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Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Steelcase Third 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] Thank you. Mr. O'Meara, you may begin your conference.

Thank you, Krista. Good morning, everyone. Thank you for joining us for the recap of our third quarter 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 third quarter earnings, which crossed the line -- 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.

Thanks, Mike, and hello, everyone, and thanks for joining the call today. Our third quarter results reflect the continued progress we're making on our profit improvement initiatives, which is evidenced by our year-over-year gross margin improvement of 360 basis points. I'm proud of all of our employees who are continuing to drive fitness and reallocate resources to support our growth and transformation initiative. I'd like to thank our sales team for capturing price increases and our operations teams for the improvements they're driving. Additionally, our operations teams continue to make changes aimed at improving our manufacturing and distribution efficiency. We recently announced the relocation of our regional distribution center in Rancho Cucamonga, California to Phoenix, which we expect will provide additional savings beyond that from our previously announced Atlanta distribution center closure. We've also begun implementing the consolidation of certain seating production into our Mexico and Malaysia operations, which will open up additional footprint that will enable us to pursue further efficiency actions. Our Americas segment delivered another strong quarter of year-over-year profitability improvement. And I'll also highlight the turnaround in the results in our International business this quarter. We delivered over $9 million of adjusted operating income in our International segment, or over $4 million if we exclude the earn-out adjustment we recorded. These figures compare to the nearly $15 million adjusted operating loss we recorded in the first half of the year. We're seeing momentum in the improvements we're making in both our EMEA and Asia Pacific businesses, where we're now benefiting from some of the actions we announced earlier in the year to lower our cost structure and tune our strategy. Our third quarter orders grew 15% overall against the prior year and 1% sequentially against our second quarter, continuing the relatively stable overall levels we've seen this year. Our International orders grew 10% year-over-year, and that included 40% growth -- or over 40% growth in Asia Pacific. In the Americas, our third quarter orders grew 16% and were led by strong growth in our large corporate customer segment. We also posted order growth in our other customer segments on a collective basis. Those segments continue to see progress in areas such as clinical healthcare spaces and classroom environments, while we experienced headwinds in others such as healthcare and educational administrative settings, which we believe is consistent with the broader trend in those verticals. Orders in the large corporate customer segment have been strengthening over the past year, and customers are coming to us for guidance as they strive to create spaces that will engage their employees and help them perform. Customers are looking to invest in spaces that solve for a host of needs, such as providing places to focus, collaborate, build social connections, and foster well-being. We've stayed invested throughout the last few years in workplace research and new product offerings to maintain and enhance a differentiated offering, and we believe that's reflected in our strong win rates, and we're continuing to position ourselves to lead the transformation of the workplace and win new business. As I look at some of our most recent significant wins, our customers say that two of the most important factors in their furniture selections are innovation and sustainability. They're seeking products rooted in insights-based innovation to help increase the performance of their work spaces. And they're also leveraging rigorous product selection processes with an eye to achieving environmental goals. So, we've taken deliberate steps to curate and grow our product portfolio to answer this call. So, for example, we recently launched CarbonNeutral options for Ology and Migration SE, and we expanded CarbonNeutral task seating options to EMEA. And this adds to the CarbonNeutral task seating portfolio we launched in the Americas last spring. This quarter, we also launched our innovative Karman mesh chair in Asia Pacific, expanding the offerings we have in that region to support ergonomic comfort and well-being. We've also made performance enhancements to Steelcase Ology and our AMQ height adjustable tables to provide improved well-being solutions at a broad range of price points. We believe we are uniquely positioned to meet evolving customer needs and expectations, and we believe our wins reinforce both our strategy and our global investments in these areas. Finally, I'd like to celebrate the work our team has done in connecting our strategy with our Better People, Better Planet aspiration. I encourage you to dive into the details of that work in our recently published Impact Report. This year, instead of releasing it exclusively as an online PDF, we integrated the report into our Work Better magazine to demonstrate the central role that having a positive impact on people and the planet has in our business and in our conversations with customers. Leaders today have an incredible opportunity to help people do their best work by creating places that work better, and Steelcase is equipped to help them and is excited to offer solutions that meet their most pressing needs. So, in closing, our demand levels have been stable and we've continued to drive year-over-year profitability improvements. We are optimistic that as more companies settle into a stronger in-office presence, their investment levels will increase. We remain focused on executing our strategy to lead the workplace transformation, diversify the customers and markets we serve, and improve our profitability. So with that, I'll turn it over to Dave to review the financial results and share details regarding our outlook.

Thank you, Sara, and good morning, everyone. My comments today will provide some additional color around our third quarter results, including a comparison to the outlook we provided in September, as well as some comments regarding our orders, the balance sheet, and our cash flow. I will also cover the outlook for the fourth quarter and share some preliminary thoughts about fiscal 2025. Our third quarter adjusted earnings per share included the benefits of a decrease in the valuation of an acquisition earn-out liability and gains from the sale of land and fixed assets. Those items benefited our third quarter results by approximately $0.10 per share, which was $0.06 more than the benefits we had included in our third quarter guidance range for projected gains on the sale of fixed assets. Setting these items aside, our third quarter results were in-line with our expectations, as the impact of lower-than-expected revenue was offset by a more favorable gross margin and lower operating expenses. Our revenue of $778 million was slightly below our expectations because order fulfillment patterns in the Americas did not continue to improve on a sequential basis as we had expected, due in part to a couple of isolated supplier disruption issues. Our teams have been actively working on these situations and we expect them to be resolved during the fourth quarter. Our favorable gross margin was driven by higher-than-expected pricing benefits across both segments and our lower-than-expected operating expenses, after setting aside the earn-out adjustment, were driven by the International segment. Moving on to the sequential comparison of our third quarter results versus the second quarter, adjusted operating income of $50 million in the third quarter represented a sequential decrease of $3 million, as a $23 million decrease in the Americas was mostly offset by a $20 million improvement in International. The decline in the Americas was driven by typical revenue seasonality at Smith System, partially offset by the land and fixed asset gains and a portion of the earn-out revaluation. The improvement in International was driven by higher revenue, improved gross margin, and lower operating expenses in addition to their portion of the earn-out adjustment. As it relates to cash flow and the balance sheet, our total liquidity strengthened by $110 million during the quarter. We generated $120 million of cash from operations, which was driven by $74 million of adjusted EBITDA and a $22 million reduction in working capital as we collected receivables from the strength of our education business in the summer and we continued to manage down our inventory levels. Our liquidity totaled $425 million at the end of the quarter, and our total aggregated debt was $446 million. Our trailing four-quarter adjusted EBITDA is $264 million, or 8.3% of revenue, reflecting a 270 basis point improvement over the same timeframe last year. Orders in the quarter were in-line with our expectations and grew 15% compared to the prior year and modestly on a sequential basis versus the second quarter. The year-over-year growth included an increase of 16% in the Americas and 10% in International. The order growth in the Americas was primarily driven by large corporate customers across both continuing and project business, while International was primarily driven by over 40% growth in Asia Pacific. The growth in Asia Pacific was driven by notable strength in India and Southeast Asia and was partially offset by continued softness in China. In EMEA, orders grew modestly over the prior year and included growth in France and Iberia, offset in part by declines in some other markets such as the UK. Turning to our outlook for the fourth quarter, our Q3 orders grew 15% and orders during the first three weeks of Q4 grew by 7% compared to the prior year. However, our beginning backlog was down 10% 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 $765 million to $790 million, which would be approximately flat on an organic basis compared to the prior year. We expect to report adjusted earnings per share of between $0.19 and $0.23, which compares favorably to $0.19 in the prior year. In addition to the projected range of revenue, the adjusted earnings estimate includes estimated gross margin of approximately 31.5%; projected operating expenses of between $210 million to $215 million, which includes $4.3 million of amortization related to purchase intangible assets; and lastly, we expect interest expense and other non-operating items to net to approximately $3 million of expense; and we're projecting an effective tax rate of approximately 24%. As we begin to think about fiscal 2025, we expect to target organic revenue growth and improved earnings compared to fiscal 2024, adjusted for items like the asset sale gains recorded over the last two quarters and the earn-out revaluation recorded in the current quarter. 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, as we believe it has positively impacted order levels over the last three quarters in our business. At the same time, we expect to begin next year with a backlog of customer orders that is lower than the prior year. Thus, it's likely that revenue growth will lag any projected order growth in fiscal 2025. While we continue to target midterm organic revenue growth between 5% to 7%, a lower level of organic revenue growth is a more plausible scenario for fiscal 2025 based on the current outlook. We remain focused on our gross margin improvement and other fitness initiatives to help fund investments in our growth and diversification strategies, and we remain committed to improving the levels of profitability in our International segment. So to reiterate, we expect to target improved operating performance again next year, and we plan to provide a more detailed outlook in March. From there, we will turn it over for questions.

[Operator Instructions] Your first question comes from the line of Reuben Garner from The Benchmark Company. Please go ahead. Your line is open.

Thank you. Good morning, everybody.

Hey, Reuben.

Good morning.

Dave, maybe just to start where you ended there with the '25 outlook, can you help me with -- it seems like some orders are maybe being pushed out because of fulfillment challenges. Can you walk me through the backlog math and why maybe next year revenue might trail orders despite what appears to be maybe a little bit of push out into the early part of your fiscal '25 from this order strength?

Well, Reuben, we're simply modeling that backlog will still be down compared to last year and that will impact the next year revenue growth rates. So, if orders grow at X and the backlog is down by Y, at least a quarter or 20% of that decline in backlog is going to impact the revenue growth. So, it's just that math that we're talking about. There's really not a lot of, I would say, significant disruption happening in the business currently. We have a couple of suppliers that have extended delivery dates. Frankly, they're suppliers that deliver for the entire industry. So, we're probably not alone in this, but we think they're going to have things resolved here pretty quick and we'll be back kind of to our normal lead times. And I would just reiterate that our lead times didn't really extend significantly. It's that they didn't continue to come down from where they were a year ago, whether they were very high because of all the supply chain disruptions that everyone was experiencing. So, we saw them come down in each of the last, I think, three or four quarters. We projected them to come down again modestly in the fourth quarter and they stayed -- sorry, in the third quarter, and they stayed flat with the second quarter. So, it impacted our revenue by, I don't know, like $10 million, $15 million.

Okay, great. And then, on the order strength, you referenced large customers. Can you give us any more detail on kind of end markets, whether it be technology, finance, healthcare, what's driving that? And then, any geographical sort of comments within the U.S. maybe areas that are bouncing back that we have been under pressure the last couple of years?

I don't remember seeing any data that suggested it was driven by one particular region or one particular or a few particular vertical markets. And surprisingly, some of the areas that you would think would be more weak, they actually have been okay this year. We're keeping an eye on the West Coast and the tech sector, of course, but we've had business -- a nice business that was generated earlier in the year and continues throughout this year. So, nothing really notable across verticals and vertical markets.

Okay. And then, last one for me. So far this year, pretty strong cash flow balance sheets in good shape. Just any kind of comments on go-forward cash flow, how to think about it, and then any changes in plans for uses of cash?

Well, we remain focused on our growth strategy primarily. And we have used bolt-on acquisitions to help accelerate some of our growth initiatives. So, we're still in the market keeping an eye out for various possibilities that might help our growth strategy. But to date, we've not found the right one at the right price. So, we'll continue to sit on some of that liquidity in hopes that we will find the right one at the right price to help accelerate our strategy. We also continue to fund a strong dividend and we -- as I think you'll remember, the Board increased the authorization to repurchase shares last quarter. So, to the extent we have opportunities to buy back shares, we will continue to look at that as also a means of using some of our liquidity.

Great. Thanks guys. Happy holidays. Happy New Year.

Thanks, Reuben.

You too.

Your next question comes from the line of Greg Burns from Sidoti. Please go ahead. Your line is open.

Good morning. With the fourth quarter guidance, could you just bridge us from reported to what do you expect organic growth would be in terms of how much of that variance is because of maybe divestitures or anything that happened in the third quarter or what do you expect in the fourth quarter? I'm just trying to understand where that lines up, maybe where the organic number lines up with where consensus was coming in.

Well, there was -- you did mention the divestiture. We did have a dealer divestiture in the quarter that you all probably were not thinking about. We hadn't talked about it. And that has a modest impact. It's a decent sized dealer but we have a high share of wallet with them so we lose the incremental margin between the dealer and the customer as well as their service revenue and any supplemental third-party products that they're selling. I don't know exactly what that is per quarter, but it's probably more than $10 million per quarter impact.

Okay. All right. And then, in terms of -- I guess, you mentioned companies getting more strict with their back-to-office policies. In terms of pipeline activity or conversations you're having with your customers, has anything -- have you seen any meaningful change there, or is it kind of still status quo with what we've -- what you've talked about over the last couple of quarters? Like, how is the pipeline of activity looking?

Well, it looks pretty good. I'll start with opportunity creation, which has been okay. Not great, but not bad. But our win rate among the opportunities has been quite strong for the last several quarters. I think Sara has mentioned that previously in either quotes in the earnings release or in our comments on the analyst calls. And that has helped our high confidence part of the pipeline be higher than prior year. So, we feel pretty good about that. We've got a nice backlog of projects that we've either competed for and already won and they're in our pipeline, or that we have high confidence in because it's a deep customer relationship, long history, and we think we're positioned well. So, when we look at our high confidence portion of the pipeline, which is frankly the most important part of it, it is showing growth over prior year.

Okay. Great. Thank you.

Your next question comes from the line of Steven Ramsey from Thompson Research Group. Please go ahead. Your line is open.

Good morning. Maybe to clarify on the delivery issues that impacted the quarter, first, I assume deliveries are better year-over-year. Maybe you can confirm that. And then, is this a cost issue or simply timing? And then, maybe a third one to add on, what are delivery times now versus pre-pandemic levels?

Yeah, Good question, Steven. They are way better than they were a year ago. I don't remember exactly what they were in the third quarter, but they peaked at like 14.5 weeks. And these again are a function of a lot of things. It's what is the requested delivery date by our customer and then how do we acknowledge it based on our lead times and our supplier reliability. So, it peaked a year ago, I think in Q4 of FY '22 maybe at 14.5, and that compares to pre-pandemic levels that were closer to 8.5 weeks. We had been trending down from the 14.5, and we were at 10 -- I think, averaging 10 weeks inside of our Americas core business in Q2. We thought it might come down a little bit into the nines this quarter and it stayed at 10.

Okay. That's helpful. Thanks for clarifying that. On the 2025 outlook, how much of that growth is driven by large corporate customers, how much of that is other verticals and some of your long-term push to diversify that customer base?

Well, I don't know that today I'm ready to talk about targeted growth rates across our vertical markets, but I will say that we expect large company to continue its momentum, which really began earlier in the fiscal year, and we believe is continuing to trend and the positive trend, we believe, is correlated with a stronger return to the office and more activity that's being driven by people being present and identifying needs to change. That said, I think we'll also target and see growth across our vertical markets. I don't know that we'll see it in every vertical market. We've talked in the past as an example, for healthcare, we're seeing growth on the clinical side, but declines on the admin side. So, in total, I don't know yet what we're going to target for that vertical in particular. I'd be surprised if we weren't targeting growth in education. That remains a very strong positive vertical for us, and things are indicating that -- trends are indicating that we should be able to target growth across that vertical. But to what degree and how that compares to large co, I don't know that today. Might be more detail that we'd be able to share in March.

Sure, totally understand. Last thing from me. Thinking about the next leg of growth for the office furnishings industry, do you think there's an incremental catalyst beyond just RTO grinding forward, or is it just kind of the continued momentum of more workers being back in the office more days in the coming months and years?

Well, maybe I'll start and then I'll let Sara pile on. I'll just quickly say yes. I mean, I think not only do people need to get back into the office, I have a strong belief that people are better when they're together. But the office is not configured to support the new ways of working, which I'm sure Sara wants to talk more about.

Yeah. No, I'll jump into that, and I would agree. I think the answer is yes. I mean, certainly, return to office will, we believe, drive continued interest in our business and our sector. But beyond that, as Dave just said, I think offices, in general, are not configured to support the ways people are looking to work. So, whether that's privacy and focus, whether that's supporting collaboration, whether that's helping rebuild social connections and personal engagement and well-being, I think all of those things are kind of open questions that lots of organizations are thinking about and trying to make investments in support. I would also say even beyond that I think the future is going to be no different from the past in the sense that there will continue to be broader, I'll say, macro-level trends that I think can also provide support to our business. For example, I was in Mexico City with our team down there a couple weeks ago, and they were talking about how much the near-shoring trend is driving opportunity for them as companies from around the world look to make different geographic choices and that's leading to a real boom of opportunity. I think we also probably all have lots of really interesting questions about how things like the growth of AI is going to change businesses and cause need for hiring or different kinds of jobs or entire new companies kind of cropping up. So, I think we're always also looking at those kinds of changes in the broader landscape and thinking about how we can target our innovation and our solution to help organizations as they adapt to those things. So, I think there are likely to be multiple things happening that provide potential for growth for us across our business.

That's great. Thank you.

[Operator Instructions] Your next question comes from the line of Budd Bugatch from Water Tower Research. Please go ahead. Your line is open.

Thank you for my -- thank you. Happy holidays to all, and congratulations on the quarter.

Thank you.

Thanks, Budd.

Let me try and get out of the noise here. Let me ask just a couple of questions. Dave, on the guidance, you're at 31.5% for the upcoming quarter and you reported 32.4%, I think for the third. Is there a way to get from the gross margin guidance from what you reported in third quarter to what you're looking for, for fourth?

Yeah, a little bit of it has to do with the inefficiencies that we tend to see in January and February when our production slows down and we leverage that opportunity to enhance or increase our maintenance -- equipment maintenance in the facilities. That's really the biggest driver that we see between the two quarters. And that's really a global situation. In Asia, we have Chinese New Year, where we shut down for a week or 10 days. And we also go through kind of our annual maintenance work in January and February in Europe.

Okay. That makes good sense. Congratulations on International. Obviously, a lot of work has been going in there. Is that persistent? You can see the persistent lower expenses? And do we see -- do we look for operating profits going forward quarterly from International, maybe with the exception of the vacation quarter?

Yeah, we are projecting profitability in both EMEA and Asia Pacific for Q4. And we'll see what next year looks like, but I like how the activity levels have been trending. The opportunity creation in Europe is actually not bad, it's actually decent. There are a number of relatively large project opportunities that have surfaced in the last 90 to 120 days that we're working on and will compete for. And we -- it just -- it feels like activity level there is just a degree or two higher than it is in the Americas and certainly then you might traditionally expect based on the macroeconomic environment. And I think a lot of that has to do with the fact that they are in fact more back in the office, and they recognize that they need to change their office environments. So yeah, we feel good. The teams are working very hard, driving a lot of cost reduction, continuing to realize pricing benefits. And we saw a little nice uptick in our win rate in Europe and in Asia as well. So, I think we have the right applications, the right sales teams, and we're competing effectively.

Okay. And last for me before my holiday wish is the large corporate customers that seem to be -- you seem to be gaining either share with them -- maybe both share and win rates and the behavior that we're seeing out of those large corporate customers. We've heard CEOs all over the State say they want their people back in the office and we've seen pushback being notably written about and talked about. Sara, what are you seeing, and how are they successfully getting people back into the office, and what's happening on that front? Can you give us a feel of how that looks going forward and what you've seen most recently?

Sure. So, we've certainly seen many companies working hard to encourage their employees to be back in the office for some period of time. And I think many leading organizations that we work with are doing that, first, by being clear about their expectations, but more importantly by making sure that they're really highlighting what is it about the office that can make that a really terrific place to help people do their best work. So, what are the amenities? What are the tools? What are the ways in which the office can support better work? And I think companies that we work with are trying to put their investments behind that in terms of spaces that really support those behaviors like I talked about a minute ago. So, thinking about how do we create great environments for people to focus? How do we create great places for people to connect with one another in like deeply human and personal ways? How do we support well-being? How do we support collaboration to foster innovation? How are those organizations looking at their sustainability goals and thinking about spaces that support those goals? So, I think those are the kinds of things we continue to hear from the organizations that we work with, and they believe and I think they're seeing some evidence that when you create a really terrific space that can support people in these critical ways, it becomes a draw. And people find that kind of environment energizing and supportive and they'll spend time there. So, I think that's broadly what I would say we're seeing across our client base, especially with large organizations.

Thank you. And, well, congratulations on the progress so far this year, and happy holidays and best wishes to everybody for a happy holiday season and certainly for a healthy and happy and hopefully peaceful New Year.

Thank you. You too.

Thanks.

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

Well, thank you all for joining us today. We appreciate, as always, your interest in Steelcase, and I want to wish everyone a happy holiday. Thanks.