Steelcase Inc.

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'd 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, simply press star one again. Thank you. Mr. O'Meara, you may begin your conference.

Thank you, Rob. Good morning, everyone. Thank you for joining us for the recap of our second quarter fiscal 2026 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 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. 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 gap 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. As related to the pending merger approval with H&I, we will not be taking questions today, and we refer you to the publicly available filings. I will now turn the call over to our President and Chief Executive Officer, Sarah Onbruster.

Thanks, Mike, and hi, everyone, and thanks for joining today's call. I'll begin with an overview of our performance in the quarter. In the second quarter, we delivered strong financial results that built on our recent momentum. Our revenue and adjusted earnings grew over the prior year and exceeded our expectations, and they marked our highest quarterly results over the past five years. Overall, we increased revenue by 5%, led by strong growth from our large corporate customers in the Americas. Our international segment posted 13% revenue growth, including 8% on an organic basis, with especially strong results from India. Our adjusted earnings improvement was supported by the revenue growth in addition to strong cost controls. Turning to profitability, our America segment delivered an adjusted operating margin of 11%, and in our international segment, our adjusted operating results improved by $5 million compared to the prior year. The improvement in the international segment was driven in part by the cost reduction actions we've been implementing over the past couple of years. Our revenue growth was supported by strong orders, which grew by 6% in the second quarter, including 8% growth in the Americas. which was driven by continued growth from our large corporate customers. Orders from our global client collaboration customers posted year-over-year growth for the third consecutive quarter. As we've mentioned before, our customers are recognizing the need to transform their spaces to support new ways of working as their employees more fully return to the office. In our international segment, strong order growth in India and some of our other markets was offset by declines in Germany and France, which continued to be impacted by macroeconomic challenges. In those markets, we're focusing on winning as much available business as possible, and at the same time, we're aligning resources to focus on the best opportunities. In the Americas, our win rates continue to remain strong, which we believe is evidence that we continue to lead the transformation of the workplace. We saw strong growth this quarter from both the financial services sector and from large technology customers. Companies across these leading industries are investing in their offices as they seek to bring their teams together in new spaces that support higher levels of connection, creativity, and performance. and Steelcase is well positioned to capitalize on this ongoing trend. Our proposed transaction with H&I is expected to further our strategy of expanding our reach within markets. We believe that combining with H&I brings together the industry's best brands to more customers, and that's one of the many reasons we're excited to pursue the transaction. We are confident that the combination will be a win for all of our stakeholders. We're working with H&I to complete this transaction, which is expected to occur by the end of calendar year 2025. I want to thank our Steelcase team for their incredible hard work and commitment as we continue to execute during this transition period. It is because of the team's talent, their dedication, and passion that makes Steelcase the industry leader that we are today and why we were an attractive choice for H&I. We look forward to the closing with H&I and to realizing the significant benefits that our combined company is expected to bring to our shareholders, customers, dealers, and employees. And now I'll turn it over to Dave.

Thank you, Sarah, and good morning, everyone. My comments today will cover the highlights related to our second quarter results, balance sheet, and cash flow. In light of our pending combination with H&I, we will not be providing forward-looking guidance at this time. Our second quarter revenue of $897 million was above the estimated range we provided in June due to stronger than expected orders from our large corporate customers and favorable shipment timing in our Americas segment. Our adjusted earnings of 45 cents per share also finished above our estimated range, driven by the higher revenue and favorable gross margins, which benefited from favorable shifts in business mix. Our international segment also finished better than our expectations, as Asia Pacific performed better than expected, while EMEA's results were somewhat below our expectations. Compared to the prior year, we posted organic revenue growth of 4%, including 3% growth in the Americas and 8% growth in international. The Americas' growth was driven by our large corporate customers, partially offset by a decline from our education customers. The international organic revenue growth was primarily driven by India, China, and the UK, partially offset by continued weakness in Germany and France. Our adjusted operating margin of 8.4% in the second quarter represented a 40 basis point improvement compared to the prior year. The improvement was driven by revenue growth and cost reduction efforts across the international segment. The Americas posted an adjusted operating margin of 11.0% in Q2, which was approximately flat with the prior year. We incurred $10 million of restructuring costs in our international segment in the second quarter, primarily related to the exit of salaried employees in EMEA. These exits were part of a series of restructuring activities which are expected to be completed in fiscal year 2027. Shifting to orders, Q2 grew 6% compared to the prior year, driven by 8% growth in the Americas, net of a 1% decline in international. In the Americas, continued order growth from large corporate customers was partially offset by declines from education customers who had grown strongly in the prior year and are now being impacted by changes in federal funding policies. The growth in large corporate customers was driven by the financial services and technology sectors, as well as our Halcon brand. For international, the 1% decline in orders was driven by continued weakness in Germany and France, largely offset by strong growth in India and Japan. As it relates to cash flow in the balance sheet, cash and short-term investments increased $32 million from Q1, driven primarily by $100 million of adjusted EBITDA, partially offset by a $28 million seasonal increase in accounts receivable, $18 million of capital expenditures, and our $12 million quarterly dividend payment. Our trailing four quarter adjusted EBITDA of $278 million was 8.5% of revenue. Our total liquidity, which includes the cash surrender value of Coley, excuse me, aggregated to $427 million at the end of the quarter, and our total debt was $447 million. In closing, and as Sarah mentioned, we're encouraged by the momentum we sustained into our second quarter. especially with the continued growth from our large corporate customers. From there, we'll turn it back to the operator for questions.

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question today comes from the line of Joe Gomes from Noble Capital. Your line is open.

Good morning. Congrats on the quarter. Thanks, Joe. So just a question, Dave, I don't know if you could kind of break out, you know, in the outperformance, you know, what was volume versus the price increases that you guys are pushing through?

I think if we talk about the order growth in the Americas, as an example, let's start there, the 8% order growth, I would say more of it was driven by volume than price. I don't think the price benefits were more than a couple of percent.

Okay. And do you have any more plans for additional price increases coming, or do you think you've got most of the tariff stuff offset?

Well, I will comment on pricing actions planned or contemplated, but I will share that we were able to offset the year-over-year inflation and tariff costs with incremental pricing benefits that were related to the actions we took earlier in the year.

Okay. And then one more for me, if I may. If you stand here today and you're kind of looking at the end markets, you know, they more or less favorable than what you were anticipating earlier in the year.

That's a good question. I would say they are more favorable. We anticipated a recovery in large corporate demand, and it's playing out, but it's playing out at a higher level. If we didn't have the declines that we're experiencing in the education business, you know, due to the federal funding policy, I think you'd really be impressed with the growth rate. But to net 8%, suggest that the large corporate demand was very strong in the quarter.

Great. Thanks. Appreciate it. Again, congrats on the quarter. Thank you.

Thanks. Our next question comes from a line of Stephen Ramsey from TRG. Your line is open.

Hi. Good morning. Maybe to stick with the demand patterns that you're seeing in the Americas, you've seen strong order growth now for the last six quarters. Maybe you can give a flavor of the demand profile if it's more return to office driven or if it's companies that were already in the office but may be moving locations to better spaces or doing major updates to existing spaces, just anything. flavor of the good order growth now versus order growth maybe in the last few quarters?

Yes, Steven, I think it's all of the above. And I would think what we definitely see is that many of these clients are rethinking their office space, whether it's rethinking existing space or moving to new space, and really focus on outcomes, you know, really asking questions about kind of what is the space designed to, you know, designed to support, whether that's creativity or collaboration or connection. I think our win rates with our largest customers remain strong and consistent, and we continue to see employers realize that they need to redesign their spaces as they return to office and provide better solutions, whether it's privacy, collaboration, et cetera. So I think that's a pretty consistent theme kind of across segments. And again, it's a mix of both companies taking a new space and moving and renovating spaces that they're already occupying.

Even maybe just to add some color to that would be that our project orders grew at a faster rate than our continuing business, supporting, you know, Sarah's remarks that a lot of this is about changing and transforming the office, whether in new space or their current space.

Okay. That's helpful for both of you. And maybe to clarify, was continuing business positive, but project was more positive?

Yeah. Yeah.

Okay, great. And then second one for me, wanted to dig into the profitability improvement and international. Maybe if you could parse it out, Asia Pacific profitability, the trend there, and how much of the better profitability was APAC versus Europe?

I don't remember the specifics, but both, I believe, improved versus prior year. We feel pretty good about where the Asia-Pacific business is at the moment. They still have additional work to do. They're in the process of continuing to drive some cost reductions that are in various stages of implementation, but they were profitable in the quarter, and we feel pretty good about where they are from a demand perspective, especially with China starting to show some demand improvement for the last couple of quarters. And in EMEA, we had improvements largely because of the, certainly the revenue growth, but because of some of the cost reductions that they've been driving over the last couple of years. And what's interesting about EMEA is when you break it down, and look at the drivers of demand, France and Germany are down and really the rest of the markets in aggregate are up. And they're up nicely. And out there I'm speaking to UK, Spain, Middle East and Africa, the export markets of Eastern, Central, Southern parts of Europe. It's really about a French and German macro situation that we're facing.

Great, that's all helpful, Claire. Thank you.

Yep.

Thanks. Okay, our next question comes from a line of Ruben Gardner from Benchmark. Your line is open.

Thank you. Good morning, everybody. Good morning. First, a clarification, Dave. Your comments on your pricing actions, did you say that you had already fully offset any inflation and tariff costs on a dollar perspective with the pricing out there? Or are you kind of, were you able to recover your margin with the action so far? And I guess, you know, historically these take time to flow through. How much of the earlier pricing actions I guess are going to continue to flow through into your numbers over the coming quarters?

Yeah, so what I was referring to was the second quarter. And on a year-over-year basis, the benefits from our pricing actions offset the tariffs and incremental inflation, again, year-over-year. And I think we actually started to get a little margin from those actions. On a cumulative basis, though, we are still trying to catch up because tariffs hit us right away and pricing lagged given the amount of backlog that we had in place that we did not apply the tariff surcharge to. So it's going to probably take another couple of quarters before we fully catch up on a cumulative basis and begin to get margin on all of that inflation and tariff costs. But it remains quite volatile week to week. We seem to get new information that we have to run through our modeling and see how it affects us. And so I will stop short of predicting when we will be out of the woods on tariffs and the related inflation.

Got it. And then can you talk about the cadence of ordered patterns, specifically in the Americas over the course of the quarter? And I guess what you've seen, I don't think I heard you say what you saw quarter to date, but sometimes you guys give the order pattern for the start of the following quarter. What are you guys seeing here lately?

Nothing unusual. It wasn't like all back-end weighted or front-end weighted. I think it was spread evenly across the quarter. In fact, when you look at the overall level of kind of average weekly demand coming in, it was fairly steady. So the plus or minus versus prior year might have been bigger or smaller in one month or the other, but it would have been because of prior year patterns.

Got it. Last one. Oh, yeah, and then the first one.

So, and Ruben, the first three weeks are roughly flat compared to the prior year.

Okay. Last one for me, given some of these are, some of the strengths here lately are more project oriented, larger customers, return to office focus. What are you seeing from a mixed perspective, if anything, on how these offices are being put together as kind of changes are made? Anything notable from maybe how it was last year or even maybe prior to 2020?

Well, I guess I would say that we, I would see, I would say we see more and more customers really rethinking like how the space is going to support their strategic goals. I think there was still, you know, in the early days after COVID a couple of years back, there was still a backlog of people who I would say were making changes and investing in their offices in ways that were maybe a continuation of the norm prior to COVID. But what we're definitely seeing now is customers who are realizing that they need to redesign their space. They're returning to office. They see that they've got to attract people, that people are working differently. and that they need privacy, they need collaboration solutions, they need technology implemented in different ways. So we're definitely seeing more and more customers incorporating those new concepts or those newer concepts into their planning.

Great. Thanks for the feedback, guys, and good luck going forward.

Thank you.

Thanks.

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

Great, thanks. Well, just to recap, our second quarter results were strong, and they continued the momentum we've been seeing in the business, supported by the ongoing strengthening from our largest customers. Our customers are recognizing the need to redefine their spaces to support new ways of working as employees more fully return to the office. So we remain focused on our strategy with anticipation of an even stronger future with H&I. So thank you all for joining, and we appreciate your interest in Steelcase.

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