Steelcase Inc.

2025 financial results. Here with me today are Sarah Armbruster, our President and Chief Executive Officer, and Dave Sylvester, our Senior Vice President and Chief Financial Officer. Our fourth 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. Hi everyone and thanks for joining the call. So today I'll cover highlights of our financial results and offer a few remarks explaining how we continue to make progress against our strategy. And I'll start with our results. We're proud of our fiscal 2025 performance and the momentum we've been able to build. Despite our industry not growing as expected, our full year adjusted earnings per share finished at $1.12, above the top end of the targets we communicated at the beginning of the fiscal year. We delivered an adjusted operating margin of 5%, including 7% in the Americas. In Q4, we delivered our 11th consecutive quarter of year-over-year gross margin expansion, improving over 500 basis points since fiscal 2022. Our fourth quarter order growth of 9% was led by 12% growth in our America segment, which we believe once again outpaced our industry with 6% order growth in the Americas for the full fiscal year. This is the sixth consecutive quarter of year over year order growth in the Americas. That order growth was led by especially strong demand from our large corporate and government customers. And we continue to hear leaders across multiple industries requiring a higher level of in-office presence, and we see some positive signals in corporate real estate. According to CBRE data, US office leasing activity in Q4 increased 24% versus Q3, and 23% year over year, making it the highest quarter of leasing activity in three years. So turning now to our strategy, we continue to lead the transformation of the workplace. The demand in the Americas coming from our large corporate customers demonstrates that leaders are looking for workspaces that can achieve better outcomes and adapt to the changing needs of their employees. As we've said throughout the year, many of our large global customers were planning key projects in fiscal 25, and those decisions really came to fruition in Q4. We saw customer activity levels pick up, first in financial services and now across multiple industries, including technology, manufacturing, and professional services. And we're winning. Our win rates remained strong during fiscal 25, which led to market share gains in the Americas, and we've seen strengthening from our global client collaboration, or GCC, customers. with strong global order growth from those customers in three of the last four months of fiscal 2025. And we see opportunities to capture more demand. As one example, we're adopting technology in new ways to benefit our dealers and customers with better experiences that lead to stronger loyalty. For example, over the past three years, we have worked actively with our dealer community to gather and analyze more than 5 million workplace applications using AI-driven analytics. Our data set is growing every week, and we continuously are uncovering emerging trends, giving us insights that help us remain relevant and responsive to evolving workplace needs. Our second strategic pillar is to expand our reach within markets. On a year-to-date basis, all our customer segments in the Americas have posted year-over-year order growth, with the exception of our consumer business. In education, we saw solid growth in fiscal 25, partially driven from school districts issuing bonds for new construction or modernization efforts. Our value proposition is resonating with those customers, and we believe our growth outpaced the education furniture market this year. In healthcare, we supported several healthcare systems who modernized facilities or consolidated organizations following the pandemic. And we were able to leverage our operational scale to execute some large projects on short lead times. And we believe the healthcare industry is poised for continued growth, largely driven by an aging U.S. demographic that is requiring more healthcare services. In the small and mid-sized business segment, our AMQ brand grew at a strong double-digit percentage in fiscal 25. Small business growth has been a significant driver of economic activity in the United States and is a strong focus for our future growth and investment. Finally, turning to the profitability pillar of our strategy, I want to build on my opening remarks. In fiscal 25, we delivered 100 basis points of gross margin improvement over the prior year, which included benefits from operational cost reductions. These operations initiatives included installing new technologies and moving production lines to increase efficiencies, insourcing select product lines, and closing select distribution centers to optimize our network. In our international segment, our results improved through the first half of the year, in part driven by the cost reductions we'd implemented. Midway through the year, we were anticipating an improving demand environment that would deliver profitability in the second half. Although we still see positive demand signals from some of our large and national accounts and international, our small to mid-sized business declined, and so we're considering additional actions to further lower our cost structure. Our balance sheet continued to strengthen as we drove $100 million of free cash flow and we returned $84 million to shareholders. I'm proud of the work of our teams to deliver these results. As you know, we're in the midst of developing and implementing a new ERP system in the Americas with the goal of simplifying our processes and enhancing our capabilities to strengthen our competitive advantage. We're now also facing new tariffs and global trade uncertainty, which requires us to respond with pricing actions, inventory purchases, and supply chain shifts. Given the dynamic nature of the environment we're in and to ensure our ERP system is fully ready, we have chosen to be agile and target the go-live for our ERP system in calendar year 2026. In closing, we're proud of our fiscal 25 results. in which our adjusted earnings per share finished above our targeted range, and we remain positive about the progress we continue to make against our strategy. We are navigating a dynamic environment of evolving tariff and trade policies, and I'll now turn it over to Dave, who also is leading our tariff response efforts, 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 fourth quarter results, balance sheet, and cash flow, and then I'll cover the outlook for the first quarter and our targets for fiscal 2026. Our fourth quarter revenue of $788 million was in the upper end of the estimated range we provided in December, benefiting from stronger than expected order growth in the Americas. Our adjusted earnings of 26 cents per share finished above our range and included 11 cents related to favorable tax items, net of related variable compensation expense. Setting these items aside, adjusted earnings fell below our estimated range, driven by shortfalls in both the Americas and international segments. For the Americas, we had a higher mix of business from large corporate and government customers, which tend to have lower gross margins, Our project spending at the end of the year was higher than anticipated, and we recorded some year-end inventory related adjustments. For international, we also experienced some unfavorable business mix, and we had higher manufacturing costs and higher operating expenses, including a bad debt provision and some severance costs. Compared to the prior year, we posted an organic revenue decline of 5%, including a 3% decline in the Americas and a 10% decline in international. The organic decline adjusts for the additional week in the fourth quarter of this year, which provided marginal earnings benefit. The America's fourth quarter revenue decline was impacted by a lower beginning backlog of orders scheduled to ship in the quarter. The international decline was driven by Germany, France, and India, which posted a current quarter decline compared to 40% growth in the prior year. Our adjusted EPS increased 3 cents, and our adjusted operating income declined $20 million. Our prior year adjusted EPS benefited by approximately 2 cents from net favorable adjustments, which were related to our unconsolidated affiliates, and were reflected in other income. Our adjusted operating income in the current year was impacted by $11 million of variable compensation expense related to the tax benefits. The remainder of the year-over-year decrease was primarily driven by lower revenue in the international segment and higher operating expenses adjusted for the additional week. As it relates to cash flow in the balance sheet, Cash and short-term investments decreased $18 million from Q3 as Q4 adjusted EBITDA of $40 million was largely consumed by capital expenditures and capitalization of cloud computing costs related to our new ERP, our semi-annual interest payment, and dividends. Our trailing four-quarter adjusted EBITDA of $262 million was 8.3% of revenue. Our total liquidity, which includes the cash surrender value of Coley, aggregated to $558 million at the end of the quarter, which exceeded our total debt of $447 million. Shifting to orders, our Q4 orders grew 9% compared to the prior year, driven by 12% growth in the Americas and 1% growth in international. In the Americas, Q4 marks the sixth consecutive quarter of year-over-year order growth, and the 12% growth rate in the current quarter was on top of 8% growth in Q4 of the prior year. The order growth was driven by large corporate, government, small and mid-sized business, and healthcare customers. We drove strong growth in both our project and continuing business, and 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 1% growth in orders was driven by continued strong growth in India and Spain, and was largely offset by weakness in Germany and the UK. Turning to our outlook for the first quarter, our overall backlog at the end of the fourth quarter was up 11% compared to the prior year. Average weekly order levels through the first three weeks in March are 7% higher than the Q4 weekly average and seem to be following typical seasonal patterns of order levels building from January through March. On a year-over-year basis, they declined 1% compared to the same period in fiscal 2025, which reflected 10% growth compared to the same three-week period in fiscal 2024. Accordingly, we expect to report revenue within a range of $760 to $785 million. which represents organic growth of between 5 to 9% compared to the prior year. As it relates to earnings, we expect to report adjusted earnings of between 13 and 17 cents per share, which compares to 16 cents in the prior year. In addition to the projected range of revenue, the adjusted earnings estimate includes gross margin of approximately 33%, which includes an assumption of $9 million of higher tariff costs as compared to the prior year and operating expenses of between 230 to $235 million, which includes $4.3 million of amortization related to purchase intangible assets. Lastly, we expect interest expense and other non-operating items to net to approximately $2 million of expense and we're projecting an effective tax rate of approximately 27%. For fiscal 2026, we are targeting additional progress toward our midterm financial targets, including mid single digit organic revenue growth and a modest improvement in our adjusted operating margin. Our revenue target reflects our strong beginning backlog and assumes the macro environment remains stable Return to office sentiment continues to strengthen and the overall positive sentiment we're hearing from our large corporate customers, dealers and sales organization in the Americas is not significantly disrupted by the shifts in U.S. trade policy and related uncertainty about tariffs. Regarding adjusted operating income in fiscal 2026, We are targeting to offset higher tariff and related inflationary costs with appropriate pricing actions. And we expect additional benefits from our gross margin improvement initiatives. In March, we announced the June list price increase in the Americas for the first time in three years in response to inflationary costs over that horizon. And we also announced the tariff recovery charge in the Americas that takes effect on orders received after today. Our ability to offset tariff costs with pricing actions could be impacted by a number of factors, such as the speed and pace of changes in the tariffs and available exemptions, such as USMCA, as well as the macroeconomic environment and competitive factors. Additionally, for your fiscal 2026 modeling, in our international segment, we're targeting break-even adjusted operating income for the full fiscal year with losses likely in the first half of the year offset by profitability in the second half. We expect gross margin expansion in fiscal 2026 to be mostly driven by the benefits of projected volume growth. And our operating expense leverage, adjusting for the impacts of the land sale in fiscal 2025, is expected to be relatively flat year over year, in part due to approximately $10 million of higher expense associated with our new ERP. Lastly, we are targeting capital expenditures and capitalized cloud computing costs of between $70 to $80 million for fiscal 2026. In closing, we're encouraged by the order growth and earnings momentum we achieved in fiscal 2025. Our beginning backlog is up 11% heading into fiscal 2026. Our large corporate customers are beginning to invest more significantly in their workplaces, and we're gaining market share in the Americas. And we have a strong balance sheet, and we're implementing necessary actions to address the tariff and inflationary environment. And we're targeting additional progress toward our midterm financial targets in fiscal 2026. From there, we'll turn it back to the operator for questions.