Steelcase Inc. (SCS) Earnings Call Transcript

Good day, and welcome to Steelcase Inc. Annual Meeting of Shareholders. I'd now like to turn the conference over to Ms. Lisa Maloney. Please go ahead.

Thank you. Welcome to the Steelcase Inc. 2020 Annual Shareholders Meeting. We're glad you could join us today. My name is Lisa Maloney, and I am Assistant General Counsel and Assistant Secretary of Steelcase. Before we begin, please note the safe harbor statement, which is posted in the meeting materials links, which appear in the lower right-hand section of your screen. The matters discussed at today's meeting may include forward-looking statements. And there are risks associated with using this information for investment decision-making purposes as further detailed in the safe harbor statement. Also included in the meeting materials is a link to the meeting procedures adopted by the Board of Directors for the conduct of this meeting. This meeting is scheduled to conclude by 11:30 a.m. Eastern Time. We will now start our meeting. Thank you for your attention.

Good morning. I'm Rob Pew, Board Chair, and it is my honor to preside the Steelcase 2020 Annual Meeting of Shareholders. I hereby call the meeting to order. Our Corporate Secretary has informed me that a quorum is present, authorizing this meeting to proceed. I want to extend a warm welcome to those shareholders who are participating in the shareholders meeting via live webcast. Thank you for joining us. In addition to Lisa Maloney, who is acting as the Inspector of Election for this meeting, the other officers of Steelcase with us today are Jim Keane, President and Chief Executive Officer; Dave Sylvester, Senior Vice President and Chief Financial Officer; Lizbeth O'Shaughnessy, Senior Vice President, Chief Administrative Officer, General Counsel and Secretary; and Mike O'Meara, Director, Investor Relations and Financial Planning and Analysis. All of the members of our Board of Directors are participating in this webcast. And a representative from Deloitte & Touche LLP, our independent auditors, are also in attendance and will be available to answer appropriate questions. I have a few comments before we move to our official business. Four months ago, I contemplated our annual meeting celebrating one of the best years in the last several decades. Our management team and all our employees working with our dealers, suppliers and customers produced strong growth in sales and profits. We should be celebrating. And instead, we have the pandemic. Yes, this is an extraordinary time in our history. But Steelcase is a company that has experienced the great depression, 2 World Wars, 9/11 and the related economic downturn, the financial crisis of 2008 and other less dramatic ups and downs in the business cycle. Each time we have emerged as a stronger organization, and I have no doubt that we will do the same thing this time. I believe we'll survive the pandemic. We will respond to the urgent conversation that's taking place around systemic races within this country, and we will continue to lead the conversation about how work gets done. My confidence comes from the fact that we have built such a strong foundation around our commitments to our people, our communities, our partners and our planet, around a conservative capital policy that allows us to stay invested when others cannot and around the core values that have guided us for decades. Yet we have learned from our black employees and from others that merely stating our core values is not enough. We must expand the definitions of values, such as treat everyone with dignity and respect or promote positive relationships, to ensure that every individual and group feels included. Our intentions have always been good, but we can improve. On behalf of the Board, I want to thank Jim Keane and his management team for their willingness to tackle issues connected to races of a diversity and to start some difficult conversations. They have faced the facts that we do have areas for improvement. We believe in design thinking at Steelcase, and racial equity is another opportunity to apply design thinking principles. Racism is a complex problem in our country, and we, because we take a systems perspective, are in a position to lead in the solutions. It would be my dream that working with the Steelcase foundation, other foundations, local businesses, educational institutions and local governments, we might be able to make lasting changes. I also want to recognize the senior leadership of Steelcase for taking swift action to mitigate the financial impact of the pandemic on our business and on its people. Steelcase's history book describes the company founders literally going door-to-door during the depression to help employees meet essential needs. I see that same spirit in the way today's leaders work to mitigate the financial impact on employees by covering the full cost of health care premiums, paying out the full bonus and helping eligible employees pursue state unemployment benefits. The past 4 months have also confirmed that it's not enough for a company to take care of its own. We have a responsibility to all of our stakeholders, including our local communities. Steelcase and Steelcase Foundation maintain their philanthropic commitments during the crisis, and we're in the process of determining how we might direct more of our support towards diversity and social justice. Yes, it's been an incredible 4 months. The rest of this year and beyond will have its own challenges. I believe Steelcase is in a unique position not just to resist diversity, but to lead and to leverage our strong capital position to emerge an even better company. Jim Keane will have more to say about these topics in a few moments. But right now, let's turn to the formal business. There are 3 proposals before us today. The first proposal is the election of the 11 Director nominees named in our proxy statement for a 1-year term. Those individuals are: Larry Blanford; Tim Brown; Connie Duckworth; Jim Keane, Todd Kelsey; Jenny Niemann; myself, Rob Pew; Cathy Ross; Trina Smelter; Peter Wege and Kate Wolters. These nominees proposed by the Board of Directors are the only candidates before this meeting. The second proposal is an advisory vote to approve named Executive Officer compensation. And the third proposal is the ratification of Deloitte & Touche as the company's independent registered public accounting firm. Each of these proposals has been approved by the Board of Directors, and the Board of Directors has recommended that the shareholders vote for each of the nominees for Directors and for each of the 2 other proposals. If you are a shareholder and have not already voted, please do so at this time by clicking on the Vote Here button on your screen. You must complete your voting within the next 5 minutes in order to have your votes to be counted. If you've already voted online by phone or by mail, you do not need to vote again. But if you choose to vote again, your vote during the meeting will supersede your previous vote. While the voting is being completed, I'd like to invite Jim Keane to make a few comments. Following Jim's comments and the announcement of the voting results, we will answer questions from shareholders in the time permitted. If you have a question, please submit your question in the space provided on your screen. Please include your name and e-mail address along with your questions so that we could follow-up with you after the meeting in case we weren't able to answer all the questions received during the meeting. Jim?

Thanks, Rob, and thanks, everyone, for joining us today. Fiscal year 2020 was our best year in nearly 2 decades. We reported 8% revenue growth and 58% growth in earnings per share. It really shows how well our strategies have been working. Our core product portfolio has enormous breadth and significant reach with more products available globally. Our 3 recent acquisitions collectively grew revenue 10% and our ancillary product offering continues to expand. Our EMEA segment was profitable for the first time in years because of investments we've made in improving margins and the customer experience. It was a very good year for your company, and I would like to thank all the employees of Steelcase for their dedication to our customers. And yes, we all know what happened next. As the COVID-19 epidemic spread around the world, we moved quickly taking appropriate actions first in Asia, then in Europe and then in the Americas. In every factory, we took actions to improve safety and reduce the risk of infection transmission. In some places, we've had to close our factories for a while because of government orders. In other places, we could operate only to support essential business, and a few of those restrictions continue today and could change going forward. We move quickly to lower our fixed costs by reducing salaries rather than through permanent head count reductions. In the Americas, for example, most salary workers saw 50% pay reductions initially. At the same time, our Board cut the cash portion of their retainer to 0 and reduced my salary to $1. Our first quarter results showed a deep decline in revenues, and we reported a net loss of $21 million on an adjusted basis. However, we can see that our quick decisive actions prevented what would have been a much deeper loss in the quarter. Now in the second quarter, we expect revenues to be much better than the first quarter as we're working through our order backlog. We have eased the salary reductions as we expect the second quarter to be profitable. Again, I want to thank our employees for the way they worked together through this crisis. In our factories, our teams had to change line layouts and installed protective screens to keep our people safe. Everyone in our factories had to learn to work while wearing masks and other protective equipment. Our office-based workers quickly shifted to work from home. And although they worked a shorter workweek, they kept the core functions of the company working effectively. In many of our locations around the world, our people are now returning to the offices, which have been modified for safety using the same principles and products we're using with our customers. We all know the outlook for the rest of the year is uncertain. That's true for most companies. At Steelcase, as of the end of June, our orders continue to track well below the prior year. In the U.S., many of our customers are just now beginning to bring people back to the office, and most will not have their offices working at full capacity until much later in the year. So it will be a challenging year. But we are in a very strong liquidity position, and we believe we are well positioned as customers turn to us for help in getting their offices ready to be productive in space, but also to use this time to prepare their offices to be even better than they were before. In the very short run, offices need more separation between desks, and, in some cases, screens or partitions in order to comply with science-based guidelines, for example, the 6-foot rule. Our own analysis reveals that about 70% of desks in the United States may not be in compliance with that standard. And they're often sitting on very expensive real estate. So there's an opportunity to help retrofit and reconfigure these spaces so they don't sit idle. In the longer run, we believe infection control will remain a concern, and we're working with experts to understand and apply the science as we design the next generation of office furniture. Work will continue to evolve. For 20 years, articles have been written suggesting that we will all just work from home, and for 20 years they've been wrong. And they're wrong again because knowledge work really depends on the relationships between people. Those relationships are developed in the white spaces before meetings, after meetings, over lunch and during informal ad hoc, coaching and feedback opportunities. Employee retention depends on whether you have a best friend at work. Those connections are a key part of employee engagement as well. On the other hand, it's a great idea to allow people the choice to work from home from time to time. And because of the experience of the last few months, we expect more companies will allow that choice on a go-forward basis. And that's good for Steelcase because many of these workers, especially frontline individual contributors, do not have adequate ergonomic furniture to work effectively at home. We're working with our customers and their employees to help support work-from-home programs, but it won't be instead of the office. Offices will also need to get better. Employees working in the office will expect to be able to find spaces where they can concentrate uninterrupted. Certainly, the office needs to support focused work better than their homes. Meeting areas will need to be able to easily and effectively connect the people working remotely, whether at home or at another location. Offices will need to be more flexible, which means less fixed architecture and more fluid and reconfigurable architecture and furniture components. These trends are global trends because the virus was truly a global experience. Steelcase operates as a globally integrated enterprise, and clients expect us to work with them globally to prepare for what's next. Finally, I also want to address the importance of addressing racism, which I am defining as the inequitable outcomes we see across racial lines. It's clear that nearly every company in America has an opportunity to improve. We've been analyzing representation, advancement and retention at every level of the company. We see specific opportunities to be better, and we've begun to share what we've learned with our employees and to discuss their viewpoints. The causes may be complex, and the best solutions may not always be the most obvious. But solving problems like this is what we do every day in every part of our business. Every day, we solve problems by listening and understanding, generating ideas, building prototypes and iterating quickly as we learn. We have announced internally a series of actions designed to make faster progress to make our company more racially diverse with representation and opportunity for all. As we implement these actions, we will learn, we will iterate, and we will improve with thoughtful speed. Racism is a system. Therefore, our work to address racism includes engaging with the communities in which we work and live. Steelcase and the Steelcase Foundation have, for many years, made contributions to organizations, addressing social justice, and we will continue to do so. Steelcase also engages our employees directly with community partners through social innovation programs to help solve complex problems. We were honored to be included in the Civic 50, sponsored by the Points of Light organization as 1 of the 50 Most Community-Minded Companies. Clearly, there is more work to be done, and we will continue to look for opportunities to address the systems which allow racism to persist. I believe stepping up to racism in all its forms will improve our business results, make us a better company and help us more fully achieve our mission of unlocking human promise. In summary, we had a very good fiscal year 2020. As we entered this fiscal year, we moved quickly to protect our people and protect our business as COVID-19 emerged, and we will continue to take steps to be more relevant to our customers as they consider the future of the workplace. We're also taking steps to be a better company in the eyes of all our stakeholders. We thank you for being a shareholder and being a very important part of what we do.

Thanks, Jim. I just want to say thanks to Jim and all his team for all the hard work they've done. They're truly a great team, and I feel blessed to have them as part of our company. At this time, the voting is closed, and I would like the Inspector of Election to announce the election results.

Thank you, Rob. I am pleased to announce that a majority of the votes have been cast in favor of each of the nominees for Director, the advisory votes to approve named Executive Officer compensation and the ratification of Deloitte & Touche LLP as the company's independent registered public accounting firm.