Steelcase Inc. (NYSE:SCS) Q4 2024 Earnings Call Transcript March 21, 2024
Steelcase Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Steelcase Fourth Quarter Fiscal 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Mr. O’Meara, you may begin your conference.
Mike O’Meara: Thank you, Dennis. Good morning, everyone. Thank you for joining us for the recap of our fourth quarter and fiscal 2024 financial results. Here with me today are Sara 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, Sara Armbruster.
Sara Armbruster: Thanks, Mike. Hi, everyone, and thanks for joining the call today. Our fourth quarter results reflect strong earnings growth, as we continued to make progress on our profit improvement initiatives. This progress is evidenced by our year-over-year gross margin improvement of 140 basis points, marking the seventh consecutive quarter of year-over-year gross margin improvement. For the full fiscal year, our earnings per share more than doubled versus the prior year, and our adjusted earnings per share increased by more than 60%. I’m proud of our employees for actively helping to capture price increases to offset the significant inflationary costs we absorbed over the past couple of years, for implementing improvements in various aspects of our operations, and for continuing to drive our overall fitness initiatives.
These efforts to improve our profitability and to reallocate resources are supporting specific growth initiatives and transformation priorities, allowing us to continue to invest in our strategy, while strengthening our financial results. Building on this, I’m pleased to share that our International segment posted additional improvement this quarter with over $3 million of adjusted operating income, following strong results in the third quarter. These past two quarters reflect significantly improved performance from the nearly $15 million adjusted operating loss that the International segment recorded in the first half of the year. To continue to enhance our competitiveness, we implemented additional restructuring actions in the fourth quarter in our Asia Pacific business, and Dave will provide some further details about our expectations for the International segment when he covers our outlook.
So, turning to orders, we grew 4% overall in the fourth quarter versus the prior year, and that includes 8% growth in the Americas. Similar to last quarter, the Americas growth once again was led by the large corporate customer segment. Customers tell us they need our help to create spaces that will attract new talent and engage and retain employees and help teams and individuals perform. And they know their spaces must do more and they must be designed to support a range of needs such as providing places to focus, collaborate, build social connections and foster well-being. So, I’ll reinforce this point with a quick anecdote. I was with the CEO of a major global corporation recently. And as he contemplated the upcoming renovation and expansion of their innovation center, he shared with me his absolute certainty that the new space must do more to support innovation teams.
And he said, “I know what outcomes we want this building to deliver, but I don’t know how to make that happen.” And that moment, when a client knows they need new thinking and expert advice, is where Steelcase shines. We’ve stayed invested in workplace research and new product development to maintain and enhance our portfolio, and we believe this is reflected in the continued strength of our win rates. We’re further encouraged by data points [such as] (ph) Business Roundtable survey on CEO confidence, which showed a significant increase this quarter, and it reached the highest level in the past 18 months as optimism in the United States economy is strengthening. We believe this increase in confidence could also support increased business investment levels.
As we seek to lead the transformation of work and diversify the customer and market segments we serve, we continue to expand our product portfolio, including new launches this quarter. In EMEA, our Orangebox brand launched Beyond the Desk, which is a modular upholstery system that offers a supportive upright sit, in combination with ergonomic fixed worktables. It effectively divides spaces, offering privacy for individuals, teams and larger collaborative workgroups. At AMQ, the Personality Plus task chair leverages our Asia Pacific portfolio to bring a new offering to the Americas. Personality Plus is designed to give small and medium businesses a new option for comfortable, supportive, ergonomic seating. And similarly, the Steelcase Learning Agree Chair leverages our Smith System brand to offer a versatile and simple seating option at a lower price point to our education customers.
All three of these examples highlight our efforts to deliver innovation and value to our customers, leverage our scale, and complement our broader portfolio of products from across our brands. Finally, I’d like to share a little more about our business transformation initiative, which is one of the drivers of our increased investment level in fiscal 2025. Business transformation for us is about optimizing and automating our business processes. We introduced business transformation about a year ago at our Investor Day when we were in the initial phases of planning. And since then, we’ve been designing streamlined and modernized end-to-end processes. These improvements are aimed at providing new capabilities to serve our customers and make it easier to do business with Steelcase.
We also expect to drive higher levels of efficiency in the ways we operate our business, which should free up resources and lower our costs. So, over the next year, we’ll be continuing that work and implementing a new enterprise resource planning system as part of our business transformation initiative. We view this as a major opportunity to increase efficiency and effectiveness, and it will also require significant resources. So, we’re eager to see the impact of this work evolve over the next year, and we’ll have more details to report in the coming quarters. In closing, we delivered strong profit improvement in fiscal 2024. Over the past two quarters, we have seen stronger demand levels, especially from our large corporate customers. We’re seeing more and more companies settle into a stronger in-office presence, and we are optimistic their investment levels will increase in response to new business needs.
We remain focused on executing our strategy to lead the workplace transformation, diversify the customer and market segments we serve and improve our profitability. With that, I’ll turn it over to Dave to review the financial results and share details regarding our first quarter outlook and fiscal 2025 targets.
Dave Sylvester: Thank you, Sara, and good morning, everyone. My comments today will provide some additional color around our fourth quarter results, including a comparison to the outlook we provided in December, as well as some comments regarding our orders, the balance sheet and our cash flow. I will also cover the outlook for the first quarter and our targets for fiscal 2025. Our fourth quarter adjusted earnings of $0.23 per share was at the top end of the range we provided in December. Our revenue of $775 million was near the midpoint of our range. And our gross margin and operating expenses were in line with our expectations. Our adjusted earnings per share benefited by approximately $0.02 from net favorable adjustments, which were related to our unconsolidated affiliates and were reflected in other income.
Moving on to the sequential comparison of our fourth quarter results versus the third quarter, adjusted operating income of $34 million in the fourth quarter represented a sequential decrease of $16 million, including a $10 million decrease in the Americas and a $6 million decrease in International. The declines were due to third quarter benefits, which totaled $15 million and were related to the revaluation of an earn-out liability and gains from the sale of land and fixed assets. For the International segment, this was the second consecutive quarter of posting adjusted operating income following a challenging first half of the year. For the second half, the International segment posted adjusted operating income of $12 million, which compares to an adjusted operating loss of $15 million in the first half.
As it relates to cash flow and the balance sheet, we generated $57 million of cash from operations in the fourth quarter, driven by strong earnings and a $24 million reduction in working capital as we continued to manage down our inventory levels. In addition, we generated $20 million of proceeds from the sale of our remaining corporate aircraft, and we funded $10 million of capital expenditures and $12 million of dividends during the quarter. Our liquidity totaled $486 million at the end of the quarter, and our total debt was $446 million. Our trailing four-quarter adjusted EBITDA is $264 million, or 8.4% of revenue, reflecting a 190 basis point improvement over the same timeframe last year. We further strengthened our access to liquidity this quarter with the renewal and expansion of our credit facility, whereby we extended its maturity to February 2029 and expanded the borrowing capacity from $250 million to $300 million.
Orders in the quarter grew 4% compared to the prior year, including 8% growth in the Americas and a 6% decline in International. Across the months, we posted 4% growth in December, a 1% decline in January and 10% growth in February. The order growth in the Americas was primarily driven by large corporate customers across both continuing and project business. Q4 marks the fourth consecutive quarter of year-over-year order growth from continuing business, and we believe the growth in orders related to project business is reflective of our strong win rates in fiscal 2024. Across other customer segments in the Americas, we saw order growth from our education and small to midsize customers, while orders from the health, government and consumer retail sectors declined.
The order decline in International was driven by EMEA, as we experienced softness in the U.K. and France. However, in Asia Pacific, we had double-digit order growth again this quarter, which was driven by India, Japan and Australia, partially offset by continued softness in China. Turning to our outlook for the first quarter, our Q4 orders grew 4%, including 10% growth in February, and orders during the first three weeks of Q1 grew by 10% compared to the prior year. However, our beginning backlog was down 8% compared to the prior year, which was impacted by customer orders that had accumulated, in part due to supply chain disruptions and extended delivery timeframes. As a result, we expect to report revenue within a range of $715 million to $740 million, which translates to a range of down 3% to approximately flat on an organic basis compared to the prior year.
We expect to report adjusted earnings of between $0.08 and $0.12 per share, which compares to $0.09 in the prior year. In addition to the projected range of revenue, the adjusted earnings estimate includes estimated gross margin of approximately 32%, projected operating expenses of between $215 million to $220 million, which includes $4.3 million of amortization related to purchased intangible assets. And lastly, we expect interest expense and other non-operating items to net to approximately $2 million of expense. And we are projecting an effective tax rate of approximately 27%. As we begin fiscal year 2025, we remain optimistic about the growing number of companies in the United States that are emphasizing physical presence in their offices for a minimum number of days per week, and we believe this trend positively impacted our fiscal 2024 order levels.
For fiscal 2025, we are targeting a mid-single-digit growth rate for orders, including continued growth from our large corporate customers and growth across most other customer segments and geographical regions. However, we entered fiscal 2025 with a lower beginning backlog, which will negatively impact our revenue growth early in the fiscal year. As a result, we are targeting organic revenue growth for the full year within a range of 1% to 5%. Fiscal year 2025 will also benefit from an extra week of revenue and the related marginal earnings in the fourth quarter, but that revenue benefit is not included in our projection of organic growth. As it relates to earnings, I want to first provide some context around fiscal 2024 results as a basis for comparison.
Recall, our fiscal 2024 adjusted earnings of $0.93 per share included the benefits of lower operating expenses associated with the revaluation of an earn-out liability and gains from the sales of land and fixed assets, which together aggregated to $20.4 million or approximately $0.12 per share after adjusting for variable compensation and taxes. Excluding these items, our fiscal 2024 adjusted earnings would have approximated $0.81 per share compared to our fiscal 2025 targeted adjusted earnings of between $0.85 and $1 per share. In addition to the projected range of revenue, our fiscal 2025 earnings targets assumes an improvement in gross margin to between 32.5% and 33.5% and increased operating expenses, including higher investments in our business transformation initiative, strategic growth initiatives and employee costs.
And lastly, we are targeting non-operating items to net to approximately $11 million. We are assuming an effective tax rate of 27%. And we are targeting capital expenditures of between $75 million to $85 million. Our fiscal 2025 capital expenditure target includes an expected increase of between $20 million to $30 million as compared to fiscal 2024, due primarily to higher investments related to a new ERP system, which is part of the business transformation initiative that Sara previously mentioned. For the International segment, we are targeting positive adjusted operating income in fiscal 2025, including a smaller loss in the first half of the year as compared to fiscal 2024. In closing, fiscal 2024 earnings marked our strongest performance since the start of the pandemic and onset of the extraordinary inflation and supply chain disruptions.
Our adjusted earnings per share exceeded the targets we communicated a year ago, and we strengthened our balance sheet by generating $238 million of liquidity over the last four quarters. And we also renewed and expanded our credit facility in recent weeks. As we begin fiscal 2025, we’re optimistic, and we remain resolved to continue leading the transformation of the workplace, while diversifying our revenue base and improving our profitability. From there, we will turn it over for questions.
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