Steelcase Inc. (SCS) Earnings Call Transcript

I'm very pleased today to host Jim Keane, the CEO of Steelcase for this video chat. It will last about 30 minutes. I have several questions for Jim that we think touch on several of the major issues facing Steelcase and society today. In addition to our audience for those live, there is a chat button on your screen that will allow you to ask questions. I will then try to incorporate some of those into our discussion time permitting. If time doesn't permit, I will forward them to the company for their response to you. Thanks to everybody for attending and listening. Good morning, Jim. You and I have known each other from the time that you became the Steelcase CFO in 2001, which was, as we all know, the end of one era and the beginning of another. And after a few years as the company's CFO, you transitioned into operations, ultimately being named CEO in 2013 as Steelcase was entering its second century. Steelcase seems now to be entering a new era, both in the business and with the new CEO. So first, if you would, talk a little bit about the Steelcase transition and the transition to Sara Armbruster's leadership and how you are feeling about that transition.

Well, thank you, first of all, Budd, for having me today. Yes, you and I have known each other for a long time, and I really enjoyed our relationship over many years. You've been a great observer of our industry and an expert in our industry and really happy to be able to have one more conversation with you before I retire. And yes, I remember that back when I started, we were entering a new era. It felt like I've kind of lost track of the years. It used to be the eras would last maybe 10 or 15 years, and then it seemed like it was 5 years. And for the last 10 years, I think we've gone through several of them. I mean, we've moved from an era of cubicles and everybody having their own offices to more hoteling to benching to ancillary, more residential influences in the office. And now as we emerge from COVID, it's a whole 'nother year of thinking about hybrid work and working from home. So I think the eras keep coming and becoming faster. And yet it's a perfect time. In some ways, I've never been more excited about the industry because everyone is talking about it. I mean, you can't pick up any business publication today and not read an article about what's the future of work. What's the future of workers. What's the future workplace. This is where we've done all our research is where we position our company. And there were times in the history, in the past when part of our job was just trying to get people's attention because they want -- we buy cubicles and we just have to buy more cubicles and what's so hard about that. And even though those were perhaps simpler times, these are maybe healthier times because, again, people are really thinking about their workplace and how it plays into their competitive advantage for their companies. So I'm sure we'll talk about that more. So I think it's a perfect, it's an exciting time. It's the perfect time for Sara. I wanted to time my departure across a number of things, mostly like such a good time, coming out of COVID is a good time. It's not completely behind us. We're not back to normal, but I feel good about this timing. She is amazing. I've worked with her for 14 years here at Steelcase. She has a McKinsey background like mine, strategy background here at the company, has led strategy the whole time she's been at Steelcase. I also led strategy. She ran IT. She ran workspace features. Again, many of the same ways I built my career before I became CEO. Sara really knows our industry. I mean, this is her area of expertise. She knows the contract furniture industry in the U.S., in Europe and in Asia. She has helped us navigate a lot of those eras we talked about. What you might not know, what investors probably don't know is that she has a lot of followership within Steelcase. She has a lot of people she mentors. She's seen as someone who is a people leader. And so in addition to being really strong on the strategy front, she's really strong on the people front. And yet, she's helped lead us through these crises. So when COVID hit, we have a pattern here of picking somebody to be officer on deck because you have to kind of work cross-functionally to deal with all the aspects of the crisis. And when COVID hit, I picked Sara to be the officer on deck for COVID. And then when we had a cyberattack last year, again, I picked Sara to be the kind of cross-functional officer on deck because she's really good at this. I mean, she can think strategically. She can work tactically and quickly in a crisis. She's a mentor to people. I think she's going to be a great CEO. So I'm excited to see what she and the leadership team here do next.

One of the things about Steelcase has been its values, and it's been a focus of Steelcase for as long as I've looked at this company. It's been really unique in talking about that. And so has been the commitment to responsible climate management. Steelcase has a major commitment to ESG with climate being mostly about the E side of that. Investors now are continuing to flock to ESG type of investments. And we at Water Tower Research spend a lot of ink and video time on ESG type issues. So maybe talk for a few minutes about your commitment, about the Steelcase commitment to ESG, its values, how and when it began, how it morphed from the beginning. Where is it right now, how do you think and how do you think it will develop over the next period?

Yes. Good question. So as I get ready to retire here after 25 years, I find myself thinking back on my first year at Steelcase. And as I said, I led strategy initially. I found myself in Board meetings where I would have to come in and present some strategy to the Board. And I would get a question from at least a couple of those Board members almost every time about how this strategy was going to relate to the environment. And today, we consider that to be very normal, of course, like anything we do has an environmental perspective. But back then, if you think 25 years ago, that just was not. They referred to it as the ecology. Like it was, the words we used were words from 25 years ago, but the idea that our Board of Directors would care about that was really forward thinking. And so Peter Wege and many others on our Board were leaders in considering this. And so all of us had to think like this. I had to think like that. You get asked that question after a couple of Board meetings, you realize next time I go into a Board meeting, I will have thought of the answer to that question because I know I'm going to get it again. And so it forced Steelcase leaders to think about sustainability before we even knew what that word meant. As a result, we worked a lot of materials chemistry back in those days. We worked on our water usage. We were one of the first cradle-to-cradle companies in thinking about how our products could become part of the food cycle when they're done. And we were leaders, I think, throughout the whole period. But as you said, like today, the bar is much higher. And I'm proud to say we're still leaders. So in ESG, I'll talk about carbon. As you mentioned, climate change is a big deal. Carbon is a big deal, where we worked on water and we worked on materials chemistry before. We're still doing that, but now we're focusing a lot on climate. We are carbon neutral. We've been carbon neutral for several years. That was a big goal when we said it. It was unclear exactly how we were going to get there, so I'm proud that we reached the goal and we're still at that goal. But once you reach a goal, you have to set a new goal. And the new goal isn't as sexy sounding as carbon neutral. You hear people talking about being carbon negative. But the new goal is science-based targets. We're adopting science-based targets, which, in essence, is a commitment to reduce our gross emission by 50% through 2030. And it's not just our emissions, we also have to engage with our suppliers, and we have to engage with the kind of energy we buy and everything that surrounds our system in order to achieve this goal. It's why even though it's maybe not as simple to understand as carbon neutral, it's actually a much bigger, much more important goal. It's a much more difficult goal than the goals we have set in the past. And we're not alone. A lot of other companies are adopting similar goals, but I will say Steelcase, for a company of our size, to be doing what we're doing puts us in a very rare group. There's bigger companies that are doing this and they have lots of resources. We're a small cap company and yes, we're in the room. In fact, last night, I spent an hour with a Fortune 500 CEO who wanted to talk to me about what we were doing, what we were seeing from our pursuit of this goal. They're also leaders in this, but much bigger company than we are. He's very passionate about it. He wants to learn from us. We want to learn from him. We actually have some projects going together where our people and his people are working together. And so we're in the room because of that commitment. So I can talk much longer about these challenges, but I'm really proud of where we are. Another important aspect around values is DEI, of course. And DEI, like sustainability, is a journey. You achieve one goal and then you reach for a bigger goal. We've set new targets for increasing diversity at Steelcase. This is all about trying to make sure our employee populations more closely represent the communities where we do business. It's working. What's interesting about DEI, it's a little like sustainability. The more that you learn about sustainability, the more opportunities you see. It's kind of the opposite versus like cost reduction. Sometimes when you tackle the low-hanging fruit in cost reduction, it gets harder and harder to find more cost reduction. What happens with sustainability and what happens with diversity is that the more progress you make, the more progress you're able to make. So for example, with DEI, one of the things we've done is increase our diverse slates. So we consider more diverse candidates for positions. And that's working. We hire more diverse people as a result. As you have more diverse people, they help put you in contact with other potential candidates. So it has a really virtuous cycle, like a really positive cycle that starts to build as you make this, as you build momentum. And the same is true for gender diversity. More than 50% of our Board is women. And it wasn't because we set out to have that kind of a goal. It's just that as we add more women on our Board, they identified other women who'd be great Board members. And we were able to just naturally have a more diverse Board. So I'm really happy with the progress in DEI. Again, I'm not declaring victory. It's not a destination, it's a journey. And as we continue to make progress, we'll continue to set bolder goals. And the last part of ESG is governance. And governance is about values. As you said before, values are super important with Steelcase. That's never changed. It's kind of a universal evergreen thing. We talk about it all the time. We use it in our decision-making. The part that's probably more unique and hard to kind of grasp is the way we think about maybe more of a nuanced part of governance, and that's about how we lead, how we think about the role of leadership at Steelcase. And we really believe that leaders need to take time to understand their people and to understand the customer. We call it empathic leadership. So feeling empathy, being able to put yourself in the shoes of your customer, being able to put yourself in the shoes of a user or an employee so that you literally begin to feel what they're feeling. What does it feel like to be them? How does it feel to be them in their job? How does it feel to be an employee at Steelcase? How do they navigate issues? How do we manage risk? How do we build up trust between leaders and employees? And we believe that as you build up empathic leadership, you can then distribute decision-making, so you can make decisions faster because people understand each other. Another aspect of this has to do with having a healthy relationship with failure that if you have a culture that does not tolerate failure, then you're not going to tolerate innovation either. You're just not going to have innovation. You're not going to have distributed decision-making because no one's going to want to make a decision if any failure is grounds for termination or something. So you have to kind of redefine failure as learning. If we make a mistake, how quickly -- it's not that you made a mistake, it's how quickly and how completely we learn from the mistake. So the job of leaders is actually to promote learning, to accelerate the pace of learning, and that's part of empowered decision-making. It's why our leadership community, where I'm sitting right now, my office is in our leadership community here in Grand Rapids. I'm about 50 feet away from our learning center in Grand Rapids because we think of leadership and learning as being really the same thing. So ESG for us is a big deal. It's not just about the reporting and the 10-K. It's not about something we have to do. It's really integral to how we run the company.

I know your office is right in that, in the learning center right near that. I found that to be fascinating, and you must have some stories of just customers wandering through and seeing the CEO and how that has impacted their belief and their feelings about Steelcase. Can you share maybe 1 or 2 of those with us?

Yes, absolutely. Customers is a great example. We have customers here all the time, and I may be scheduled formally to meet with a customer for breakfast or lunch. But a lot of times, I'm not, and I will just encounter a customer as they're here to meet with other people. And I would never have seen them otherwise. Like if I was in some kind of Ivory Tower sequestered leadership floor, I would follow my calendar dutifully and I wouldn't be interrupted by those things. So this way, it's awesome because I have a chance to interact with way more people than I would normally. And that's also true for employees. We've had a lot of our people back in the office this summer. And I've been on Teams and Zoom like everyone else, and I see a lot of people that I normally have been in meetings with. But that's only a fraction of the employees of the company that I know. And if we had people back in their offices, but I wasn't actually proximate. If I actually wasn't where they are, then it wouldn't really matter. I would never see them. They wouldn't see me. So being here, as you know, like the aisle of the building kind of goes 20 feet from my office right here. I run into people all the time that I have no reason to really be talking to. I see them when we wait for coffee. I see them when we're in meetings. I'm meeting new employees that we're onboarding right now, interns that were here for the summer, which was a very diverse group, by the way. All those interactions wouldn't happen if we didn't have leaders positioned here. It's not just about me, it's the entire leadership team. So we have all the leaders here. I run into those guys but then they run into everyone else. So it's a key part of our culture that is also part of the distributed decision-making. We wanted to really reduce any kind of a threshold between access to leaders and anybody else. We're all the same.

And when I hear from investors, and I've heard a question right now is, of course, returning to the office is a big question today facing business and the investors are all interested right now with lots of media articles about that. The Delta variant seems to be putting off some companies from returning as soon as they may be previously expected. What conversations are you having with customers today? You speak to a lot of CEOs. You gave the example of speaking to one last night where you're working jointly. What issues are on their minds? And maybe you can talk a little bit about, without even naming names, as to some of the things you're hearing from CEOs and leaders, C-suite leaders that you interact with.

Yes. So we've had a lot of conversations all through the crisis. You mentioned at the beginning of the crisis, we had essential industry -- essential worker customers who were trying to figure out how can we have our people in the office. We have to have our people in the office, how do we do that safely. So a lot of the early discussions were just about safety, and that is super important. During the heart of the crisis, we spent time doing research around work from home. I mean, it was really a unique research opportunity. Suddenly, everybody is working from home, so like how is that working out? So we surveyed and interviewed 52,000 people, 52,000 people across 11 countries to learn what we can learn about that because you'll never have a chance to really learn so much so quickly. So that was super interesting. And then we take all of those experiences and we apply it to today. So today, as you say, we're a global company. And so it's a different situation in Asia and Europe than it is in the U.S. And I'm going to focus your answer on the U.S. just for brevity, but glad to talk about the other markets if you want. But it is very -- for those of us who are pretty much in the United States and not traveling very much right now, I just got to say, it is so unique here. We are facing a unique situation because of the politicalization of everything. So vaccines are a political topic. Masks are political. Even returning to the office is kind of political. People are -- and the emotions around these things are amplified by the fact that people are distributed. Everybody's kind of raging on social media about one thing or another. The articles are amplifying these emotions and kind of picking on the extremes. And so I think we're all feeling this, right? I mean, you can feel the rage around kind of any topic. But that's not true in Europe. It's not true in Asia. It's really a United States sort of a thing. So for leaders of companies that I talked to, and yes, they're all super interested in this topic. It's like on the top 3 list of every CEO is what are we going to do about return to office. That's hard because of the emotions they can feel in their employees and they feel among themselves. Making it more complicated is what you said, the starting days keep shifting. Like if we had a clear date like it was September 1, and everybody thought it was going to be September 1, and then Delta came along, just having something to build off of like, okay, at a certain date, we're going to make a decision, Delta comes along, pushes that decision back, that has only added to the confusion and the uncertainty. So if I were to summarize, go, number one, customers are uncertain. Company leaders are uncertain. And because they're uncertain, there's a tendency in that moment to go, well, let's survey our employees. While we're waiting for a decision, what do employees think? The problem is the surveys aren't going to answer the question because some employees say, for example, that they want to work from home forever, not many, but there is some who say that. But they also say, if I work from home, I don't want to be at a disadvantage versus those who work in the office. And I think that could be naive. I mean, you can want that, but it doesn't mean that's not true. I mean there's more trust builds up with people who see each other all the time. There's lots of reasons why people who might be co-located could have a huge advantage when it comes to promotions and so on, and that will play out over time. Some employees say they want to work in the office like it was before. They totally want to come back to the office. They miss being in the office and they look forward to being like that, but it's not going to be like that if half their coworkers aren't there. So they're not going to be happy to be in the office if the office feels empty. And then a lot of employees are somewhere in the middle. They like to work in the office sometimes, they work at home sometimes. But even that isn't the same. If you're at home and half your team is in the office and you're on a video call, it's not the same as when you were all virtual. And our experience ourselves is that it doesn't stay in the middle for long. Once you get people back to like half of the people in the office and half aren't, it kind of moves towards more people wanting to be in the office because you want to be there for that full experience of connecting with people and being. So there's sort of a tipping point that we find. So I don't think the employee surveys are going to answer this. I think instead, company leaders have to decide. They have to think about their strategies. They have to think about what their human resource strategy is going to be as a result of the core strategy. And then we got to think about facilities and their work from home, work in office philosophies. And I would say I believe that most CEOs have already decided. They're not quite ready to say it out loud because of the emotions that are out there and they're not at the starting point quite yet, but I think most of them see the benefit of having their people back in the office. They know that the whole is more than the sum of the parts. They're starting to worry. They were worried about last year's incoming class of new employees. They're never quite connected to the culture. They're really worried now as they have their second incoming class that's never been connected to the culture. As they hear about the great resignation, 40% of employees wants to return, it says 40% of employees are thinking about leaving their company right now is they have more and more people leaving and therefore, hiring more people, the culture of your company starts to become just something the old people talked about, like the new people are going to experience a very different culture if it's virtual, mostly virtual. So CEOs want to get people back. And that's where I'd say most of the CEOs are right now. They're just waiting for the right time. There are some CEOs who have decided to go more aggressively towards work from home, dramatically reducing real estate. Frankly, when I think about those, they are mostly in businesses that are more transactional naturally, where the work is more transactional, where employees tend to work more individually. In many cases, those companies probably should have considered automation or offshoring before. And maybe work from home is just a step towards that. So I don't see that as a long term like that's how people in the U.S. are going to work or in Western markets, but it is going to happen to some degree. And then there are a lot who are intrigued with the idea of, how do I attract a broader employee base? Like maybe I hired all my people here in Palo Alto and now I could hire people from a broader employee base. There's a little bit of that. And then most people though, I think, are waiting to see what happens. They're like, they haven't decided really if they want to follow the pack. They want to be like, they want to do what other companies do. And so they're kind of going to be in the Peloton. So as the Peloton forms up, it will be some combination of probably more working from home than before, maybe not quite as hybrid as people think, but that is where a lot of companies are. So I hope I sort of answered your question. That I think it's mostly uncertain, but I think a lot of companies have decided they just haven't been able to announce it yet.