. So, yeah, it's been a great round of conversations and being able to reengage with customers and design partners and our dealers to understand what's on their minds and what they're seeing and hearing. And I think the consistent theme across all of those conversations has been change, change in the workplace and people thinking about how they can engage employees, allow them to work in new ways and be effective and bring them back to the office. And I think that that change is something that's always good for our industry. And when we see CEOs and business leaders really engaged in thinking about work and thinking about workspace, I think that that tends to be a good opportunity for Steelcase. So people are asking questions about how to bring people back effectively. As Jim said, some organizations may not have had the most up-to-date workspaces before the pandemic. So I think they're now asking questions about how they need to catch up and what the future looks like. We're definitely hearing interest in specific kinds of solutions. So for example, how organizations that may have had a very open office floor plan before the pandemic, how they're now thinking about the best way to reintroduce different levels of privacy across their office space to accommodate different kinds of needs. People are asking questions about hybrid collaboration and how they're willing to integrate technologies for communications with physical space to enable people who are in the office to effectively work and collaborate with people who might be in another location. So I think all of these kinds of questions show a really deep reflection on the part of our customers about how to support their employees and how to re-engage their people. And I believe that that's going to create tremendous opportunity for Steelcase.

It does sound exciting, and I'm sure none of us wanted to get to this level of strategic thought about the use of space quite this way, but we didn't have any choice. So it really does sound like it's going to be a very new normal. I do have a few other questions on, David, for you. Inflation price, you talk about the $14 million in the second quarter. I'm not sure you sized it for the third, if you can, if your crystal ball allowed it. Do you think it peaks in the third quarter and then goes down? Does price cost get positive in the fourth quarter, or we're not quite there?

Based on current estimates, which are coming from external indices that we're using, my comments were that the net effect in Q3 would be similar to Q2. So let me break that down. I think we'll see higher inflation. We're projecting higher inflation in Q3 compared to Q2, but we're also projecting higher pricing benefits in Q3 versus Q2, in part because the April adjustment will be more fully in place, but also the August adjustment that we just announced earlier this month will be kicking in as well. And by the fourth quarter, again, based on current external indices and projections, we would expect to offset more of the inflationary pressure. So let's call that an approximate push, you know, plus or minus on either side.

Got you. And I'm going to sneak in one more, if Ruben did. You talked about school and a little bit about health care, but school, are we going to see the normal seasonality for Smith? I mean, we've got, and I'm not sure we know normal anymore, but is the second quarter where we peak, or what do we do for school with so much money coming into that from the federal government?

Yeah, so we are definitely going to see the same seasonality in the second quarter in terms of just the summer surge. That's really a factor of orders that we've already received and are executing against. And so we believe that's true. And what is unclear right now is what exactly will happen with all this money that's flowing. We are right now seeing very strong demand signals, and some of that is converted already into orders. So if there's some states that have moved that money from the federal government through their systems into the hands of people who can make buying decisions. And some of the orders we're seeing already in some parts of the country are related to that. In other parts of the country, it's going more slowly, so it has to move through various approval levels. It's possible, we don't know for sure, but it's possible that we could see an extension of the demand curve into the second half of the year more than we would normally see, because once that money is there, people are going to, I think, want to spend it. but it's a little too early to know for sure. That's what we're imagining. Good news is, of course, we have the capacity to handle our summer spike, and so if the demand continues, we should be in good shape.

Okay. Well, I know I'm an old guy, but I got a little choked up when I heard everybody was back in the office. I mean, normal is good. We're all looking forward to a lifetime of normal from now on. So congratulations to you for navigating this, Jim, and to your team across the globe. Thank you very much.

Thanks, Biden. We welcome you back here anytime you want to come for a visit. It's been a fun week here in Grand Rapids. Yesterday, we had an ice cream social outside the window where we were meeting. Our employees gathered for that. A couple days earlier, we had the first gathering of people we've hired since before the pandemic. These are people that were all hired during the pandemic, and they had not been together really face-to-face, so to be able to bring those new employees together with members of our leadership team and be outside and talk with each other and meet each other. I'm an old guy too, Bud, and I tell you, I feel a new energy when I'm together with some of these people who have just joined our company or just people we haven't seen for a while. So thanks for your comments.

Well, Neocon is going to be in October this year, so I'm curious to see what happens. They say they're going to revert back to the June dates, but October is not a bad time to do this, I think. We'll see. I'm sorry?

We're looking forward to it, Neha Khan, and October is, as you say, different than normal, but I'll take it. I'll take being able to be together again with people from the design community and our dealers and our customers.

Well, good talking to you. Thank you.

Thanks.

Your next question comes from the line of Rudy Young from Barenburg Capital. Your line is open.

Hey, guys. Good morning. Thanks for taking my question.

Hey, Rudy.

So with hybrid workplaces, that, of course, creates a need for new products that kind of accommodate to the new type of office model. Can you talk about what kind of products you're currently focusing on in order to kind of cater to this new space and how you're thinking of R&D expenses throughout the year?

Yeah, so I'll give you a few examples. First of all, we think privacy is going to be a big deal for a lot of people. depending on what their office was like before when they went home to work for a while, they saw the benefits that come from kind of unbroken concentration, the ability to work without interruption. And we've heard a lot of that from users, that they want to come back to the office, but they don't want to lose that ability to concentrate. And some offices that haven't been updated for a long time might not offer enough of that. They might have high-density benching applications, for example, that can really be challenging for people who are trying to concentrate for long periods of time. So we think that there could be a return to the kinds of products that we offer that might include private offices, which would involve wood furniture and architectural walls. Could be more enclaves that are more on demand that people might just use when they need it. And again, that's something that architectural walls can respond to and also products like room wizards that are there for room booking. And also in open plan, products that can provide visual privacy and some acoustic privacy. And we have a number of products already in our portfolio like Brody, but we also have, uh, other products that are in development of response to those needs. So that that's on privacy. The second theme I'll talk about is collaboration. So as Sarah mentioned, you know, when the people come back to their offices, meetings aren't going to be the way they were before, because it's likely that they'll, whereas in the past, a meeting of six, seven, eight people, everybody would be in the room. Now you find more and more that one or two people might be working from home that day. So almost every meeting is going to be a hybrid collaboration meeting. And even people who choose to be in the office every day are going to be working in a new way because some of their colleagues might be working from home. And that puts challenges on existing conference rooms that really aren't set up for that. How do you make sure that those people that are working remote are fully represented in the meeting? And we have solutions already in our portfolio. that have been there for many years, like Mediascape. We also have our partnership with Microsoft that has provided products that we can offer to customers that help meet some of those needs. And then finally, ancillary spaces, spaces that use furniture that's more informal. People continue to be interested in those kinds of products, but they are really interested in how those products can support real work, the real work of people meeting with each other, solving problems together, brainstorming together, making decisions together. So we believe it's going to be more focused on the real work side of ancillary versus the kind of social side of ancillary. So those are three examples, and there's many more, but those are some of the ones that have emerged early and through our own experiences.

Great. It's really helpful. You talked about small and medium businesses kind of driving orders for this quarter. I guess what kind of timeline and expectations for when some of the larger orders from the bigger firms to start coming in?

I think that's tied to cities opening and those companies getting back to the office. So I would imagine it's going to be a more meaningful part of our back half of the year and into the following year.

Got it. And then last one for me, you kind of mentioned project spending as well didn't increase at the rate you expected this quarter, I believe. Can you talk a bit more about kind of spend rates you're seeing and, you know, if you expect them to be slower in the second quarter as well?

Well, we provided guidance of 190 to 195 net of land gain, right? So the net was 180 to 185. And last quarter, we also gave an indication of what we were targeting for the whole fiscal year, that we were in kind of that same range of spending, obviously excluding the land gain, that we didn't see operating expenses in the back half of the year tracking above $200 million. So I think they tracked a little bit slower than we were expected because we were operating in a cautious way, and we saw the pandemic surge in India and Europe has remained Locked down for much of the of our first quarter. So our spending paced a little bit cautiously. But as we as our confidence continues to grow about the recovery, I think you're going to see our spending increase to the level that we're projecting in Q2 before the land gain and then likely be at or around that same level plus or minus, let's say single digit millions into the back half of the year.

Rudy, was your question about our spending or was it about our customers' project spending?

I'm sorry, yeah, it was more focused on the customer spending aspect.

Yeah, from a customer perspective, this is where those leading indicators are so important. So customer visits, RFPs, mock-ups, these are all the kinds of activities that are more connected with large customer activity, and we consider all of those to be good signs. It's a little hard for us to know exactly when those are going to turn into orders because it's like we're restarting the engine right now. If this was a normal part of the cycle, we would know exactly what that time period is from those kinds of activities to orders. But right now, it can't be positive. But we're encouraged by the kind of sequential growth we're seeing in that kind of activity.

It's really helpful. Thanks a lot, guys.

Again, for any questions, please press start, then the number one on your telephone keypad. Your next question is from Catherine Thompson from TRGQ. Your line is open.

Hi, thank you for taking my questions today. I want to follow up on the MEA growth. Could you clarify about what in markets are driving demand? In the U.S., you talked about school and healthcare improving overall. But are there notable particular end markets that are driving demand in Europe?

Not that they come to my mind. I'm looking across the table as well. I mean, it was pretty broad-based geographically and across the end markets, led by the U.K., Germany, and France.

And led by the U.K. in part because the U.K. was digging out a pretty deep hole. You know, they had a really rough time with COVID. They were in a pretty aggressive shutdown that really affected demand. And now that has improved significantly, and we've seen a nice return to a recovery there in the U.K. But as Dave said, we're seeing it across really all the markets with only maybe a couple of exceptions.

I mean, to Jim's point, if you recall last year how COVID moved across the world, starting in Asia, moving to Europe, and then to the U.S., For Europe, we were in the pandemic for much of our first quarter, so our order rates were depressed. But still, 44% growth was pretty resilient, pretty impressive.

Yeah, yeah. And just to be clear, can you clarify, what was your order growth in Europe?

Year over year, the growth in orders was 44%. Okay. In orders. Perfect.

All right. Then when looking at just more of the supply chain question, we look at a wide variety of companies on the building products and materials, just the construction value chain. And what we are hearing as a consistent theme is just you're having key supplies or components moving slowly that are delaying deliveries. Is this happening for you, and does this contribute to your second half sales guide?

Yes, we're seeing those kinds of factors ourselves. So we see it through upstream suppliers in the U.S., but also kind of around the world. We see it through the challenges of moving products through the freight systems, you know, containers over the water, but also land freight, everything is just maxed out and has been maxed out for a while. So we use those supply chains and we are doing our best to manage through it, but we have seen interruptions and some lead time increases because of it. And as we think about our outlook for Q2, we've considered some of that. And so our growth is hedged in consideration of supply chain challenges. We're hopeful that that will continue to resolve. And some of it is also downstream. which may be a little different, that it's the installation of furniture, it's the construction projects themselves that have to be complete for us to be able to deliver furniture because the customers don't want the furniture at that point of the construction cycle. So if they're facing labor challenges on the job site, then that can slow down our shipments and slow down orders. I'm hopeful in the U.S., though, that as we get into September and some of the forces related to unemployment begin to dissipate, We'll see people returning to the workplace in larger numbers, and some of those factors will begin to normalize. And also as COVID improves, hopefully, every week, every month in the U.S., in the rest of the Americas, and around the world, a lot of those supply challenges should also start to be resolved. So I'm hopeful that as we get past the second quarter into the third quarter, we start seeing some improvements.

Okay. Last question on the supply chain. One of the things we're also seeing is that things are slowly getting a little bit better. However, with shipping containers, now you're going to have to compete against the Christmas rush with shipping. And you're seeing all sorts of companies like Home Depot getting down on ships and then others renegotiating rates in order to just have space on ships. What, if any, impact would that holiday peak season impact your ability to ship? And what other factors have you done to mitigate this risk?

Yeah, so I'd say, first of all, compared to lots of those other companies, our supply chains are largely regionalized, meaning the customers we serve in the United States are primarily served by products that are made in the Americas. The customers we serve in Asia are primarily served by products we make in Asia, and the same for EMEA. So that's the first thing. If we don't have to ship as much over the water, that's good. And then we have many components and products that are made in multiple places around the world, so that gives us some flexibility. So we're probably less vulnerable to that compared to other companies you might be thinking about. That said, we still have some, and And we faced our own challenges and it can be a part or a mechanism that might be made in one part of the world. Uh, one of the challenges we faced this year was the containers were coming over from Asia and we had products to export from the U S to customers in Asia. So it finished goods made in the U S shipping to Asia. And, and normally you would, you would think that there'd be no problem finding those containers because ships were choosing to go back empty rather than waiting to reload. there was actually a shortage of outbound containers from the U.S. to Asia. So I don't think we're going to see that again. I think this was a very unusual situation. It was driven by the stimulus money as well as lots of other factors. So I think when we get through this, we may face challenges, but I think there will probably be different challenges. And, again, I don't think we're as vulnerable as a lot of other companies when it comes to this.

Okay. And then finally, just this. You touched on this a little bit in the prepared commentary and in the Q&A. But when you're having conversations with your clients in terms of the new office, what are the big differences for the past? Is it still an open format? Then also, when you think about the types of products sold, you were selling a lot of chairs and lockdown in the wake of that. What is the margin profile of the types of products that are being demanded now? How does that differ from what we saw in the height of the pandemic? Thank you.

Yeah, so I think the big difference is in, as people are thinking about offices, is first of all, over the last several years leading up to the pandemic, there was a segment of customers who were always trying to find a way to make their offices the most efficient from a real estate perspective. which meant higher and higher levels of density, smaller offices, more open benches. And I think as we've come through this pandemic, even with people largely vaccinated and with COVID in remission, we still have a new sensibility about density in the workplace. So I think users are going to be more reluctant to sit in the kinds of highly dense environments that they maybe were asked to sit in before. And so That's one difference we're seeing. I don't want to exaggerate that because I don't think it's going to go dramatically in the other direction, but I think some of the people that were pushing that to an extreme have some work to do to pull back on density. I also think, as I said before, that privacy is going to be a bigger factor. I think collaboration is going to be in the forefront of what a lot of people are talking about because what we've learned is that there's certain kind of work that you can do from home, a day a week, a couple days a week. The part that's tougher to do, and by the way, meetings themselves you can also do from home. So straight up meetings where people are just kind of reporting on giving updates on their projects or whatever, that kind of work can be done from home. But true collaboration where people are trying to brainstorm, use design thinking, develop new products, these require a different level of activity. And so as people are thinking about collaborative spaces, they're not just thinking about meeting rooms in the classic sense, they're thinking about spaces that are for more active meetings. And our product, like our Flux product, is really designed for that kind of work. So maybe those are a couple of examples. In terms of the mix of products sold, if there's a shift away from high density benches, I wouldn't say those were the most profitable products before. They were largely commoditized products. It was hard to differentiate some of the products that are in demand, like some of these technology products that Sarah mentioned, products that support use of technology in the office. products like Flex, these are all quite relevant. Seating remains relevant, so we haven't really seen a shift in seating. In fact, you could say, if anything, the work from home surge, which will continue going forward, there will still be interest in working from home, causes people to value high-performance seating to a greater degree because there's no chair you sit in as much as the chair you sit in at home if you're working from home all day long. I mean, that's eight hours a day of sitting in that same chair. That's really unusual in an office. people are beginning to understand the value of high-performance ergonomic chairs. And that, we think, will also be true or continue to be true in the office. So I don't see a major shift in the mix from a profitability perspective. And if there is any at all, I'm actually enthusiastic about that potential.

And one of the things also pulling the string on, could you theoretically see more of your products are being bought simply because you know, with an open format, you don't have dividers, you don't have these things. Is there a possibility of, okay, well, the margins could be similar, but you could be buying more things in the new office? Is that, what are your thoughts on that assumption?

Well, I think our biggest competitor is the longevity of our existing products. So in offices don't change. Customers own products that they've bought. last year or five years ago or ten years ago, and they work just fine. They don't wear out. Very high-quality products that can be used for many, many years. So I think the way to think about that is change is good. When our customers are going through change, when they're realizing that it's time for them to step up and make investments because the nature of work has changed, expectations for the workplace have changed, challenges in attracting and retaining workers which that you know probably from the articles you've seen that there's a lot of talk about employees looking to change employers and so there's going to be a battle for talent in this coming year i believe all those things are demand drivers for us much more than what people sometimes think of which is you know office vacancies or what's happening the commercial you know office space sector it Those are important, but it's changed within the existing real estate footprint. That is the primary driver. So that's where I think the buying more products part will come, that as customers look at their spaces, if they decide, as I believe, that they need to update those spaces, that's a really important demand driver for us.

Okay, great. Thank you very much.

there are no further questions at this time mr king i turn the call back over to you thank you so we wish you all a safe and enjoyable summer as we all continue to return to normal thank you all for joining the call today this concludes today's conference call you may now disconnect