Steelcase Inc.

Good morning. My name is Dexter, and I will be your conference operator today. At this time, I would like to welcome everyone to the Steelcase third quarter fiscal 2022 conference call. All lines of face will mute to prevent any background noise. After the first remarks, there will be a question and answer session. If you would like to ask questions 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. Romero, you may begin your conference.

Thank you, Dexter. Good morning, everyone, and happy holidays. Thank you for joining us for the recap of our third quarter fiscal 2022 financial results. Here with me today are Sarah Armbooster, our president and chief executive officer, and Dave Sylvester, our senior vice president and chief financial officer. Our third 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 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, Sarah Armbruster.

Thanks, Mike, and good morning, everyone. With my time today, I'll share a summary of our third quarter financial results and then provide an update on our strategic priorities before handing the call over to Dave to discuss our results in more detail. Our third quarter results saw very strong order growth, but we continue to be impacted by a significant number of supply chain challenges and inflationary costs. in our America segment, which impacted our results. Our order growth of 40% was broad-based across all segments, including in all of our main geographic markets and across multiple markets. Similar to last quarter, several parts of our business approached or exceeded pre-pandemic order levels in our third quarter. Specifically, orders at Smith Systems, AMQ, and in our Asia Pacific region were all higher than in the same period in FY20. And orders in our EMEA segment were within 6% for the third quarter of fiscal 20 levels. These businesses have been key parts of our growth strategy, and it's good to see that growth materialize. I'm really proud of how our teams have remained hyper-focused on keeping our commitments and delivering results in these areas. It's this kind of dedication that gives me confidence as we look to implement our broader growth strategies going forward. Unfortunately, and similar to last quarter, due to ongoing supply chain challenges, we did not ship everything we'd expected to ship in the third quarter, which cost more of our revenue to ship out of the quarter than we'd anticipated. Labor and raw material shortages are impacting some of our suppliers. Ocean freight continues to be challenged by availability and port congestion, and we continue to experience trucking availability and other logistical challenges. These issues are causing extended lead times, production delays, and adjustments to delivery schedules. We know supply chain issues are impacting many industries, including ours, and our teams are working every day to overcome these challenges and meet our customer commitments. Our operations teams have been pursuing numerous actions to address these challenges, including sourcing more products locally, transitioning to new suppliers, utilizing overtime to stay on schedule, increasing inventory levels as buffers, and utilizing expedited freights to compensate for transportation delays. And we have not experienced any significant change in our order or project pipeline cancellation levels. if these issues are impacting our industry more broadly. So although our revenue was below our expectations for the quarter, our strong order growth supports our confidence in the recovery. And that confidence is bolstered by our aspiration to help people do their best work by creating places that work better. We believe work is going through one of the most significant transitions in our lifetime, And solving for what people want and need to thrive at work remains a rich source of opportunity. So that's why our strategy remains centered on work. And as I talk with CEOs and business leaders, they resoundingly continue to express a broad desire to bring employees together in person to strengthen their culture, support learning, assimilate new employees, and offer more inclusive career experiences. So while return to office plans vary from company to company, they almost, without exception, involve some aspect of hybrid work. And we believe that provides incredible opportunities for Steelcase. As decision makers visit our work-life centers and talk with our researchers and designers, they're hungry for our insights and looking for help in navigating how to make hybrid work. And for most, that answer will involve changing and re-equipping the office. It will require new ways of supporting privacy, rethinking of how to support individuals, places to rebuild social connections, and new kinds of spaces that bring people together to collaborate and innovate, even if those people aren't co-located. We believe all of this translates into a long-term growth opportunity for us, because no matter what an organization's workplace strategy, they'll need help to manage the shift in work. So we remain optimistic that as the pandemic recedes and COVID becomes endemic, companies will do two things. Ask their employees to spend time in the office and make significant changes to their current office environments to support hybrid work, which we believe will drive further stimulation in demand. As we look ahead to how we're planning to drive growth in the future, we're focused on four overarching strategies. First, as I mentioned, we believe we are best positioned to lead the hybrid work transformation, and this is a top priority. We plan to leverage our insights about hybrid work to drive innovation and to advise our customers. We're very excited about recent product introductions that support how people work now, such as our Flex personal workstation and the Flex work wall, plus new pod products from Orangebox. We're also collaborating with leading technology companies such as Microsoft and Zoom about how to integrate digital solutions more optimally into physical spaces as more of us are working in mixed presence modes. Partnering with other industry leaders remains a part of our innovation process and allows us to move quickly and build on each other's insights and solutions to deliver value for our customers. We've also increased our investments to drive our work from home business through new products, enhanced digital experiences, and increased capabilities such as speed of delivery. We also see opportunities to grow by deepening our presence in key adjacencies, which is a second priority. Many of our enterprise customers value Steelcase for the depth and breadth of solutions and service we provide. But we believe we can also serve customers that desire speed and simplicity. We are seeing great growth in our AMQ business, which we acquired in part due to its quick delivery capability. So we're leveraging learnings from AMQ and applying those learnings to our other brands. We're also expanding new relationships geared towards small and medium businesses. And with West Elm, for example, we're working on efforts to build on our successful retail relationship. In Asia Pacific, our presence has continued to deepen to serve a broader customer base, and we believe we will continue to drive outside growth in our largest APAC markets of China and India. We've also built on the success of our Smith System business in the Americas and used that momentum to grow our education business significantly in Asia. And we'd like to expand our education business even more broadly geographically. A third priority is to continue creating value by using our business as a force for good. Preserving the planet, empowering people, and running our business with integrity and empathy are core to who we are. And those values have never been more integrated into how we do business than they are today with our customers, how we design and manufacture our products, and how we attract and engage our employees. We've met our goal to become carbon neutral, and we're continuing to work toward our goal of a 50% reduction in emissions from Steelcase-owned and controlled facilities by 2030 using third-party verified science-based targets. Lastly, we are keenly focused on accelerating our profitability trajectory. We've implemented several recent pricing actions in response to the current inflationary headwinds. We've controlled our operating expenses, And we've seen strong order growth while we work to overcome supply chain challenges. We have a longstanding focus on fitness, which we think of as the organizational capacity to deliver outside results relative to our cost structure. And we plan to continue to vigorously reallocate resources and investments toward our highest priorities, as well as to expand our organizational capacity to achieve results. We're seeing strong interest from organizations around the world to both redesign and equip their offices as they tackle the new needs demanded by the transition to hybrid work. So while there are still challenges that lie ahead, this intense interest in work combined with our talented, committed organization and our focus on growth gives us optimism as we move into the new year. We're feeling the pulse of change and believe our long-term results will reflect our optimism. I'd now like to turn it over to Dave to cover the financials and our outlook for Q4.

Thank you, Sarah, and good morning, everyone. My comments today will cover our third quarter results in comparison to the outlook we provided in September, the sequential comparisons to the second quarter, and some notable comparisons to fiscal 2020 before the pandemic. I will also cover the balance sheet and cash flow and our outlook for the fourth quarter. As Sarah said, our performance in the quarter was negatively impacted by supply chain disruptions, and I'll talk more about that in a few minutes. But first, I want to highlight a few other areas of our business and performance that were more directly within our control, as we feel quite good about these areas of our business. And overall, we remain optimistic about our prospects next year. We posted year-over-year organic order growth of 40 percent in Q3, which included 36 percent growth in the Americas with strong growth in every regional market, 31 percent growth in EMEA with order levels nearing fiscal year 2020 levels, and exceptional growth of over 125 percent in our Asia-Pacific region, with the region's orders exceeding third-quarter fiscal 2020 levels by over 40%. Our research and new products are resonating with customers. We are pleased with the growth of our recent acquisitions. EMEA is benefiting from achieving the growth objectives included in our turnaround strategy, and our investments in Asia Pacific are also paying off. Our EMEA segment achieved over $8 million of operating income and nearly a 5% operating margin in the third quarter, which exceeded its highest level of quarterly in fiscal 2020 and is confirmation that our strategies to improve profitability in that segment are working. Our sales organization is working diligently to negotiate the contractual adoption of our recent pricing actions and we are beginning to see increasing yield from their efforts, which supports our belief that price yield will offset current levels of inflation in fiscal 2023. Our operations team's have remained resilient in the face of mounting supply chain challenges. Sarah summarized a long list of actions they've implemented in response to this dynamic environment. But for every challenge resolved, new challenges seem to arise. And yet they remain resilient and continue to meet customer commitments at a high rate. Our performance isn't quite at the level we expect, but we hear from customers and dealers that we're performing consistent with or better than other industry suppliers. We introduced several award-winning new products in the third quarter, despite significant reductions in spending since the start of the pandemic. And we continue to closely manage operating expenses overall, which kept our rate of spending relatively low and below our estimates again this quarter. We won several large multi-year contracts in the Americas during the quarter, And our win rates remain strong in EMEA and Asia Pacific, which further value have the solutions our customers need. And lastly, customer visits increased compared to the prior year and approximated pre-pandemic levels. In addition, an increasing percentage of the visits were in person and included senior executives who are interested in our research and hybrid model experiences. While we're pleased with our strong performance in these areas, the impact of supply chain challenges on our performance in the third quarter was both significant and higher than our expectations. For revenue, the supply chain disruptions in the Americas caused extended lead times, delayed shipments, and adjustments to delivery schedules, which we estimate caused at least $35 million of shipments to shift from the third quarter into the fourth quarter. As a result of those delays and the stronger order growth in the quarter, our backlog increased significantly by the end of the third quarter, which I'll address in more detail when I cover our outlook. You'll remember we estimated at least $40 million of shipments shifted from the second quarter into the third quarter, leading to a strong beginning backlog in the Americas. That shift was split fairly evenly between Smithfield and the rest of our business in the Americas. And while shipments at Smith's system largely caught up in the third quarter, we estimate that shipment delays in the rest of our Americas business increased sequentially by at least $15 million. Despite the lower than expected revenue, our earnings for the third quarter were within the range we forecasted in September due to lower than expected operating expenses and more favorable than expected gross margins in EMEA and the other category, driven primarily by higher revenue in those segments and favorable shifts in business mix. Gross margin in the Americas was negatively impacted by the lower revenue and higher than expected inflation net of pricing and supply chain disruption costs. We incurred approximately $27 million of higher net inflation and approximately $10 million of higher freight costs and inefficiencies associated with the supply chain disruptions in the Americas compared to the prior year. If not for the year-over-year impact of the net inflation and the supply chain disruption costs, we estimate that our earnings would have been approximately three times higher this quarter. Moving on to the sequential comparison of the third quarter results versus the second quarter, operating income of $16 million in the third quarter represented a sequential decrease of $18 million, driven by a $34 million decrease in the Americas, partially offset by stronger performance in EMEA and the other category, which generated a combined increase in operating income of $16 million. The decline in the Americas was driven by $17 million of gains recorded in the second quarter related to a land sale and small investment, a decrease in revenue driven by typical seasonality at Smith's system, an increase in inflation net of pricing benefits of approximately $8 million, and higher freight and labor costs and inefficiencies associated with the supply chain disruptions of approximately $7 million. The results in EMEA and the other categories reflected improving demand trends across most markets, favorable business mix, and strong operational performance leading to favorable gross margins. As it relates to cash flow on the balance sheet, we ended the quarter with $275 million in cash and $445 million in total liquidity. Operating cash flow reflected a $39 million increase in working capital, a $19 million payment of prior year FICA taxes that were deferred under the CARES Act, and higher customer deposits. Investing activities included our acquisition of Acarbe and $14 million of capital expenditures. We returned $40 million to shareholders during Q3 through our quarterly dividend of $0.145 per share and the repurchase of additional shares under a 10B51 program, which was completed on November 30th. Under this program, we repurchased 3.7 million shares, 1.9 million in the second quarter, 1.7 million in the third quarter, and the remainder in the first week of the fourth quarter. Moving to the outlook for the fourth quarter, we expect to report revenue within a range of $740 to $765 million. which is approximately 0% to 4% higher than the revenue we've reported in the third quarter, and on an organic basis approximates 9% to 13% growth compared to the prior year, which you'll remember benefited from the temporary global operations shutdown, which pushed approximately 60 million of shipments into the fourth quarter. We expect the sequential and year-over-year increases in revenue to be impacted by the following additional factors. First, our consolidated backlog at the end of the third quarter was approximately $800 million, which was 47% higher than the prior year, and 13% or approximately $90 million higher than at the end of the second quarter on an organic basis. Also, more than 20% of our backlog is scheduled to ship after the end of the fourth quarter, which, while similar to the third quarter, is higher than historical patterns. Second, we expect double-digit percentage year-over-year order growth in the fourth quarter. On a sequential basis, orders are expected to decline consistent with typical seasonal patterns as return-to-office projections remain uncertain. Third, we expect continued global supply chain disruptions to negatively impact our order fulfillment patterns similar to the third quarter. We expect earnings to approximate break even, which includes our expectations of gross margin in the range of 26.5% to 27%, including projected inflation net of pricing benefits of approximately $20 million compared to the prior year driven by the Americas, as EMEA is projected to fully offset inflation through pricing actions. Continued supply chain challenges and related disruption costs similar to our higher similar to or higher than the level experienced in the third quarter, unfavorable shifts in business mix compared to the third quarter, lower production and absorption of our fixed costs due to the significant level of finished goods inventory at the end of Q3, the continued effects of supply chain disruptions, and some seasonality in Q4. Operating expenses are projected to fall within a range of $193 million to $198 million including the recent Vacar Bay acquisition and related intangible asset amortization. And we expect interest expense, investment income, and other income net to approximate $5 million in total. Looking forward to fiscal 2023, while it's difficult to predict the extent to which commodity price increases will moderate and when supply chain challenges could ease, the prospects for next year could include the potential for improved demand driven by a broader return to office, and significant gross margin improvements from our pricing actions and some level of improvement in supply chain disruptions. And while we plan to invest in our strategy, we remain focused on fitness across our business model aimed at improving our operating expense leverage. In closing, Supply chain disruptions and commodity cost inflation continued to be significant and negatively impacted our revenue and gross margin performance in the third quarter. We remain pleased with our recent order rates, our ability to tightly manage costs, and the strong performance of our EMEA segment, which provides evidence strategies are working. And as we expect to see benefits from our pricing actions, potential improvements in supply chains and a broader return to office in the coming months, we remain confident in the recovery of our industry and the prospects for significant improvement in our fiscal 2023 earnings. From there, I'll turn it over for questions.

At this time, I would like to remind everyone in order to ask questions, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile a Q&A roster. Your first question comes from the line of Ruben Garner with Benchmark Company. Your line is open. Ruben Garner Thank you.

Good morning, everybody. So apologies, I missed the first, I don't know, five, seven minutes of the call. I had trouble getting on. So if you talked about this, apologies. The customer delayed deliveries, two-part question. One, what were the reasons cited? Is this because of a delay in the return to the office, or is it construction supply chain issues that are pushing it out? And then number two, it looks like you've got more finished goods inventory. So for those customers that did push it out, is there any way for you guys to kind of maybe adjust to this moving forward so that you guys obviously have limited materials, limited labor available so that you can, I guess, focus efforts on the customers that will definitely be ready? Or is this like something that you can't predict and adapt to?

Well, let me start with the first part of your question around the delays that were driven by customers. First, I would say that the delayed revenue was driven by a number of factors, and the biggest factor was related to our supply chains, both domestic and long-distance supply chains. It was linked to port congestion as well. That was the bigger driver. But in addition to that, we also have been experiencing a higher rate of what we refer to internally as push-out. And what that is is where backlog gets rescheduled. And we're seeing a higher level, which is coming from our customers, and we believe that it's driven by challenges to complete sites or for the readiness of them to accept products. That could be because of installation challenges. It could be because the project or the construction isn't fully complete or they just don't want it right now because they have pushed back they return to office. It could be all of those things. We just don't have the intel behind what's driving it. But it was the smaller piece. The larger piece was driven by the supply chain challenges. Does that answer the first part of your question?

Yes, it does, Dave. And the second part, well, I'll let you go ahead, but I think I got it based on the first answer.

Well, maybe clarify what more you'd like to hear in the second part.

Well, I'm just curious if there's any way to, I mean, your backlog is rising even faster than orders and, you know, the supply chain is an issue. But you have inventory on hand. So is there any way to kind of, I guess, confirm customers are ready before you guys focus? Or are these things just, you know, going to happen in this environment? There's no way to kind of improve on where you focus your efforts?

Well, I would say yes, of course, and our operations teams and our order fulfillment teams do that every day. And they're working even more extensively trying to confirm that customers are ready. They're also looking for any opportunity that exists where we can pull things forward. And they're, in addition, trying to build ahead as much as possible. You know, we don't have a tremendous amount of capacity inside of our regional distribution centers. But with the lower level of volume that we've experienced from the pandemic, we do have some capacity. So if we can build ahead, if our suppliers and supply chain can support us and we can build ahead, that can be a good thing and provide some cushion as demand continues to grow with return to office. So I'm confident that the operations side of the business is doing everything possible to try to drive efficiencies, pull demand ahead where possible, and only make stuff and and ready delivery for customers that are ready to accept it. But it's quite an uncertain environment out there today, not only affecting us in our manufacturing and fulfillment model, but our industry, broader industries, and certainly our customer base as well.

Okay, perfect. And then on the backlog, can you talk about the profitability of what you have in backlog and, I guess, how that might be impacted if we do see a rollover in, you know, steel or other inputs. If transportation rolls over, would that improve the profitability that you have or would it be too late? And then I guess conversely, if we see further inflation, does that put that product at risk? And I guess is there a point where your backlog gets too big that you guys maybe don't take as many orders as you otherwise would?

I'll take as much backlog as I can get, and I think everyone else in the company would do the same thing. Now, whether or not we can deliver it in the relatively short period of time could be challenged by the supply chains. But you asked about the profitability of backlog. Remember, the backlog shifts relatively fast. This quarter, similar to last quarter, we have about 20% of the backlog that is scheduled for deliveries beyond 90 days. We always have a little bit of that, but 20% is higher than what we typically see. So first of all, it's going to shift pretty quickly. So I don't know whether steel prices, which moderated for the first time in many months in November, I don't know whether we'll see benefits of any of that moderation fast enough to affect the profitability of our backlogs. The other comment I'll make about the backlog, though, is some of these projects that are in backlog that have finally been ordered were projects that were quoted and won quarters ago. And so, yeah, the profitability is a little bit lower, which is why one of the reasons why we guided to the level of gross margins in the fourth quarter that we did is we have a shift in business mix that in part is attributable to profitability and backlog.

Great. And last one for me, we talked about the way the pricing works in the contract industry a lot in recent months. Since you last reported, there's been a couple of players in the industry that have made a little bit different moves, and I wanted to get an update on your philosophy. We heard one implemented a surcharge and another is I think putting out a price increase that takes effect a little faster than typical. Can you guys just talk about, you know, how you guys are approaching it, how it works and flows through, just to remind folks, and then I guess the reasons why you're addressing it the way that you are.

Hey, Ruben, I'll let Mike take that one. You know, you'll remember he ran pricing and contracts for us for several years before investor relations, so he's familiar with that more than I am.

Yeah, so Ruben, thank you. You know, we think about the different tactics to implement pricing, whether we should do it through the traditional process of list price and the way the contracts are kind of structured or whether we should do something more different like a surcharge, which we've done in the past. The surcharge right now we've decided not to do at this point. We haven't announced any surcharges. It works differently with customers. We have long relationships with customers. And we try to work through the contracts and the terms that we've established. Sometimes that means there's a timing difference between when we are experiencing the costs and when we can implement that pricing with the customers. But so far, we've chosen to do it through the kind of more traditional price increase route, which is what most of the industry does. We have seen similar actions across the industry. So, so far, we feel pretty good about the strategy. It's working as far as we're converting at the normal pace, even though we've implemented so many. And we'll continue to look at whether we need to do additional price increases, I'm sure, as inflation, you know, changes.

And if I could sneak one more in, guys, just to follow up, you mentioned the META I think was price-cost neutral, and I'm sure someone's going to want to ask about the profitability there, so I'll leave that one. But the differences between EMEA and the Americas from a price-cost standpoint?

Yeah, we've seen significant inflation in EMEA, but not at the level that we're experiencing in the Americas. That's the primary driver. And we don't have the same level of, I would say, significant inflation and long-dated customer contracts in Europe that we have in the Americas. We have a lot, but it's a little bit more efficient or easier for us to work through those contracts in Europe. And again, the level of inflation that we've experienced to date, while significant, has not been at the same level or as pervasive as we've seen in the Americas.

Thanks, Chris.

Yep.

Your next question comes from the line of Greg Burns from C. Doherty Company. Your line is open.

Morning. I just wanted to get maybe an update on some of the more recent conversations you're having with your customers, given that the headlines are seen around variants and cases of increasing. Has it changed in any way in recent weeks? Are you seeing any softening in any of your leading indicators? What's the current outlook look like for you?

Yeah, so, Greg, I'll speak to that because I have pretty regular conversations with other CEOs and decision makers. And I think throughout the pandemic, I mean, we've seen customers take a variety of approaches to how they're thinking about, you know, return to office plans, whether that's setting a schedule and then changing them as the situation evolves. Some certainly have set dates and they've actually implemented them and have started to bring people back. You know, we do have some customers who never really left the office in any meaningful way. So we've seen quite a variety throughout the pandemic. And I would say that, you know, in my recent conversations with customers, I haven't yet heard a dramatic shift in plans specifically based on the new variants or recent developments. I think customers generally continually, they consistently say that they believe their people are better when they're together and they're still thinking about and working on hybrid work plans, you know, whether that's, you know, different variations of hybrid. You know, but I do think that as sort of science and society become more accustomed to living with COVID and we know that those leaders do want to have their people together for at least part of the time, that they're still, you know, working on various types of hybrid return to office plans. So at this point, and the new variant news is still relatively new, I wouldn't say we've heard a dramatic shift in what customers are contemplating.

Okay. And then in terms of the work from home, can you just update us on how you're approaching that market? Because, you know, with some of the Omicron, the headlines, you saw Apple push out, but at the same time, They're giving all their employees $1,000 to go set up their work environment. So how is that market evolving in terms of how businesses are approaching work from home and kind of what's your strategy to capitalize on that?

Sure. So, you know, we've been quite focused on supporting people working at home since the start of the pandemic. And we've been approaching that in a couple of different ways. So certainly we're using direct sales to customers through Steelcase Store as one opportunity to help support people working at home. And we've seen nice growth in that business. At the same time, we've also been working with our major customers, some of whom choose to implement programs. to either provide their employees with a stipend or with different types of catalogs that those employees can essentially shop from to support themselves at home. So we've really been fortunate to have a number of customers in different arrangements to support people working from home in that way, and we, of course, continue to pursue those opportunities. And then, as I mentioned in my comments, we're also continuing to work with partners like West Elm, on different retail-oriented ways to promote our products and to make our products available for people who are looking to outfit their homes. And we're really excited about those opportunities and some of the things that we believe will continue to allow us to drive growth through the retail channel. So we've been taking a pretty comprehensive approach to work from home, and we intend to continue to pursue that.

Do you have a view on the size, like how big a home office or work-from-home could be in terms of the overall market? Does it detract or add? What is your view on kind of how the market evolves from here, given your view on hybrid work?

I think it can be beneficial for the overall industry demand because I think you could imagine that people in a hybrid world could potentially work from home some days and the office on other days. And the more that they do that, the more they may want to have a similar setup at home, you know, with an ergonomic chair, height adjustable desk, and appropriate work tools. And frankly, that's what we're seeing through some of the order patterns in the work-from-home business. Some of the order growth in the quarter was driven by this B2B2C that Sarah just referenced, where companies are putting programs together to better support their employees at home. and some of it was also driven by the other channels that she pointed out. You know, it's not the biggest part of our business right now, but it has been growing nicely. We're investing in it, and we think it's a positive story for us in the end, so we're going to continue to funnel some of our strategic investment dollars in that direction.

Okay, great. And then lastly, in terms of closing the price-cost gap next year, what is the timing? When do you expect to get neutral, and what would be maybe the main drivers that might make it happen sooner rather than maybe more towards the middle, beginning of the year versus the end? What would drive the timing of hitting that target?

Well, a crystal ball would help. I said last quarter that we expected it to get to a push by the second quarter. And what's happened since is non-steel commodity costs continue to go up. There's increasing pressure on labor rates and the like. So that may put pressure on it moving out, let's say, a quarter. But what could be beneficial is if we finally saw steel pricing turn. If finally we saw in November steel pricing be less than October pricing, So if we see that again in December and again in January, maybe that pulls it back into Q2. But I think it's somewhere in that realm of possibilities that we're imagining. And if inflation continues to push on our overall cost structure, then we have a pattern of taking pricing to offset that. So I wouldn't want you to think that we or are limited in what kind of pricing we can take. If we have inflation, we have a history of putting in additional pricing to offset it.

Okay, great. Thank you.

We have a question from Rudy Yang from Barenburg. Your line is open.

Hey, guys. Thanks for taking my question. So obviously order growth in the APAC region was strong this quarter. But I guess any more color you can provide on the trends you've been seeing there? I mean, have order sizes been similar to those you've seen in America? Have you seen meaningful sales systems develop there? And I guess do you think there are still many more offices in India and China that have yet to kind of commit to reopening?

That's a good question, Rudy. I mean, when I looked at the order patterns, in Asia across the quarter, there were a few, I would say, sizable orders, not sizable relative to the Americas. I mean, the Americas still leads the way when we have a large order there. It's quite large. And there was nothing in Asia that was, I would say, highly unusual, like what we had last year in the second quarter in EMEA when we had picked up a $19 million project in the educational sector. There was nothing significant like that. There were a few, I would say, good projects, but there were a lot of just kind of normal recurring mid-sized projects that were spread across the entire region. I mean, I think every single market that we summarize, the way we look at the business in Asia across like five or six different markets, every single one of them, the order levels were ahead of FY20. So it wasn't one particular area. India and China were the notable ones. They're the largest ones, and they grew more than 100%, which was quite remarkable. It was soft in India last year because of COVID, but still to grow over 100% was pretty remarkable. What our sales leadership tells us is that it is getting back to normal. um in much of the region not everywhere i mean they have the the increased threat of the variant and they have countries that have locked down uh international travel in and out of the country uh and the like but uh as far as business activity and people getting back to the office it feels as though it's ahead of much of the rest of the world emia doesn't feel that far behind though um it's the americas frankly where return to office While it's continuing to get better week after week, you know, we look at the CASEL index like you do and look at office occupancy in major city. And it does continue to get better week after week, but not quite at the pace that we're seeing in other parts of the world.

Awesome. That's really helpful. I appreciate that. And then you mentioned that your new products have been resonating pretty well with customers recently. I guess, can you just comment to what main type of products have been generally received well, and maybe talk a little bit about your timeline heading into 2022 for just your focus on developing and releasing new products, just catering to the hybrid space?

Sure. So I think a number of things. that we have launched and are talking to customers about are really resonating. And this is all, you know, innovation that's based on the insights that we've developed from the research that we've been conducting throughout COVID. And so just to give you a flavor of the kinds of things that we're working on that customers are quite engaged in are really any kind of solution that relates to privacy. There are lots of reasons that customers are reassessing privacy in their offices, whether it's for safety reasons and keeping people maybe more separated from others at times than they would have been previously, but also to support things like video conferencing and hybrid work where we know there are different needs for acoustical privacy and other types of privacy. So that really spans everything from rethinking what an individual workstation looks like and needs to do to perform to lightweight space division to things like pods and some of the great solutions we've launched out of the orange box business, even things like private office solutions. So we're really seeing interest across that whole range and have been working on a variety of different product solutions that support privacy in some ways. Maybe one other I'll touch on is social spaces. One of the biggest reasons I believe many customers as well as employees are interested in being in the office is because of the ability to interact and reconnect with colleagues. So there are tremendous benefits in many cases that customers articulate to us about bringing people together to reconnect, to sort of re-energize their people, to rebuild those social connections and trust and all the things that many people value about their work experience. So things like ancillary spaces, different kinds of social settings that are still high performance, but allow people to come together and work in that way are important. And certainly that's one of the reasons that we are quite excited about the opportunity to acquire Vicarvey and add their solutions to our portfolio. So, you know, those are two examples of things that definitely resonate with customers as we talk to them along with work-from-home solutions and distributed collaboration. As far as our timeline, we continue to have a healthy product development pipeline. Certainly, as we see strong order growth and we have these conversations with customers and we observe that there is so much change in this industry, we think it's quite important to stay invested in new ideas to help our customers solve for hybrids. So we're continuing to invest. We're continuing to focus our innovation efforts on these areas that we think will be particularly important as customers navigate hybrid work. And we expect to continue to be bringing new innovation to the market, you know, on a pretty continual basis over time.

Great. And then just last one from me. You know, we've talked a lot about offices already, but can you tell us how some of the order trends have evolved for Smith System and the education market? and maybe provide an updated view on how your opportunity in the education vertical has evolved?

Sure. I mean, Smith's system, as we said, is already tracking at order levels back above FY20 levels. I think a few quarters ago we commented about the number, the amount of customer visit traffic, both virtual and in-person, being significantly higher. They're having a terrific year. Of course, they're impacted by inflation and supply chain disruption, so it would be even better on a bottom-line perspective and probably on a top-line perspective if they didn't have those challenges. But we're excited about where they're finishing this year, and they're talking about targeting for next year. It's turning out to be a terrific acquisition for Steelcase.

Great. Thanks, Gus.

Next question is from Steven Ramsey at Thompson Research Group. Your line is open.

Hi, good morning. Maybe to start with EMEA profitability, discussed that a minute ago, but maybe to add on, do you expect orders and delays of orders that you're seeing broadly to affect EMEA in the next couple of quarters? And to remind us, are operating expenses

in that segment still reduced uh for covid or are they already at normalized levels and will kind of remain at those normalized levels going forward well i mean they're they're certainly still reduced to some extent uh from uh covid you know our discretionary spending is still quite low we are traveling again in in and around the mia but not at the level that we were um so i think some level of discretionary spending will likely come back in the coming quarters. And I would also say our product development costs have not been pulled back to pre-pandemic levels, or they've not come back entirely to pre-pandemic levels. So they are somewhat low, but they're intentionally low because we're coming out of this situation. On the order patterns, your question, can you restate your question at the beginning around order patterns? Sure.

Sure. Are the delays of shipments that seem to be more pronounced in America, is that happening in the Bay?

They're happening, but to a much smaller extent and not really even worth calling out, which is why we didn't talk about it in the press release or in our remarks earlier. They have a challenged environment. They're experiencing inflation. They have supply chain challenges, but they are, so far, they have been more manageable than and or contained inside the quarters.

Okay, helpful. And then in the third quarter, operating expenses lower than the guidance. Did any of that have to do with the delayed shipments that you talked about? Or was that just broad discipline?

Yeah, no, a little bit, of course, you know, there are some variable items in overall operating expenses. And so part of it was that. But we continue to be, I would say, controlling incremental spending. We have lots of ideas and lots of investments that we want to make in our strategy, but we're timing them, or at least trying to time them, with improvement in the top line and bottom line. So when we saw the shipment delays and the increasing disruptions, the growing non-steel commodity demand, inflationary pressures, we were pulling back to the extent possible on some of the discretionary spending.

Okay, helpful. And then last one from me, wanted to look at cash and cash usage, networking capital. It appears inventories taking up more cash year to date. Is that inflation for purchasing? Does that reflect unfinished or unshipped products and maybe how does this naturally unwind, or how do you see this evolving in the coming quarters?

Yeah, it's a good question. You'll see in the queue when we file it on Monday that our finished goods inventories are at $150 million right now. And you know we're largely made to order. We do have some made-to-stock businesses with Smith System, AMQ, and others, but And we always have some level of finished goods that's waiting to be delivered to our customers, but $150 million is a lot. And that has to do with the supply chain disruptions. Some of our orders, you know, are not complete, so our dealers and customers don't want them until they're complete. Some of the sites aren't entirely ready, so we're sitting on some of those inventories and waiting – for them to be delivered. You'll also see in the queue that our raw materials are also higher, and that's quite intentional. Where we can, we're trying to get as much component inventory in our factories from our supply base to try to build some increased buffer for the supply chain disruptions that we've been experiencing and expect will persist into the coming quarters. Receivables are also higher. Stephen, but there's nothing of concern in there. I mean, I look at that with our credit people and our controller every month, and while receivables are higher, it's really more linked to the growth in our business than anything else.

Makes sense. That does it for me. Thank you. Okay.

Again, if you'd like to ask a question, press star, then the number one on your telephone keypad. Next question is from . We have a question from from Water Tower Research. Your line is open.

Hi, good morning. I'm calling in from , Water Tower. Thank you very much. Thanks for taking our questions, and I want to wish everyone a happy holidays. First, we'd like to congratulate Sarah for taking over as CEO. Congratulations to you.

Thank you.

Secondly, we have two questions on behalf of Bud. Sarah, thank you for the detailed comments about return to office. And I know there's been a lot of comments on the call. We were wondering if there was any product or business that you felt would benefit the most, where you are most excited given what you're hearing from businesses about 2022 and beyond. And then the second question, which is a quick one, is given the Omicron variant, has Steelcase mandated vaccinations for its associates? Thank you.

Sure. So let me start with the second question. We are a federal contractor. We enjoy a number of contracts and supports. the US government. So we have been following the various guidelines that were introduced a few several weeks ago relating to federal contractors and vaccines. And those guidelines have been paused temporarily in the federal courts. But we were well on our way to working toward compliance. And I would say that I'm very pleased with where we are right now as far as you know, vaccination and compliance. And at this point, We don't expect any significant disruption to our workforce, whether or not those guidelines are allowed to go forward by the courts or not. As far as your first question in terms of where I'm most excited about the future, I really do think I'm going to give you maybe a broader answer than you're looking for, but I really do believe that we are well positioned to support hybrid work and to be partnered with our customers as they navigate this tremendous change in how their organizations work from a traditional five-day-a-week-in-the-office model to something that's different. And as I talked about earlier, I think whether it's privacy, social spaces, distributed collaboration and the integration of technology into physical space to support that, whether it's work from home solutions and programs. You know, I believe that we currently have and will continue to invest in a very comprehensive portfolio of offerings to support our customers, no matter which direction they move their workforce and their workforce strategy going forward. And I also know that we have invested heavily over the past few years and will continue to focus on the research and the insights globally to help keep us really on the leading edge of those changes and those organizations' needs to help fuel our innovation going forward. So for me, I'm excited about the opportunities we see there and the things that I think we can do to support our customers.

You know, it's interesting your comment about social interaction because I unequivocally agree with that. But I wonder from your conversations and, you know, your – knowledge of the business and where you see it headed, if people will have short memories when they get out to 23, 24, or is this hybrid model is really going to be something for the long term and secular for the industry?

It's a great question, and it's one that we discuss all the time here at Steelcase. And I would say, you know, anecdotally, what I'm hearing anyway is you know, it's a mix of things. Certainly there are some people who believe that, you know, all of us collectively will settle into some new hybrid norm that will be a combination of time in the office as well as time at home or in a third place, like a co-working site. But it's interesting that I'm already hearing from some customers and even some of our own research suggests that there is, for some people, a work-from-home fatigue. And what's may have seemed um you know great in terms of flexibility and and being able to uh you know do your email with your dog sleeping on your feet um you know after two years maybe after three years uh it starts to feel like it's maybe too much of a good thing so you know again this is anecdotal um but i would i guess the broader point is that i think what we're hearing continues to be to be mixed, and I think we certainly believe that that work is where our strategy needs to center, and so we're going to continue to focus on supporting people at work, whether that work ends up being in the office, at home, or some combination.

Great. Well, thank you very much, and again, thanks for taking our questions, and happy holidays.

Thank you. Thank you.

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

Well, thank you. I'd just like to wrap up by wishing everyone a safe and happy holiday season, and thank you for your interest in COK.

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