Steelcase Inc.

Good morning, good afternoon, good evening. My name is Ruel and I will be your conference operator today. At this time, I would like to welcome everyone to the Steelcase Second Quarter Fiscal 2022 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. O'Meara, you may begin your conference.

Thank you, Ruel. Good morning, everyone. Thank you for joining us for the recap of our second quarter fiscal 2022 financial results. Here with me today are Jim Keen, our President and Chief Executive Officer, Sarah Umbruster, our Executive Vice President, and Dave Sylvester, our Senior Vice President and Chief Financial Officer. Our second 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. The replay of this webcast will be posted to ir.steelcase.com later today. Our discussion 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.

Jim Keene Thanks, Mike, and good morning, everyone. I'm glad to be with you to share our update today. Our second quarter orders grew 24 percent over prior year and 12 percent sequentially versus the first quarter, reflecting the recovery we discussed last quarter. The order growth was broad-based across all segments, including strong growth in every regional market in the Americas. Our confidence in the recovery is supported by the fact we saw parts of our business approaching or exceeding pre-pandemic order levels. Our second quarter order levels at Smith System, Orange Box, and AMQ were all higher than the same period in FY20, before the pandemic. Our EMEA and APAC regions We're within 5% of those same FY20 levels. And in Asia Pacific, that includes overcoming a large decline in India where the pandemic impacts were quite significant. The order strength sets up a strong revenue outlook for the third quarter. Unfortunately, due to ongoing supply chain challenges, we were not able to ship everything we anticipated in the second quarter, which caused some of our revenue to shift out of the quarter. 90 days ago, we spoke to you about supply chain challenges such as procuring raw materials, logistics disruption, and labor shortages at some suppliers. And since then, some of those issues have improved, but others have lasted longer than we expected, and new issues also arose. Our teams have been resilient and are working diligently to overcome the challenges. When our suppliers have been late, we've expedited logistics and run overtime to catch up. When commodity sourcing has been difficult, we found alternative supply sources and sometimes changed product materials. As ocean freight has become less reliable, we've increased our safety stocks, ordered earlier to allow for longer port transit, and we incurred air freight when needed to meet critical customer commitments. It's a long list of challenges, but we've seen minimal cancellations given that these disruptions are impacting our entire industry. And of course, other industries are facing many of the same challenges. We've also seen higher levels of commodity inflation, and steel inflation has been extraordinary. I said last quarter when we announced our second price increase of the year that some of these material costs were anticipated to decline, but if they didn't, we'd need to consider another adjustment. Since then, the cost of steel and several other commodities have continued to increase and are expected to stay high for a longer time. Therefore, we announced this week an unprecedented third price increase, which will begin to take effect in November. When we spoke last time, vaccines had just recently become widely available in the U.S. and many customers were planning return to office dates immediately after Labor Day. Since then, vaccination rates plateaued and the Delta variant began to spread across the U.S., which caused many companies to delay their plans. We sense many of our customers are quite eager to get their employees back to the office. And in fact, many companies have established vaccine mandates in recent weeks. The Biden administration recently announced federal mandates we believe will provide a clearer path for our customers and their employees and is a real positive for our business. As we look at some of the pre-sales activity in the Americas during the second quarter, we had mixed signals. Our in-person customer visits were up, but our pipeline of project opportunities and new RFPs were down a bit. That might be because the Delta variant pushed back return to office plans, or it could be the supply chain disruptions are a distraction. As orders were very strong during the quarter and continue to be strong through the first three weeks in September, and we have seen virtually no cancellation of existing orders, we continue to be optimistic. We have more confidence now about how the workplace of the future will take shape. While there are extremes at either end, The mainstream perspective is the office will remain the primary place for work because of the informal interactions critical to productivity, innovation, and culture. It's also clear that most companies will offer employees a hybrid work experience, giving more permission for them to occasionally work from home or other locations. Those who don't will struggle to compete for talent. For customers who already modernize their workplaces, this shift will happen naturally. But for many other customers, their office is not ready and hybrid will be hard. They will need to update their allocation of individual and team spaces. They will need to shift from rigid fixed office architecture and furniture to more flexible solutions. And they will need to integrate digital layers to every environment to support video conferencing. We believe there's a lot of change coming to the office. As we previously announced, I'll be stepping down as CEO next month after more than seven years in this role. And I'll be retiring in January of 2022 after 25 years with the company. I'm really pleased we're seeing the post COVID recovery, picking up steam around the world. And even here in the Americas where order rates have been so strong, it's a good time to be making the transition to Sarah Armbruster. I'm pleased with so many things the people of Steelcase have done over my tenure here. And even though these last 18 months have been so challenging, I feel we are emerging from the crisis stronger than ever and more relevant than ever to our customers. Our APAC business is growing again, and our EMEA business has made so much progress in terms of profitability and market presence over the last few years. Our Americas business has expanded into new markets through successful acquisitions and has an updated product portfolio in the core. I'm also proud of our ongoing commitment to ESG, We just released our 2021 impact report last week, so I won't go through it all here except to highlight our commitment to reducing carbon emissions and the accountability we set up to measure our progress against DEI goals. I'm really optimistic about our future because of our trajectory. We continue to learn and we continue to get better every year. I'm also really optimistic because of Sarah, who has the right experience, skills, and character to lead this company next. And Sarah has a terrific team of people with so much experience working together. I'm excited to see what they do next. So now I'd like to ask Sarah to make a few remarks as she prepares to take over as CEO.

Thanks, Jim. And good morning, everyone. It's great to be with you today, and I look forward to working more closely with the investment community when I step into the role of CEO. There's a lot I could say about the future of Steelcase and why I'm optimistic. So I'll start by saying that we made the decision during the pandemic to continue to invest in new product development, and I'm so glad we did. Our teams have been developing products to help our customers create inspiring, high-performance spaces, and we'll continue to launch more of these products throughout the coming months. Customers tell us that they need furniture that is more flexible to support both focused work and working more collaboratively. allowing people to shift between work modes more seamlessly within the same space. And our research has identified similar needs. So as Jim mentioned, we believe companies will need to solve for this evolving concept of hybrid work. Some people have wondered whether employees will work from home when they desire to do focus work and come to the office when they need to collaborate with their coworkers. But that isn't how most of our days are scheduled. We normally have a mixture of meetings, collaborative sessions, and focus time throughout each day, which is why companies need spaces in their offices designed to support all those ways of working. And while some companies are doing a good job of providing a range of spaces to their employees, we know better is possible, especially when creating hybrid work experiences. Hybrid is a seismic shift in how work happens for many organizations. So solving for hybrid is something we're very focused on. And over the next few months, we plan to introduce new products that provide flexibility, privacy, and control. These plans include a product line expansion that will provide even more flexibility and privacy for individuals by really focusing on rapidly evolving individual needs and expectations. And we believe that this will be the only product collection available in the market that will cover the entire floor plan. And I'm particularly excited about a new product that we will unveil next week. It truly represents 21st century design that leverages new technology, proprietary materials, and patented components to meet the needs of employees today, whether they're working in the office or at home. In addition to supporting product innovation, as CEO, I will continue to prioritize other new opportunities for growth. I don't have anything specific to announce today, but you can expect that we'll maintain our focus on areas to expand our core office categories, as well as in specific vertical markets such as education and healthcare, and where we see geographic opportunities. We're also likely to explore adjacent growth areas that leverage our capabilities and our strengths. Inorganic growth is clearly something that we'll consider, but I believe there are many opportunities to grow organically as well. Finally, Jim touched on our latest impact report and our focus on ESG. One of the reasons I was attracted to Steelcase 14 years ago was because protecting the environment, treating people with dignity, and having a culture of integrity are commitments that Steelcase takes seriously. We've been living those core values for decades, And making occasional adjustments as our business evolves, but those values have largely stood the test of time. And I'm committed to keep listening and learning because there's always room for improvement. And I'm committed to building on our legacy of keeping people at the heart of everything we do. I'm proud to be part of a company committed to doing the right things and doing things right. We take these steps knowing our efforts toward building a healthy planet, supporting and empowering healthy people, and cultivating a healthy culture are critical to our success. In closing, we're hearing from CEOs around the world who want to get their people back together and they don't feel their current offices are ready for hybrid work. They need that collaborative spark for innovation and they recognize that the talent war depends on strong cultures and supportive networks to help people learn and grow. Companies are planning their returns and redesigning how they work, and they want our help to create safe, energizing spaces that support the new hybrid ways of working. And we're already partnering with them to bring those ideas to life. So thank you for your time today, and once again, I look forward to working with you in the future. I'd now like to turn it over to Dave to cover the financials.

Thank you, Sarah, and good morning, everyone. My comments today will include highlights related to our second quarter results, including comparisons to the outlook we provided in June and sequential comparisons to the first quarter. I will also cover the balance sheet and cash flow, our outlook for the third quarter, and our targets for the remainder of the year. Compared to the outlook we provided in June, order growth of 24% was better than we expected, and the favorable performance was broad-based across most regions. However, second quarter revenue of $725 million and earnings per share of 21 cents were below the estimated ranges we provided. For revenue, we recorded an organic decline of 14% compared to the prior year, driven by the higher beginning backlog in the prior year due to the government mandated shutdowns during the first quarter. Our order intake throughout the second quarter was stronger than expected. However, supply chain disruptions were significant during the quarter and delayed some expected shipments in the Americas until after the end of the quarter. We estimate that this had an aggregate impact on second quarter revenue of at least $40 million and contributed to the strong backlog at the end of the quarter, which I will address in more detail when I cover our outlook. For earnings, We missed our targeted range due to the lower revenue and lower gross margins, partially offset by lower operating expenses compared to our projections. Our gross margin performance was negatively impacted by inflation net of pricing benefits driven by steel and other commodities, which was approximately $20 million higher than the prior year and exceeded our expectations by approximately $6 million. In addition, we experienced higher freight cost inefficiencies associated with the supply chain disruptions. Operating expenses, which included a $15 million gain on the sale of land that was included in our guidance, were $7 million below our estimated range due to lower sales activity, the pace of spending supporting marketing and product development projects, a $2 million gain related to a small investment, and favorable COLE income. Our teams continue to do a great job managing our costs while prioritizing strategic investments, supporting growth as we navigate the recovery. Beyond these drivers, we recognize $4 million of discrete tax benefits in the quarter driven by tax planning strategies. Moving on to the sequential comparison of the second quarter results versus the first quarter, operating income increased by $66 million driven by a $168 million increase in revenue and the $15 million gain on the sale of land, partially offset by higher inflation and other costs related to the supply chain disruptions. The sequential increase in revenue was driven by the strong backlog at the beginning of the quarter and normal business seasonality, which includes Smith System and other education projects that tend to shift during the summer months. While orders in the second quarter were 12% higher than the first quarter, which is better than typical seasonality, the impact of that growth on our second quarter financial results was muted by the supply chain challenges I mentioned earlier. The sequential comparison of gross margin was impacted by approximately $11 million of higher inflation, net of pricing benefits in the second quarter, plus higher freight cost inefficiencies associated with the supply chain challenges. And for operating expenses, they were relatively flat after adjusting for the land gain in the second quarter, as increased costs related to selling activities, marketing, and product development were largely offset by lower variable compensation expense driven by the timing of expense recognition related to equity awards. Regarding orders in the quarter, we continued to see strengthening demand trends within our order patterns during the quarter, which exceeded our expectations. On an organic basis, total orders grew 24% compared to the prior year and 12% sequentially compared to the first quarter, with sequential growth of 10% in the Americas, 17% in EMEA, and 20% in the other categories. In addition, average weekly order trends improved throughout the quarter in the Americas, and as Jim mentioned, several parts of our business approached or exceeded pre-pandemic order levels. As it relates to cash flow in the balance sheet, we ended the quarter with approximately $361 million in cash and $531 million in total liquidity. Operating cash flow reflected a $39 million increase in working capital related to the sequential revenue growth, our semiannual interest payment of $12 million, and receipt of an $8 million tax refund. Investing activities included $17 million of proceeds from the land sale and $13 million of capital expenditures, and we continue to expect capital expenditures to total between $65 and $75 million for the full year. we returned $44 million to shareholders during the quarter through our quarterly dividend of 14.5 cents per share and the repurchase of 1.9 million shares under the 10B51 program we announced in June. And through yesterday, we've repurchased an additional 0.6 million shares in September. Moving to the outlook, For the third quarter, we expect to report revenue within a range of $755 to $785 million, which is approximately 4% to 8% higher than the revenue we reported in the second quarter. And on an organic basis, approximately 20% to 25% higher than the prior year. which was negatively impacted by shipment delays of approximately $60 million due to a temporary global operations shutdown. We expect the sequential and year-over-year increase in revenue to be impacted by the following additional factors. First, our consolidated backlog at the end of the second quarter was 22% higher than the prior year on an organic basis, and 15%, or approximately $90 million, higher than at the end of the first quarter, driven in part by the supply chain challenges which pushed shipments that would have otherwise shipped in the second quarter into the third quarter. Second, we expect a modest sequential improvement in order levels, in part due to seasonality, but also because we expect more companies will plan for their employees to return to the office and continue investing in their workplaces. Third, we expect continued global supply chain disruptions to negatively impact our lead times and order fulfillment patterns at a level similar to the second quarter. Plus, our current backlog includes a higher than historical percentage of orders scheduled to ship beyond the third quarter, and we expect this trend to persist until the broader supply chain challenges subside. Taking this range of revenue into consideration, we expect to report earnings per share within a range of 7 cents to 11 cents for the third quarter of fiscal 22, which includes our expectations of inflation net of pricing benefits to increase sequentially from the second quarter by approximately $8 million, which equates to an expected year-over-year impact of approximately $28 million. the persistence of supply chain challenges and related costs similar to the level we experienced in the second quarter, operating expenses in the range of $195 to $200 million, which includes higher investments in marketing and product development and increased sales activities, interest expense, investment income, and other income net of approximately $5 million, and an effective tax rate of approximately 28%. For the fourth quarter, We expect a growing percentage of companies will reopen their offices and will increase their capital spending related to their workplaces. Thus, we continue to target double-digit year-over-year revenue growth. The year-over-year comparison will be impacted by the effects of our global operations shutdown in Q3 of the prior year. Plus, the supply chain challenges we've been experiencing over the last couple quarters could continue impacting our revenue conversion through the end of the year. Regarding inflation, I mentioned in the earnings release that it continued to increase throughout the second quarter, driving us to announce a third price increase taking effect in November. While the November adjustment is expected to result in a small benefit in the fourth quarter, we expect higher yield from our April and August adjustments, which we expect will offset the projected sequential inflation, potentially resulting in a net sequential improvement between the third and fourth quarters. We are also targeting fourth quarter operating expenses, non-operating items, and a tax rate to be similar to what we are projecting for the third quarter. Thereafter, the prospects for fiscal 2023 include the potential for improved demand from a broader reopening of offices, pricing benefits potentially offsetting current levels of inflation, and moderating supply chain challenges. In closing, supply chain challenges dampened our performance in the quarter due primarily to an unexpected push out of shipments, but we are pleased with the recent order rates and remain confident in the recovery. Inflationary pressures are continuing, but we have taken decisive action through multiple price increases this fiscal year to mitigate the impacts. And we are projecting double digit year over year revenue growth for the second half of the current year and believe the prospects for fiscal 2023 include continued improvement. From there, I will turn it over for questions.

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 pause for just a moment to compile the Q&A roster. Your first question is from the line of Greg Burns from Saudi PN Company. Your line is now open. Morning.

So I just wanted to kind of dig in a little bit on your commentary around orders, because it sounds like the order trends have remained strong, but you also had a little bit of commentary around softening and some metrics like pipeline and some other kind of leading indicators on demand. So, but that doesn't seem to be kind of showing up in your, your order yet. So, you know, how, how should we take that? Is that just, you know, on the margin, you're starting to see a little bit of a slowdown in some of those areas and, you know, you know, it's something to monitor or is that something that maybe is a bigger headwind as we go forward?

Yeah, I would say we're not really concerned about it right now. But we're sharing it in the spirit of transparency because we've talked about these kind of long leading indicators. So when we talk about customer projects, these are the appearance of new projects on the horizon. We maybe are just beginning to engage on them. We track them. It's not a perfect metric. It relies a lot on our sales organization entering those opportunities into our tracking tools, our software. So when we see that rise and fall, it could be a signal, but it could also sometimes just be the pace at which those are getting entered. And as we mentioned, in our sales organization, our dealers, our customers are all really focused on orders that are already in-house, shipments that have already been scheduled. The interruptions we've seen in our supply chain have caused our sales organization to really focus on that. How do we make sure that we're communicating with customers about when their orders are showing up? And that can take the scent off of some new project opportunity identification and entry. So I'm not particularly concerned about it because there's so much noise in that system right now and it's an imperfect metric. As I said, in-person customer visits were up during the quarter. Some of that is probably because COVID was easing and more people were willing to travel and visit us here. So we saw that going in that direction. RFPs were down slightly, but we had a nice surge of RFPs before. Again, we're just sharing it in the interest of transparency, and probably because with Delta rising, we have our radar on. We've been watching really carefully to see any sign that the rise of Delta could cause a softening in the business. I'd actually expect that to show up first in orders, where people decide to delay or defer orders, but that hasn't happened as far as we can tell. We've seen that sequential growth in orders continue. and we've seen strong year-over-year growth in orders. So for now, we're optimistic because that order growth is sustained, but we wanted to be transparent with you, Greg.

Okay, thanks. And then in terms of your pricing increases, have you gotten any pushback from your customers? Is there a risk that the continued increase in prices might dampen demand or cause orders to be delayed?

We haven't seen evidence of any orders being delayed or dampening of demand at this point, I think. But there is risk always. So anytime you do a price increase, we anticipate that we're going to have customers who have very professional sourcing organizations who have all the same data we have. And they're going to push our data versus their data to make sure those price increases are justified. You do two increases. You're going to have that conversation twice. You do three increases, everyone's going to say, wow, okay, what's going on? So those conversations are energetic, but we have a lot of facts on our side. Steel inflation has been 150% since before COVID, just as an example. That's extraordinary. It's unprecedented as far as I can remember. And customers get that. And they're seeing it across lots of other things that they buy. So true. Those conversations, I think, are going to continue to take place and continue to, you know, we have to back these things up. So, again, we have the facts to back it up.

Okay. And then lastly, have you seen any improvement in India? I know they were kind of the epicenter for the recent wave of COVID, but it seems to have improved. Have you seen any change in that market?

Yeah, so I'll talk about that both from the supply side and the demand side. So the supply side is our own ability to fulfill orders, and that's much better now. We went through a very tough time in India. Our plants were shut down. We really shifted our focus, as Sarah said, towards our people, making sure we were taking care of our people and helping people access vaccines and ventilators and all those sorts of things. And now, in the last several weeks, our factory has been ramping back up and we're really now at a point where we can fulfill more orders than we've received. So we're no longer demand constrained. On the supply side, as you can imagine, our customers were in that same state. There wasn't a lot of people placing new orders, but now we're seeing that demand build. Specifically in India, we're seeing the pipeline build. We're seeing orders getting to the or opportunities coming to the part of the process where they will convert from being wins to being actually orders that are entered and scheduled. And we expect that to continue to build up here in these next few weeks. So in that case, we have very good short-term visibility that we should see a boost.

Great. Thank you.

Your next question is from the line of Rudy Yang from Barenburg. Your line is now open.

Hey, guys. Thanks for taking my questions. So I just want to revisit orders again because clearly they were pretty strong this quarter. And I guess you talked about some orders in some areas of your business recovering back to pre-pandemic levels. I guess my question is how much further do you think order rates can expand in these areas of your business? And I guess can we expect a lot more upside in the growth in orders from these areas just considering that they're already pretty strong?

I hope so, and I think so. So, you know, first of all, I'll talk about it geographically. We have markets like Asia and EMEA where the sequential order growth was the strongest geographically, and those markets are continuing to show strong momentum. So I'm not seeing any sign of us hitting like a peak, and I think there is some pent-up demand. So it's not just a matter of us getting back to the order rates we saw in FY20, but, you know, we've got 18 months of less demand, and so there is a pent-up demand opportunity there. So I'm not seeing any signs of that. And when it comes to some of the acquisitions we mentioned, like Smith System, the growth in Smith System, and that business is primarily here in the Americas, is being fueled by a lot of the stimulus money and other money that's aimed at helping rebuild the infrastructure we have around K-12 education. As that money continues to flow, and it's expected to continue to flow and be spent well into next year, that business is being driven by not just the recovery from the pandemic, but really that kind of spending. When it comes to Orangebox, we see a lot of demand building for Orangebox products. One key product from Orangebox are these pods, pods that can be used for video conferences, for telephone calls, and even as kind of a short-term product kind of private office, like my office here at Steelcase is an orange box pod. As people return to their offices, there is an increased interest in having spaces where you can do video conferencing with privacy or where you can have the kind of privacy you had when you worked from home. So we see a demand for orange box products, again, that isn't just a recovery from the pandemic, but it's actually being fueled by some of these forces we're seeing. And then finally with AMQ, AMQ is a good, strong business. We have a value creation plan that's about addressing, expanding distribution, expanding products, launching new products. We had a value creation plan that was intended to grow that business beyond where we were in FY20, and so I think there is opportunity for it to continue to grow beyond that.

Got it. Thank you. And then my second question is on revenue guide for the second half of the fiscal year. It seems like you're continuing to target double-digit revenue growth still, but I guess, what gives you confidence that you won't encounter any additional supply chain impacts in Q3 and Q4?

Well, we expect that we will, actually. So, you know, we don't expect the supply chain problems to go away instantly. And we know the way this works. You fix a few things and then something else pops up. The number of broad supply chain problems we're facing is improving. So, You know, we're not talking about steel or foam anymore. Those are sort of systemic issues we face. We do face this challenge of ocean freight and ocean logistics, which affects some of our product lines. And we would expect that to continue. So the revenue outlook that we're providing is already considering ongoing supply chain issues. If those issues were to improve at a greater pace than we expect, then we should do better than that. But we already have figured that in as we've provided our outlook.

Got it. Thank you.

Your next question is from the line of Stephen Ramsey from Thompson Research Group. Your line is now open.

Hey, good morning. This is actually Brian Barris for Stephen. Thank you for taking my questions. I guess first, maybe around taking orders and thinking about kind of the delays and the supply chain challenges that you talked about throughout the call, is this incentivize customers to maybe place owners sooner to get ahead of things and not have to deal with super long lead times when they actually want product, or maybe, maybe it has no impact on their ordering timeline decisions. I guess just wondering what you guys are seeing on that.

Yeah, it's a good question. And we've had this discussion ourselves, uh, quite a bit because you do see that sometimes. And, and, and I, you know, just to elaborate on your question, you could imagine that as customers get used to longer lead times, they start looking out and saying, okay, let's get these orders placed, almost like reservations, earlier than they normally would so they don't miss the delivery dates on their project. So that kind of thing can happen. And it probably is happening to some degree. So the question is to what degree? How much of the order growth is due to that? And I don't think it's as much as you might think because when we break down our orders, the most order growth we're seeing, the fastest year-over-year growth and sequential growth is coming in Asia and EMEA where our supply chain challenges have been less severe. That would say that that's real growth, probably less affected by the longer lead times. When we look at our growth in areas like Smith System, that's fueled by the CARES Act and other spending that's out there. I don't think that's really driven by that change either. You know, regardless of how we look at it, it seems as though the Americas order growth would be the one that would be the most affected by that. But, again, we don't see that evidence.

No, I mean, frankly, what we see is the week or two before a price increase takes effect, we see a bit of a spike, and then the next two weeks we see an air pocket. So if you kind of step back from those four weeks, you kind of feel like it might have pulled orders ahead for a couple of weeks. But we don't see strong evidence or really any significant evidence that it's being pulled forward more significantly because of price increases that are out there.

So you may wonder, why didn't we just say no, we're not seeing it? Well, anecdotally, here in the Americas, we are hearing that some customers and architects and design firms and project management companies are advising their clients that you should get your orders in because of these supply chain challenges that are affecting the whole industry. So, you know, it comes up, and it's probably there to some degree, but, again, I don't think it's there to a significant degree.

Understood. Yeah, very helpful clarification there. I guess you touched on it in the response there. EMEA, the supply chain, seems to be better than the U.S. The pushed-out revenues seem like it was mostly U.S.-related. I guess can you just touch on the differences between what's going on in the U.S. versus EMEA? How is EMEA that much better on the supply chain and not having the the delays that you're seeing in the US side?

Yeah, good question. So when the issues were things like steel and foam, they affected everyone globally. The steel issue really was a global issue. The foam issue started in the Americas, and this is really related not to COVID, it was related to the hurricane that hit Texas that knocked out a lot of the chemicals that go into the foams. But once it hit the US supply chain, the global market for foam was affected within a few weeks, and so foam became an issue everywhere. So those issues have gotten resolved, and EMEA doesn't have that kind of issue. They are still facing issues with kind of global ocean freight, but they're less reliant on that long supply chain than the Americas has been. And then when we get into the details, you know, some of the issues in the Americas have to do primarily with finished goods suppliers we have in the Americas for products that are only sold in the Americas. And there's only a few of those, but they affect a few different product lines. So our Americas business has been more affected by that. And that's what I mean by we don't have these broad issues we had a quarter ago. We're now down to kind of discrete kind of supplier by supplier issues. We just have less of that in EMEA and less of that in Asia. In Asia, the issues had been around Malaysia, our Malaysian plant, which was shut down during the quarter and is now open and running. It was related to Malaysian suppliers to that factory, which are doing better today. They're not completely out of the woods, but they're doing better. That factory serves all of Asia, but also serves products that we sell in the Americas and in EMEA. And then the Pune plant, which we talked about in India, which definitely had an effect on India, but not so much an effect across Asia. Each of those regions has its own supply chain, and the Americas is today, I think, more affected by some of these discrete items related to specific suppliers.

Thank you.

Again, if you wish to ask a question, simply press star, then the number one on your telephone keypad. Your next question is from the line of Bud Bugach from Watertower Research. Your line is now open.

Jim, good morning, Sarah and David and Mike. Jim, congratulations to you on your tenure and your retirement. And, Sarah, best wishes to you on proceeding to the CEO role. Thank you, Bud. Thanks, Bud. I guess everybody's gone to orders, and I will. You were looking a little bit into the third quarter. Can you kind of quantify what you're seeing in the third quarter? I was interested. David, I think, said order pacing actually improved. As the second quarter improved, is it improving into the third quarter?

Yeah, the first three weeks of September have been actually quite strong.

And compared to the last three weeks in the second quarter? Compared to prior year?

Yeah, the growth rate versus prior year in the first three weeks. I'm always a little hesitant to give three weeks of order patterns because it's only three weeks. But relative to the prior year, they grew more at a higher rate than we saw in the second quarter. So they kind of continued to strengthen into those first three weeks.

And so better than 24%? I mean, that's kind of the way it would work. Okay. That's pretty encouraging. And you're looking at the gross margin for the third quarter. If my math is right, and it's just quick, can you kind of where you think gross margin will wind up in the third quarter based upon what your guidance implies in the high 20s?

Well, I gave you all the components, and now you're asking for the answer.

Sure. I mean, you know, why not?

Yeah, I mean, there are so many variables, but, I mean, we have sequentially, Mike, correct me, but I'm going to go through them again. We have similar levels of cost inefficiencies related to the global, let's say, freight issues we're dealing with. We have increased pressure from inflation net of pricing, so it's going to be higher in the third quarter versus the second quarter. of a little bit higher volume, right? We're guiding to a little bit higher volume. So how does that all play out in the third quarter versus the second quarter? I guess I'm going to let you do your modeling. But I think what you're going to find is, as you model, that the gross margin shouldn't be dramatically different than what we saw in the second quarter.

Yeah, that's kind of where I got to. But it was interesting, as I did that, I tried to go back and look at America's gross margin, and I don't remember seeing a gross margin lower than that. I mean, that's a bit concerning. And so... Am I wrong on that? You've reported that for a while.

Good question. I didn't go back. Yeah, it's very low, but when I look at how it's impacted by year-over-year inflation of $20 million and another $5 million of cost inefficiencies from all the global supply chain issues, those are some pretty big numbers that are impacting the margin.

Yeah, there's a time thing here where the inflation is hitting us hard in the third quarter. The price increases won't start to fully benefit us. Well, they will start to benefit us right now, but they build over the next few quarters. So we're in this trough where the price increase impacts are not nearly as great as they will be eventually, but inflation is hitting us right away. So that's where you see the downward pressure on America's margins.

Thanks. And share repurchases, I'm curious to see if you would kind of think where is that going to work for the year? I know you gave us what you did in September so far, but under 10B5, what do you think is going to go for the year and how much more aggressive can you be under 10B5? What do you think the stock price is going to do for the rest of the year is the bigger question.

You know our approach is to be – opportunistic with an intention to minimally offset dilution. And we talked last quarter about our confidence in the recovery, and it's been supported by the growth rate that we saw in order patterns this quarter. So we put the 10B5 program in place last quarter really in some ways as an insurance policy. If the market didn't buy into the recovery like we were seeing, then we might be interested in buying some shares back. And the stock did drift downwards, and so we ended up in that 10b-5 program buying shares, and it continued through yesterday.

David Morgan Okay. I think that's actually helpful. Thank you, David. And let me just end with my questioning on ESG. I did see that you released the new report last week. Talk for us a little bit, if you would, about some of the differences you've seen in ESG, and maybe I'll ask the Bobby Orr question. Kind of where is it going? from here? We've seen, obviously, with what happened last summer, we saw a lot of change by corporations for DEI is one particular thing. Where's it going?

Well, I think it's a new topic for a lot of companies. But as Sarah said, this is an old topic for Steelcase. We haven't used the phrase ESG because that's a fairly new term, but the commitment to The way we play a role in the communities where we do business has always been part of Steelcase. The commitment to sustainability has always been part of Steelcase. I think where it's going broadly and for us is when we think about sustainability, we started a lot of our work around materials chemistry and reducing waste, and that's still important. But today, a lot of our effort has shifted towards climate change, and particularly thinking about carbon. and being more mindful of the carbon dioxide and methane we release through our own operations and now through the operations of our suppliers. So the shift is from early stages of carbon, which was maybe just about trying to become carbon neutral, and we've been carbon neutral for quite some time now, towards adoption of science-based targets, which are far more sophisticated and difficult, frankly, and maybe less sexy, but that's the real work of of addressing this issue globally is for companies to be embracing these science-based targets, which essentially means you've got to think about your gross emissions. Gross emissions from your core operations, gross emissions from your supply chain, and gross emissions from the energy you purchase. So that could be the utilities you buy energy from. You can just imagine the math involved in kind of figuring all that out. But we've got a great team of people who've done just that. We've made these commitments to those targets. And a lot of other companies are starting to do that. So I think that's one shift. We're moving from the kind of light sustainability initiatives that may be more symbolic and emotional in the past towards things that are much more about science and engineering and math, frankly. So we're right on that. I think we're leaders in that, and I'm really proud of the efforts there. DEI is clearly a rising topic across society and across every business. And it's true at Steelcase as well. Every company, including Steelcase, has room to be better on DEI. We really re-energized our efforts around that last year. We set goals around how we think about hiring people, how we think about being mindful that people are getting equal opportunities for promotions and development, and measuring that in lots of different ways. And it's actually part of executive compensation this year, our progress against a lot of those goals. So that's a big difference. In the past, typically ESG was not part of executive compensation. If it was, it was kind of broadly an ESG target. Now it's zeroing in more on DEI. And again, I think Steelcase is a leader. And there are other companies doing this, but it's a rising force. And it's going to continue during Sarah's tenure. I think that's why she brought up in her comments, I think every CEO and every CEO of Steelcase is going to have to continue to make progress along all those fronts. Do you want to add anything to that? Okay. Thanks, Bud.

So broader adoption, symbolic to kind of engineering and science-based executive compensation, kind of the basic keys, and getting back into the supplier base. I remember when lean was becoming a big topic and going back to the supplier base was a big issue for how do you get lean. Are you able to get back into your supplier base on ESG and on climate change issues?

We are, and that's a really good question, Bud, because the top 100 companies in the world are all over this. So if I go to any of the top 100 or even the top 500 companies who might be suppliers to us, they're ready for those questions. They've already been asked those questions by their customers. And so when we ask them about their carbon data or material chemistry data, they've got it. But the rest of the supply base, which is frankly most of the supply base and is probably most of the carbon generated, are not really ready for this. And it's a very difficult process for them. We're often the first ones asking them this question. And so they have to take a big breath and go, okay, where do we even start? How do we figure out what our carbon footprint is? How are we going to make commitments about reducing that? And it's interesting you would bring this up because I had a conversation recently with one of our largest customers, whose CEO is really committed to that particular problem. How do we get past the Fortune 500 and think about the next 1,000, the next 5,000 companies? What are the tools and processes that we need to put in place? And his business is actually in the business of doing things like that. So he's very interested in talking with us about our experiences, and we're going to continue to have those conversations. In fact, our people and his people are collaborating, taking some of the things we've learned to help him and his business develop some of those tools. And I won't be more specific about it, but That is a big next frontier, getting these mid-sized part of America's supply chain ready to make the same kinds of commitments.

Yeah, I think it's kind of the iceberg issue. That's actually brilliant, and that's exciting if we can find a way to do that. So thank you for that answer. And again, best wishes to you and to Sarah. and to the team for the third quarter and beyond.

Thank you, Bud.

There are no further questions at this time. Mr. Kian, I turn the call back over to you.

Thank you. So at a personal level, I would like to thank all of you, our shareholders and the analysts who cover our company on behalf of our shareholders for your interest in our company today and over the years. I've known some of you for more than 20 years. And I've enjoyed our conversations and your ideas about how we can be better. Thank you for being part of Steelcase.

This concludes today's conference call. You may now disconnect.