Steelcase Inc.

Thank you, Rob. Good morning, everyone. Thank you for joining us for the recap of our third quarter fiscal 2025 financial results. Here with me today are Sarah Umbrister, 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'll now turn the call over to our President and Chief Executive Officer, Sarah Armbruster.

Thanks, Mike. Hi, everyone, and thanks for joining today's call. So today I'll cover the highlights of our third quarter financial results and offer a few remarks explaining how we continue to make progress against our strategy. So to start, we're proud of our third quarter results and where we expect to finish the fiscal year. Despite our industry not growing as expected, our full year adjusted earnings per share are projected to finish above the top end of the targets we communicated at the beginning of the year. In Q3, we delivered 3% organic revenue growth and stronger than expected adjusted earnings of $0.30 per share. And for the 10th consecutive quarter, we drove year-over-year growth margin expansion as our teams delivered solid cost improvement results and we captured the benefit of higher revenue. The stronger results were driven by our America segment, which delivered 7% organic revenue growth and an adjusted operating margin of 8.1%. The Americas also drove our fifth consecutive quarter of year-over-year order growth, and based on the latest industry data, we've increased our market share again this year. Consistent with the expectations we outlined last quarter, we began to see improved order trends from our large corporate customers near the end of the third quarter, and we've continued to see a strong trend into early December. We're also beginning to identify increased activity from our largest technology customers who, like customers in many other industries, are increasingly expecting a higher level of in-office presence. And finally, it's notable that this month's Business Roundtable CEO Confidence Survey reached the highest level in over two years and indicates stronger investments in capital spending and hiring as we head into 2025. The strong quarter of growth and profitability in the Americas was partially offset by lower-than-expected results in our international segment. In the EMEA and APAC regions, we launched additional restructuring actions. I also want to note some of the positive signs from the quarter, such as year-over-year and sequential order growth in China, and higher activity levels and a few significant wins across some of our largest customers in EMEA. So turning to our strategy, let me start with transformation. Work has changed more dramatically in the past five years than it has in generations, and we see ongoing trends that'll continue to impact the workplace. So I'll briefly describe what we continue to observe. First, we anticipate continuing reliance on computer screens in the workplace. Screen-based interactions have overtaken in-person communications, even among people who are in the office together. People, you know, are more likely to join meetings on a screen at their desk than to walk to a meeting room. And this behavior significantly changes how we use our offices, and it highlights the opportunity to bring new collaborative and privacy solutions to our customers. Second, organizations and their employees are rapidly adopting artificial intelligence. We see a super cycle of economic growth coming from these new technologies, and that indicates it's time to design AI-ready workplaces. As more people adopt AI tools, the flow of work will change, and that will require a redesign of the space that supports those work processes. In addition to those two trends, we're also seeing workplaces evolve to support teams that are tackling really complex issues like sustainability, So this shift demands new kinds of collaboration spaces and support. And we also see organizations increasingly using their space to respond to employee well-being concerns by giving people things like more autonomy and privacy. So in response to these trends, we're introducing customers to a way of thinking about the office called community-based design. This design approach helps create dynamic and inspiring workplaces that respond to these diverse needs of employees. really by providing them with choice and control across multiple types of work. This inherent flexibility helps many companies prepare for the next generation of working. So let me move now to diversification. On a year-to-date basis, all of our customer segments in the Americas have posted year-over-year order growth, except our consumer business. One area of focus for our diversification efforts is healthcare, and I haven't talked about that in a few quarters, so I want to share today how we support health organizations with their unique needs. In the third quarter, our healthcare business delivered strong revenue growth compared to the prior year. We believe the healthcare industry is poised for continued growth, largely driven by an aging U.S. demographic that is requiring more healthcare services. And to serve these customers, we create evidence-based solutions that support better experiences of care for patients and families and clinicians and communities. We recently completed a project for a US healthcare system that had received funding to replace older furniture on a very tight deadline. In working with our local dealership, we leveraged our operational capabilities and scale to deliver more than 7,500 pieces of furniture in a very short period of time. within that customer's patient and clinical spaces. And we see many healthcare institutions with similar needs to modernize their infrastructure and reimagine the patient experience. And that's really where we best support our healthcare customers. So let me turn now to the profitability pillar of our strategy. And I want to build on my opening remarks. As we've discussed for the past year, we've been executing our business transformation initiative to simplify our processes and enhance our capabilities to strengthen our competitive advantage. We are in the midst of developing and implementing a new ERP system and processes in the Americas, and we are now targeting to go live in the second quarter of fiscal 2026, which allows us time for additional development and testing. Now, finally, as we think about our efforts to use our business as a force for good and design better futures for people and the planet, I'd like to update you on one area where we are making significant impact for our customers and the well-being of our planet, which is designing for circularity. The number of global companies who have set significant science-based carbon reduction targets has gone up more than 100% in the last year. And it's now at 40% of the global market cap. These customers, many of which are our largest global clients, are seeking solutions that help them meet their own carbon reduction goals. So having different options to reuse or repair or remake and recycle through circular by steel case allows us to grow and maintain those customer relationships. For example, one update in this space is our new circular by steel case remade services, which are launching in the US and expanding in Europe. These end of use services empower our customers to meet their sustainability goals, reduce our own carbon footprint, and keep furniture out of landfills. Our ability to evolve our business in this way is proof of our commitment to our customers and the planet. So congratulations to all of the employees who've helped Steelcase make meaningful progress toward our people and planet goals and more broadly across our entire strategy. So to close my remarks, I'd say that we're proud of our results this quarter and that we expect our fiscal 2025 adjusted earnings per share to finish above our targeted range. We remain positive about the progress we continue to make against our strategy, and I'll now turn it over to Dave to review the financial results and our outlook in more detail.

Thank you, Sarah, and good morning, everyone. My comments today will start with the highlights related to our third quarter results, balance sheet, and cash flow. I will then share a few remarks about our outlook for the fourth quarter and the full fiscal year, as well as some initial thoughts to support your modeling of fiscal 2026. Our third quarter adjusted earnings of 30 cents per share were above the top end of the estimated range we provided in September, and our revenue of $795 million was near the midpoint of our range. The Americas drove the earnings favorability on higher revenue, stronger gross margins, and lower operating expenses. Our international segment finished below our expectations, primarily due to lower revenue, as we had soft orders in some markets and some customer-driven project shipment delays. Compared to the prior year, we posted organic revenue growth of 3%, including 7% growth in the Americas, partially offset by an 8% decline in international. The Americas' third quarter revenue growth benefited from favorable shipment timing in our beginning backlog, which will have an impact on our fourth quarter comparisons. Our prior year adjusted operating income included benefits from a decrease in the valuation of an acquisition earn-out liability and gains from the sale of fixed assets. Setting those items aside, our improvement in the Americas was due to the strong volume growth, higher pricing benefits, and cost reduction initiatives. while the international decline was largely due to lower volume and higher competitive discounting. Due to the continued soft demand in our international segment, we implemented additional restructuring actions and other cost reduction measures during the quarter, which together are projected to drive approximately $5 million of annualized cost savings by early fiscal 2026. As it relates to cash flow in the balance sheet, Cash and short-term investments increased $70 million from Q2, driven primarily by $71 million of adjusted EBITDA. Our trailing four-quarter adjusted EBITDA of $284 million improved by 9% over the prior year, and as a percentage of revenue, our trailing four-quarter EBITDA margin improved to 9.0% compared to 8.1% in the prior year. Our total liquidity, which includes the cash surrender value of Coley, aggregated to $577 million at the end of the quarter, which exceeded our total debt of $447 million. We repurchased approximately 400,000 shares in the third quarter or approximately 2.1 million shares on a year-to-date basis. When aggregated with our quarterly dividend of 10 cents per share, we've returned over $60 million to shareholders in the first nine months of fiscal 2025. As Sarah mentioned, we are now targeting our ERP Go Live for the second quarter to provide more time for system development and testing. As a reminder, we were projecting $75 to $85 million in capital expenditures for fiscal 2025. which included approximately $35 million of investments related to the ERP implementation. With the additional development and related shift of our targeted go-live, we anticipate capitalizing additional expenses in the fourth quarter, increasing our total capital expenditures projection to approximately $100 million for fiscal 2025. This full year estimate includes approximately $15 million of capitalized internal labor costs. As we move into fiscal 2026 and finish the build and development phase, much of the expected project costs related to the testing, go live, and stabilization phases are expected to be expensed as incurred. As a result, the fiscal year-over-year annual impact to operating costs is expected to be more than $20 million, including the expected initial amortization of the capitalized development costs. We also expect to begin capturing some of the value of our streamlined business processes and enhanced capability of the new ERP system after we go live in fiscal 2026. Orders in the quarter were down modestly compared to the prior year and included 2% growth in the Americas and an 8% decline in international. In the Americas, Q3 marks the fifth consecutive quarter of year-over-year order growth, and the 2% growth rate in the current quarter compares to 16% growth in Q3 of the prior year. The order growth was driven by government customers, and as Sarah mentioned, our order trends from large corporate customers improved in November and have continued to be strong into December. Our project business grew in Q3, while our continuing business or day-to-day orders declined. We continue to believe the growth in our project business is reflective of how we are leading the transformation of the workplace, as evidenced by our strong win rates, and estimated market share gains over the last year in the Americas. For international, the 8% order decline was driven by declines in most of our major markets in Asia Pacific and France. However, we did see order growth in Germany and some smaller markets in EMEA, and we are encouraged by higher project activity levels from some of our global customers in our international markets, as well as Some recent wins related to large opportunities with national accounts in France, Germany, and the Middle East. And for the first time in many quarters, we posted year over year order growth in China and total Asia Pacific orders grew nearly 20% on a sequential basis as compared to the second quarter. Turning to our outlook for the fourth quarter, our overall backlog at the end of the third quarter was down 5% compared to the prior year. And while orders during the first three weeks of December were strong, growing 15% over the same period in the prior year, they included a number of large projects scheduled to ship beyond the end of the quarter. Accordingly, we expect to report revenue within a range of $770 to $795 million, which after taking into consideration an additional week of shipments in the current quarter, represents an organic decline of between 4% to 7%. Before moving to our earnings expectations, I want to share a few comments regarding an issue we're navigating in our supply chain. The issue is related to a laminate supplier that was significantly impacted by Hurricane Helene, and we believe the disruption is being felt across our industry. Efforts are being taken to mitigate the impacts to our customers. However, it could take several months before the disruption is fully resolved, and it's possible that the outcome of these efforts could be different than the assumptions we utilized in determining the range of revenue projected for the fourth quarter. As it relates to earnings, we expect to report adjusted earnings of between 20 to 24 cents per share, which compares to 23 cents in the prior year. In addition to the projected range of revenue, the adjusted earnings estimate includes gross margin of approximately 33.5% and operating expenses of between 230 to $235 million, which includes $4.3 million of amortization related to purchased intangible assets. Lastly, we expect interest expense and other non-operating items to net to approximately $1 million of expense, and we're projecting an effective tax rate of approximately 27%. Based on our year-to-date results and our fourth quarter projections, we believe our fiscal 2025 adjusted earnings per share will finish above our targeted range for the year. And as Sarah said, we're proud of the results our teams are driving and the progress we're making on our most important initiatives. As we begin to think about fiscal 2026, we believe the current macroeconomic environment and what we're hearing from our large customers in the Americas are supportive of us targeting organic revenue growth and improved adjusted earnings for next year. During the current year, demand from the financial services sector improved significantly, and we believe there was a correlation with the stance many of those companies took about increased employee presence in their offices. We are seeing a similar shift in expectations regarding the number of days in office across several large customers in the technology sector, where pre-sales activity and demand expectations are also beginning to improve. We also expect growth from small to mid-sized education and healthcare customers, and we are encouraged by the positive signs in our international markets that I mentioned earlier. The key to potentially driving meaningful organic revenue growth in fiscal 2026 is related to our large corporate customers. And it seems the level of demand from that customer segment may be at or near an inflection point. Regarding adjusted earnings in fiscal 2026, we are targeting additional benefits from our gross margin improvement initiatives, and we expect to begin capturing some value from our business transformation initiative and new ERP system. However, as I stated, we expect to capitalize less of the related implementation costs in fiscal 2026 compared to fiscal 2025, and it's prudent to imagine some level of inefficiency during the cutover to the new system. Plus, we intend to further invest in our revenue diversification strategies. Thus, we expect gross margin expansion in fiscal 2026 to be mostly driven by the benefits of projected volume growth, and our operating expense leverage could be relatively flat year over year. For purposes of updating your models now, We believe a low to mid-single-digit organic revenue growth rate for fiscal 2026 is a reasonable target at this point, but likely with a low contribution margin. After we complete our fiscal 2026 detailed planning process in Q4, we will provide a more detailed outlook in March. From there, we'll turn it back to the operator for questions.