Steelcase Inc (SCS) 2021 Q1 法說會逐字稿

Good day, everyone, and welcome to Steelcase's First Quarter Fiscal 2021 Conference Call.

As a reminder, today's call is being recorded.

For opening remarks and introductions, I would like to turn the conference over to Mr. Mike O'Meara, Director of Investor Relations and Financial Planning and Analysis.

Thank you, Sarah.

Good morning, everyone.

Thank you for joining us for the recap of our first quarter fiscal 2021 financial results.

Here with me today are Jim Keane, our President and Chief Executive Officer; and Dave Sylvester, our Senior Vice President and Chief Financial Officer.

Our first 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 risk 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, Jim Keane.

Thanks, Mike, and good morning, everyone.

It was just 3 months ago we released our results for the fourth quarter and fiscal year 2020, and it was a great year, the best in nearly 20 years.

And during our call with all of you, we discussed how it was clear we were facing the worst human health crisis in our lifetimes, and we knew the economic impact would be extraordinary.

I told you we had 2 objectives, to keep our people safe and to protect our business.

3 months later, I think we've done both.

We modified our production lines around the world, provide adequate separation between workers, and as we restarted these lines, we ramped up production speeds and staffing gradually.

Where possible, our office-based employees work from home.

And in our offices, we implemented modifications to keep everyone's space.

3 months ago, we were aware of a few positive cases.

And since then, unfortunately, we've had other employees around the world contract the disease.

But to the best of our knowledge, we have had no transmission between employees in our factories or offices.

So we are keeping people safe.

We are also protecting our business.

Again, 3 months ago, we had already closed or significantly restricted production in many of our factories around the world.

We had already taken dramatic actions to reduce our fixed costs through salary cuts and spending reductions.

We knew it was going to be a very tough quarter, and it was, with $21 million adjusted net loss as you saw in the earnings release.

But those quick decisive actions really helped us avoid a much deeper loss.

And we actually did better than some scenarios we had modeled internally.

Of course, we are also focused on protecting and strengthening our liquidity.

The cost reductions really helped.

But we were also able to work with our customers, dealers and suppliers to optimize working capital.

We improved our liquidity position by $98 million in the quarter and finished with $799 million of total liquidity.

That puts us in a very good position to weather whatever comes next.

I'll give a little more detail on how the quarter played out.

March started out relatively strong.

Orders were about even with the prior year, and revenue was up.

But in the last 2 weeks of March, as stay at home orders were put in place in the Americas and EMEA and many of our factories began closing, orders and shipments fell off quickly.

April was an incredibly difficult month, of course, with revenues falling 60% versus the prior year.

In the Americas, it took a couple of weeks to reschedule our factories to run orders for customers considered to be in essential businesses, and then we ramped up production gradually as we called back workers.

By May, our shipments began to increase as restrictions were beginning to ease, but our lead times for new business remained longer than normal because of our large backlog.

That April and May period was pretty chaotic as we had to change customer delivery dates multiple times as our situation changed, and sometimes orders we shipped could not be delivered because of changing local restrictions.

Now in June, lead times for most products were back to normal, and our factories have been quite busy.

Only our Mexico and India factories continue to face some local restrictions.

We expect to have a much better second quarter compared to our first quarter because we have so much backlog to produce and ship.

We're going to be particularly busy, particularly in the Americas, and we expect to be profitable.

So what's next?

Obviously, orders are down significantly because in most places around the world, work is just starting to come back to the office.

Some customers are getting ready to bring their employees back to work by making temporary inexpensive modifications to their offices, often with our help.

However, in more dense metropolitan areas, challenges around elevators and public transportation will likely force many companies to delay a return to the office until the virus is contained.

We are working with these customers to provide work from home packages they can offer to their employees to provide a more ergonomic and productive work from home experience.

We do see projects in the pipeline in every region.

Customers with new leases and existing projects on the books are likely to complete those projects though perhaps on a delayed time line.

We expect to see continued strength in the government and education sectors, but many other customers are doing what we're doing, protecting their businesses by cutting back on short-term discretionary spending as they prepare for a challenging year ahead.

Our conversations with customers are beginning to shift towards actions they can take now to help them prepare for the next evolution of the office.

We've all seen articles suggesting the office is dead, and we will all work from home.

Those types of articles were being written 20 years ago, and they were wrong then and they are wrong now.

They show up every time there's a new technology like laptops and then high-speed Internet and WiFi and now low-cost video conferencing platforms.

The predictions are always wrong because it's not about the technology, it's about the people.

It's not about whether you can have everyone work from home in the short run.

It's whether in the long run, you can win that way versus your competitors who are always innovating, always transforming and always disrupting.

Over 20 years, we've occasionally seen customers announce large-scale work from home programs.

And then 2 or 3 years later, those programs are quietly dismantled, and employees are asked to return to the office.

It takes a while for the problems to show up, but they always show up.

On the other hand, it's always been a good idea to give employees the flexibility to work from home from time to time.

The workplace is an ecosystem of places, both in the office and outside the office.

We believe as we emerge from this crisis, working from home will be embraced by more companies as part of a holistic approach to more effective work, and we will continue to expand our products and our programs to support working from home, but the office is far from dead.

In fact, we believe customers and their employees will expect more from the office as we look to the future, and that's where our conversations are centered.

Meeting spaces will need to more fully support remote participants.

When employees need to really focus on individual work, spaces must provide privacy and separation without compromise.

Nobody should feel they have to work from home to get work done.

Employers will reevaluate workstation density and desk sharing policies to address raised awareness of infection control as part of well-being.

And spaces need to be far more flexible so they can adapt more easily to changing conditions.

We're excited about the future of the office, and we continue to help our clients imagine what might be next.

Yesterday, our Board of Directors increased our quarterly dividend to $0.10 per share, reflecting the strength of our liquidity position and the expected improvement from the first quarter.

The dividend is still well below last year, since we expect this will be a challenging year.

And given the impact on the global economy, the challenges could extend into next year.

We're not providing guidance, but we are committed to continuing to take whatever actions are needed to manage our business through the crisis.

Finally, I want to reflect on the conversations we've been having in America and around the world about racism, diversity and inclusion.

We've been having those same conversations within Steelcase and listening is always the best way to start.

We're also providing opportunities for all of us within Steelcase to learn more about these topics.

And we're also taking action, for example, by setting goals to increase employment of underrepresented groups.

We're also continuing to work with the communities in which we do business to promote social justice.

Most of our work is through social innovation, where instead of just making contributions, we offer opportunities for our own people to put their skills and talents to work in helping nonprofits in our community.

For example, during the worst of the crisis, we made masks and screens for our local hospitals to use when PPE was not available.

This year, in addition to our regular internship program, which we kept in place despite the crisis, we're sponsoring 50 additional summer interns from Grand Rapids Public Schools.

(technical difficulty)

Points of Light organization included Steelcase in their Civic 50, which they consider the most community-minded companies in the nation.

For a company of our size, this was truly an honor.

We are excited about what we can do next.

So in summary, we knew the first quarter would be tough, and we made some tough decisions.

It turned out a little better than some scenarios we modeled and our liquidity is strong.

We expect the second quarter will be better as we work through the backlog, but we could face soft demand as customers get ready for what's next and economic conditions remain uncertain.

We're confident the office will remain the best place to work and will continue to evolve even as working from home rises in importance and we continue to work on being a better company and helping improve the communities in which we operate.

Now I'll turn it over to Dave for more detail on our financials.

Thank you, Jim, and good morning, everyone.

There is a lot of material to cover this morning.

So I'll start by summarizing a few key takeaways.

First, the management team took decisive and broad-based actions to reduce our cost structure due to the unprecedented nature and speed of the government-required closures across many of our markets, which ultimately drove the 41% revenue decline.

As a result, our first quarter adjusted operating loss of $35 million was approximately $70 million smaller than it would have been had we not taken such aggressive actions as quickly as we did.

Second, strong accounts receivable collections and a significant increase in customer deposits contributed to sustaining our very strong liquidity position at the end of the quarter, which approximated $800 million and included $162 million of COLI balances.

Third, we are projecting our strong backlog of customer orders and the continuation of significant cost reduction efforts will result in operating income for the second quarter, which we estimate will more than offset the first quarter adjusted operating loss and drive year-to-date profitability halfway through the fiscal year.

And lastly, in the midst of continued uncertainty, we are unable to provide an outlook for the remainder of the year, but to help with your modeling, we are sharing that we currently estimate our breakeven point for adjusted operating income is approximately $600 million of quarterly revenue, with the current level of salary reductions and other cost containment efforts we have in place.

To better understand the impact of the significant revenue decline on our first quarter operating results, I believe it's most insightful for me to walk through a sequential comparison to the first -- of the first quarter and the fourth quarter.

To start, we should first adjust the fourth quarter to exclude a few nonrecurring items, all of which were disclosed in detail last quarter.

These items include PolyVision's operating results and the net gain related to the sale of PolyVision.

The impact of the extra week and variable compensation expense related to some discrete tax benefits.

Adjusted for these items, we estimate fourth quarter revenue would have approximated $885 million, and operating income would have approximated $56 million.

This compares to our first quarter revenue of $483 million, and the adjusted operating loss of $35 million, or an approximate $90 million reduction in our adjusted operating results.

Without the actions we took to reduce our cost structure, the $402 million sequential decline in revenue on its own would have reduced operating income by an estimated $160 million or more.

The related decremental variable margin of approximately 40% benefited from the impact of a couple of items.

First, we made the difficult decision to enact temporary layoffs across much of our hourly workforce in the U.S. and some other markets, which maintained the variable nature of our direct labor costs during a period of dramatic revenue decline; second, we recorded $23 million of lower variable compensation expense, which had a positive effect on the decremental margin.

That is until we crossed variable compensation thresholds as the revenue decline deepened and we began posting losses.

As a partial offset to those benefits, we experienced some labor and logistics inefficiencies related to the shutdown and restart of our operations, plus we funded various temporary employee benefits like the full funding of employee health insurance premiums, return to work incentives and free lunch programs, but these items had a smaller effect on the decremental variable margin.

Beyond these variable items, we took significant actions to reduce our remaining cost structure, which had the effect of reducing our spending in the first quarter by an estimated $70 million and lowering the overall decremental operating margin to approximately 22% in the quarter.

The actions included significantly reducing salary costs through temporary reductions in hours and base pay, plus we substantially eliminated semi-variable costs and aggressively pulled back on project and other discretionary spending.

We took similar actions around the world, but the overall decremental operating margins varied by segment, approximating more than 20% in the Americas, approximately 20% in EMEA and less than 20% in the Other category, each adjusted for the nonrecurring items in the fourth quarter that I mentioned earlier.

Before I move to our liquidity, I will cover our income tax benefit in the quarter, which approximated 30% of the pretax loss.

Historically, we have calculated our tax provision during interim periods by utilizing an estimated full year effective tax rate.

However, for this quarter, we recorded our tax provision based on an estimate using only first quarter results, essentially as if we were filing a 3-month tax return.

We took this approach given the heightened uncertainty associated with estimating a reliable effective income tax rate for the fiscal year as well as potential benefits that may be available under the provisions of the Cares Act.

As a result, the mechanics of our first quarter tax provision primarily included the following: we adjusted the pretax loss to exclude the nondeductible impairment charge as well as some other smaller items, and then we estimated our international and U.S. provisions for the 3-month period, assuming the U.S. portion of the pretax loss would be carried back 5 years under the Cares Act and reflect the federal benefit of 35%; and lastly, we revalued net deferred tax assets in the U.S. that we estimated would reverse in the period and contribute to the net operating loss, which can be carried back 5 years under the Cares Act and thereby, generate tax benefits at the higher statutory rate of 35%.

The first quarter income tax benefit of approximately $17 million, included an estimated $10 million of net benefits related to the Cares Act.

Our ability to realize the tax benefits recorded in the first quarter is dependent on our full year results, which could be substantially different compared to the first quarter.

It's possible we may be in a better position to estimate an annual effective tax rate for this year in a subsequent interim period and it's also possible we may continue to take a year-to-date approach in the preparation of the second quarter tax provision.

In either case, the effective tax rate recorded in the first quarter may not be indicative of what to expect over the course of fiscal 2021.

Our liquidity increased by $98 million compared to the end of last year despite the adjusted operating loss we recorded in the first quarter.

The cash surrender value of our COLI assets increased by a couple of million dollars and the remaining $96 million increase in liquidity resulted from the following inflows and outflows.

In March, out of an abundance of caution, we borrowed against our global credit facility and $245 million in borrowings were outstanding at the end of the quarter.

Consistent with many other companies that initially took a cautionary approach to liquidity and credit facility access, we will be considering whether to repay some or all of the outstanding balance in the coming months based on the level of stability in the overall capital markets.

We returned $51 million to shareholders through share repurchases and dividends in the quarter.

The share repurchases included those made to satisfy participants' tax withholding obligations upon the issuance of equity awards, plus we repurchased 3 million shares during the first 3 weeks of March under a 10b5-1 repurchase plan we entered into in December 2019.

The dividend of $0.07 represented a $9 million reduction compared to the dividend paid in January 2020.

And with the increase to $0.10 approved by the Board yesterday, our July dividend represents a $6 million decrease compared to the prior year.

We funded approximately $160 million of variable compensation payments and benefit plan contributions relating to fiscal year 2020 as well as retirement and deferred compensation plan payments.

Customer deposits increased by $95 million in the quarter, largely due to temporary discounts we offered our dealers to incentivize them to pursue customer deposits and sustain positive banking relationships.

The remaining net decrease of $33 million was driven by our operating loss in the quarter, along with capital expenditures of $9 million, which were 36% lower than prior year.

A modest use of cash related to working capital in the quarter reflected a $116 million reduction in accounts receivable, which was more than offset by a significant reduction in accounts payable due to our reduced spending levels and a $33 million increase in inventories, which was driven by government restrictions and the increase in our backlog of orders.

We finished the first quarter with a strong backlog of customer orders, which totaled $751 million and was 11% higher than the prior year.

We have seen some order cancellations but so far, they have remained relatively small and isolated, and some were reordered with different applications and/or at smaller amounts.

Most of the backlog is scheduled for manufacturing and delivery by the end of August, and all of our manufacturing and distribution facilities are currently open, although a few are currently subject to some government restrictions on their operations.

It's possible some of the backlog may be further delayed or even canceled and/or our operations could be impacted by changing government restrictions.

The level of revenue we post in the second quarter will be dependent on our ability to manufacture and ship the backlog and/or our customers' ability to receive and install the furniture as well as the conversion rates we experience relative to new orders received throughout the quarter.

It's also important to note that the backlog number does not include dealer incentives or various sales returns and allowances, which are an offset to revenue and can vary relative to revenue and performance from quarter-to-quarter.

We anticipate significant improvement in our second quarter revenue compared to the first quarter.

But with so many variables in play, we are not providing an estimated revenue range for the quarter.

We expect the incremental operating margin related to the sequential revenue improvement in the second quarter to be better than the decremental operating margin we experienced in the first quarter relative to the sequential revenue decline.

The second quarter incremental margin will benefit from variable compensation expense not being accrued until we offset the first quarter adjusted operating loss and begin to exceed return on invested capital target thresholds.

However, it will be somewhat dampened by the easing of our salary reductions in May as well as the possible reinstatement of some additional discretionary spending in the second quarter.

All in, we estimate the second quarter incremental operating margin percentage related to the sequential revenue improvement will range between the mid-20s to the low 30s.

Thereafter, as we approach the back half of the year, our revenue will be dependent on the state of the broader economic recovery and capital spending, which will be influenced by CEO and CFO sentiment.

There are positive scenarios wherein employees return to the office more broadly.

And in preparation, companies invest to reconfigure and retrofit their spaces to improve social distancing, health and safety.

And there are other scenarios, wherein one could imagine that companies extend their work from home strategies and prolong capital preservation.

Larger cities may be impacted for longer periods of time than smaller cities due to concerns related to public transportation and elevator logistics in taller buildings.

Certain vertical markets may rebound faster than others.

Our recent order patterns reflect some of these variations now, but we don't know how long it will last and which sectors or markets will begin to loosen up and get back to work more quickly than others.

Thus, we are unable to provide an outlook for the remainder of the year.

What I will share is some color around our current breakeven point taking into consideration the current level of temporary salary reductions and other cost containment efforts we have in place.

As I said at the beginning of my remarks, we estimate the adjusted operating income breakeven point approximates $600 million of quarterly revenue.

That level of revenue would translate to an approximate organic decline in the second half of the year of between 35% and 40% compared to the prior year, adjusted for the sale of PolyVision and the extra week in the fourth quarter.

Let me stress, though, that this is not a forecast.

While orders in June have so far averaged a 34% decline from the prior year compared to the 47% and 42% declines we posted in April and May, respectively, they remain volatile week to week, and the prior year comparisons vary week-to-week and month-to-month as well.

And while we are having a growing number of conversations with customers about how to improve the safety and effectiveness of their offices, it's too early to predict the timing and magnitude of any related order patterns.

Our breakeven estimates assumes the continuation of our current cost reduction efforts, but those may change or take on a different form as we could experience attrition and not backfill all positions or we may choose to increase our investments in growth strategies.

It's also possible that we might take action to reduce our cost structure more permanently if we think our revenue may remain severely impacted through next year.

We just don't have enough information to make any of those decisions right now, which is why we are currently maintaining the average 20% salary reduction and keeping very tight controls over our semi-variable costs and discretionary spending.

In closing, I feel very good about how effectively our leaders are navigating through this crisis, serving our customers, taking care of our employees and supporting our community partners, all while protecting the company and our liquidity.

I remain very impressed with the agility of our dealer partners as well as our suppliers across our global supply chain, and I cannot say enough positive things about the resiliency of all Steelcase employees, especially those in manufacturing and distribution, many of whom went from working full-time in early March to facing restrictions or being laid off for nearly 2 months and are now back working as hard as ever to fulfill our backlog while enduring the heat of the summer months with modifications to their standard work due to social distancing and other safety measures.

From there, we will turn it over for questions.

(Operator Instructions)

Our first question comes from the line of Steve Ramsey with Thompson Research Group.

I guess thinking about conversations you're having with customers, just more detail on, are these conversations centered around more near-term solutions?

Or are they thinking longer-term in nature yet about how offices will look?

And are they talking about how they will do work from home scheduling with offices or full-time office, and if they're going to be expanding square footage?

I mean, just kind of the color qualitatively around those conversations.

Sure.

So this is Jim, and I'll take that on.

So the -- I'd say the conversations are on all those things, and it's difficult to quantify it because we're not like trying to keep score, but even with the same customer we'll sometimes have a conversation that will cover the full range of the things you talked about.

So just to add more to that, I'd say that the first level of conversation we've had with them is often just how they're running their business.

For companies that have factories, they're curious about what we did in our factories.

All of our customers have offices, of course, they want to know about the protocols we're using, temperature checks, and one-way aisles and temporary modifications to workstations and how they can do that themselves.

So the conversations often start there.

Some customers choose to make those kinds of short-term modifications.

I'd say they generally, when they're doing that, they're looking for inexpensive options.

They're imagining that those are going to be temporary and largely disposable, and they don't want to spend a lot of money on it and they want to get it in place quickly.

So we have products that allow them to do that, whether it's clear plastic screens or it's corrugated screens, temporary solutions to help them do that.

So that's often where the conversation starts.

It starts with protocols, and then they may start with modifications to their space.

Now how eager they are to do those modifications depends on where they are geographically and how they're thinking about their own return to the workplace.

As I mentioned, you have customers in very large cities that are probably going to be the last to do that because it's not just about the office, it's how do we get people to the office.

So how do they -- what's the deal with public transportation, are people comfortable getting on the subway?

Are they comfortable -- how are they going to be able to deal with elevators in very tall buildings?

The elevators just can't be filled at the density that they've done historically.

So people are imagining it could take a long time to get people up and down.

Some companies right now, I think, I'd say, starting in mid-June through now, are beginning to ease people back into the office.

We're hearing about ideas like bringing the first 25% back in places where they weren't there.

I spoke to a customer yesterday, though, that is an essential business and they -- they're at 95% occupancy right now, and they never really went through the shutdown.

So it really depends on what industry they're in and what part of the country they're in.

Beyond the very short-term discussions, we're also trying at the same time to extend the conversation to talk about how people could renovate spaces.

So how they can make their meeting rooms work more effectively.

For example, we know that for a significant period of time here, we're going to have, in most cases, people in the office and people at home.

And so every meeting is going to require people connecting in using Microsoft Teams or Zoom or other platforms.

And the spaces really aren't set up for that, and we're not used to it.

So for the last several weeks, for companies that have been largely shut down, everyone has been on the video call, but they're all calling in from their home.

It's a different dynamic when half of the workforce is in the office and half is calling you from home.

It changes the experience for everyone.

So how do you create spaces that do that?

Again, we have lots of ideas about how we can help people support that kind of work.

And then the longest term conversation is more about reinvention.

So how do you change the office in the long run to benefit from all the things we've learned?

So for example, in the office, as I mentioned before, our people will expect more privacy.

There will be more attention and sensitivity around infection control.

And I think that will extend beyond the next few months.

So extend beyond when there's a vaccine.

Not everyone is planning on getting a vaccine.

And we know that vaccines, even the best vaccines for flus we have today aren't fully effective.

So the sensitivity around infection control will continue, and people will need to make changes to their office to support that.

And they're going to value more the power of the office when it comes to creativity, innovation and collaboration.

So a lot of clients are saying, let's start there.

Let's think about where our office is going to be long term.

And then let's move backwards to now.

What are the things we can do now that are actually no regressments?

They're not disposable.

They're actually a path to a new kind of office.

And those are the kinds of conversations we're having about that topic.

And then secondly, you mentioned work from home.

And of course, we're having a lot of conversations with customers about that as well.

They realize that work from home is working okay for some employees, but not so well for other employees.

And even for employees who would like to work from home, they don't have the furniture they really need to have the safe, productive ergonomic environment, and they're discovering that as the time goes by.

So customers are coming to us and saying, how can we put together some sort of a program or how can we support our employees as they try to outfit their offices at home with better furniture, and we're working in lots of different ways with clients around that idea.

That's helpful.

And I want to focus on education for a minute specifically.

What is near-term demand looking like in the education basin?

Is there opportunity here with Smith over the near and the long term?

And maybe just strategic updates in how you're pursuing this market, I would assume it's somewhat dynamic right now also.

Yes.

It's dynamic.

And yet, I'd say it's strong.

So we've had a continuation of strong demand from the education sector.

I'd say, in fact, if you looked across all the sectors in which we do business, essential business, of course, has been strong throughout, government is strong, but education has -- it's really strong.

And this summer, as we all know, schools from kindergarten through college are working to try to change their environments to prepare for what's next.

How do they have the right level of social distancing?

How do they change their density?

How do they provide more flexibility?

And so this is true in the United States, but it's really true all around the world.

We're seeing an uptick in demand and orders.

Just this morning, we got news that we won a project in Europe for 4,000 node shares from a school system in an area that was hard hit by coronavirus.

And the idea of getting an order for 4,000 node shares all at once is -- I mean, that doesn't happen every day.

So that was -- that's just a sign of what we think is happening right now as people are trying to prepare for what's next.

Our challenge is just being able to keep up with the demand right now in the education sector.

There's certain products that are in high demand.

And as we're getting our production up to full capacity, we're working to be able to fulfill that demand in order to suggest alternative products to help people meet these needs.

Yes, Steven, if you think about the Smith System business in K through 12, they over the last several months or quarters, various communities and school districts raised capital to modify their school systems, and that capital raise was -- cannot be used for normal operating purposes.

It has to be used for renovation.

So a lot of that activity is continuing this summer.

Of course, some of it is being modified given the pandemic, but it is moving forward.

So our Smith system business has remained quite busy.

And then remember 2/3 of their -- historically, 2/3 of their revenue annually is recognized in the summer.

Our next question comes from the line of Greg Burns with Sidoti & Company.

Dave, when we think about the $600 million breakeven point for revenue, obviously, the incremental margins in the second quarter will be a little bit on the higher side.

But looking beyond that on a more normalized basis, if we take the $600 million as the baseline breakeven, how should we think about the decremental and incremental margins from that $600 million baseline based on the current cost structure?

Well, I don't know how to answer that because I -- to imagine decremental margins beyond $600 million would require me to imagine further cost reductions.

If we thought that we were going to move below that level, we would very likely be talking about taking additional actions, which would influence the decremental margin.

And on the incremental margin, it's going to depend on the level of confidence that we have really in the midterm outlook.

Because that's -- the point of our -- the strength of our liquidity is to not only protect us in this, but also to be one of the first ones to play offense on the way out.

So at the point where we anticipate things are starting to solidify and improve more significantly, we may look to more aggressively invest or get behind some of our growth initiatives.

So I can't really give you a firm incremental or decremental.

I'm just trying to give you a sense of at our current cost reduction efforts, we are -- we would expect our breakeven to approximate $600 million.

Okay.

And then in terms of the backlog, the commentary you gave there, the cautionary commentary about it's going to depend on government regulations.

But as it stands now, with what you're seeing in the market, do you think you'll be able to deliver that -- the majority of that backlog?

Would something have to change from here for you to not be able to deliver that backlog?

Or how should we think about kind of the current state of the market, how you see it and your ability to deliver against that backlog?

That's correct.

Something would have to change from here.

And what I was trying to provide color on is we've seen a lot of change and therefore, we could experience some additional change.

But if nothing changes, that backlog is scheduled for manufacturing and delivery, those schedules have been confirmed with dealers and customers.

And so if that plays out, we would expect to manufacture, ship and recognize much of the revenue associated with the backlog.

And I'll add to that.

A lot of the government regulation shifts that we've seen are a matter of moving shipments up a couple of weeks or back a couple of weeks.

I doubt that we would -- we don't have any intelligence right now that would suggest that there would be actions that could cause us to push back what we currently have into further out into other quarters.

It's really just a matter of a couple of weeks here or there.

Okay.

Great.

And then lastly, in terms of the evolution of work from home, you mentioned being positioned in more like a B2B type environment where companies are leveraging yourself to supply their workers.

But what about the B2B2C side of the market, where maybe consumers are on their own to go out, get their home offices?

How are you positioned overall in the work from home market?

Is it going to be mostly a B2B kind of traditional model for you?

Do you have a B2C component?

Is there investments you need to make there?

How do you characterize the opportunity in work from home for Steelcase?

Yes, it's really both.

So to some degree, it's because you need to have the B2C to have an effective B2B.

So what I mean by that is sometimes business-to-business customers will come to us and they actually want to put together a discrete program for their people.

They want to help choose the furniture and buy a package and then have us fulfill that.

And that's great.

Sometimes business-to-business customers will instead provide a stipend to their employees and direct them to certain websites where the customers -- where the employees can go where they get additional discounts and so on.

And those are typically our B2C platform that they go to.

Now we might create a special version of that B2C platform just for that customer's employees.

But we have a platform that's called store.steelcase.com, and you can go take a look at it.

We've recently invested in upgrading the back end of that platform to improve the buying experience and to modernize the reliability of the back end of that system.

So -- and that just happened a couple of weeks ago.

So we are ready to go to support that kind of business.

And then we also do and have for a long time, sold our products directly to consumers through that same website.

And that demand is also rising.

So people whose companies might not have a program, still are finding themselves working from home and are often saying, "I want that same chair at home that I sit in at work, I want a height-adjustable table." And so we're seeing rising demand for that.

And then beyond our own website, we've sold our products through partners who have their own retail and e-tail platforms.

And most recently, we've extended our partnership with West Elm.

As you know, with West Elm, we've used a lot of their designs and interpreted and reengineered their designs to be sold as ancillary products in corporate work settings.

But now we've extended that partnership so that we're selling Steelcase work-from-home product to the West Elm websites.

So if you go to a West Elm, you can see a collection of products there that integrate Steelcase products with West Elm products, including products that we do for West Elm.

So it's just another way for us to address this market.

(Operator Instructions) Our next question comes from the line of Reuben Garner with The Benchmark Company.

So I had some connection issues working from home and so if I repeat anything, sorry about that.

But maybe I'll just start with Dave, the color you gave around the decremental and incremental, sequentially, if -- I guess, maybe some back-of-the-envelope math, if you're -- I think you said that you're expecting year-to-date after the second fiscal quarter that you'll be breakeven or profitable.

I can't remember how you worded it, but does that imply with the decremental -- or sorry, sequential incremental margin comment that -- commentary that you gave that we should be looking at -- and I know you're not giving guidance, but just based on what you have provided that we should be looking at kind of a minimum revenue number in the low $700s than a minimum profitability number in the $35 million EBIT number for Q2, is that what you've pointed us to, at least to start?

No.

If I was, I would have said that.

I would -- you know me, Reuben, I would have been explicit.

No, I was really just trying to give you the math of what was behind the decremental margin of 22% at the operating line between Q4 and Q1.

Again, adjusting Q4 for the nonrecurring PolyVision sale and extra week, et cetera.

And then trying to articulate why we think the incremental margin between Q1 and Q2 will actually be better than that, and then we ranged that.

In my quote in the release and in my earlier remarks this morning, I've said that we expect to be profitable in Q2 and profitable year-to-date.

And that's on an adjusted EBIT basis, I guess, is the (inaudible)?

Yes.

I mean I'm excluding the impairment charge we took in the first quarter.

Okay.

All right.

And then, Jim, you mentioned, lead times.

I think you said mostly back to normal or maybe it was most products are back to normal.

What, if any, products -- or Dave, I think you mentioned in certain countries, there was -- or jurisdictions, there were still restrictions on your manufacturing.

How big of a deal is that for you guys right now?

And I guess, are there any states -- specific states or countries that we should be watching for if the virus does pick up again and restrictions go backwards and not forwards.

I know Michigan is a big one for you guys, Mexico.

Where should we be keeping an eye on to make sure that you guys are able to actually manufacture and ship the product?

Yes.

So we have -- I'll just give you a list of factory locations in the U.S. So Michigan, of course, is super important to us.

Alabama is also important to us.

We have smaller but important facilities in Texas and California.

And then we have regional distribution centers that are -- I won't go -- try to give you a list because I wouldn't be able to do them all.

But they're located in different spots.

Now for the RDCs, if you -- if an RDC happens to be in a state that restricts distribution, which we did run into briefly before, that can have an impact temporarily while we reroute our shipments.

We usually are just dealing with that as a matter of disruption not permanent closure or inability to serve customers in a market.

For manufacturing, I gave you the list, of course, I'd say Michigan and Alabama are the two that we're always going to be watching.

And I think every -- I don't know what the governors are going to do if they see a rise in cases.

I think there's a general understanding that the first wave as it hit caused people to take fairly kind of across-the-board actions to just shut everything down.

I think now that there's more information about how viruses transmit and how spread happens, there's a recognition that it isn't everything in the economy that's causing that.

Like I said before, we've had 0 transmission in our factories.

So factories that are operated safely can be very safe.

In fact, in some countries, we've been told that they prefer to have the population working in the factories because the time in the factory is actually much safer than the time people come out in the general community.

So we're hopeful that if we do have a rise in cases in this first wave or if we have emergence of a second wave, that the actions taken in different states will be different than before.

In terms of specific products, it's -- we have a few factories around the world, this is really more outside of the U.S. We have factories around the world that are so limited, not many, just a couple that are limited to either essential business or they're not allowed to have people commute long distances to get to work.

Things like that, and I can't go through all the details of it here.

But things like that creates temporary and just, I'd say, an impairment of a part of our ability to operate that factory, but it's not major.

And then the other source of longer lead times would be places where the supply chain just hasn't come all the way back to normal yet.

We had production shutdown in some places in Asia, and those components have to go across the water to get to the factories elsewhere in the world.

And so some of that just hasn't sorted out yet, but within 2 or 3 weeks, 4 weeks, every week that goes by, that system gets a little bit more stable.

And my expectation is in 30 days from now, we won't be talking about that anymore.

Okay.

That's very helpful.

And just a quick follow-up on that before I move to the next one.

Maybe I should ask the manufacturing part this way.

Is there -- are you guys able to -- so let's say, Michigan goes backwards and shuts down manufacturing, even though it may not be likely at this point or the right thing to do.

If they did that, are you guys able to move things around?

Are you able to manufacture the things that you're doing in Michigan elsewhere to hold you over if that happens?

Or is that just not possible just given the way you're set up?

It is and it isn't.

So there are some products where we have good redundancy, and we can move production around.

And we -- every year, we get better at that.

But there's also cases where we can't, where there is something we only make in one place.

And then we have to do the calculus and say, okay, we can move it, but it's going to take us 8 weeks to move it or 16 weeks to move it.

And do we think by the time we move it that the order will have been reversed and we have those conversations all the time.

In general, it's not worth moving it because these actions are usually not long term.

And the cost of doing it is something you don't get back.

So you don't get efficiency when you do that, you actually spend money you don't see back.

So we try to make our best decisions about that.

But generally, we don't end up moving.

Remember, though, like one of the things we learned in Michigan is that -- and if they went back to a tighter restriction.

Remember, Michigan right now is one of the best states in the country as it relates to virus transmission, it's super low here.

And so hopefully, it'll stay that way.

But what we did learn as we went through this, is what is the definition of essential business in Michigan, what percentage of our production can continue to run.

And we didn't know that when we first got the order to shut down.

I mean we literally shut down.

It took us a little bit.

We just figured out what we were allowed to make.

It took us a little bit more time to resort our production so that we can make -- get everything else out of the way and be able to make the products we're allowed to make.

We learned a lot from that.

And so we've already had several meetings about, okay, if this were to happen again, how do we respond to an order in a way that lets us stay operating to the degree we are allowed to without the kind of disruption we saw the first time.

Got it.

And then last one for me.

Jim, you spent a good deal of time talking about reasons that the office is not dead in your prepared remarks.

I tend to agree with you.

My technical difficulties this morning are a prime example of why I need to be in an office.

But can you talk about your confidence in, I guess, over the last few months, how it's trended based on your conversations with customers that there is going to be not only a return to the office, but the investment needed to make that happen and how you guys will benefit?

And I guess as a part of that, how quickly should investors think about that business starting to return?

I know it's really hard to tell, but are your customers talking about doing more of the second stage, not just putting up shields, but actually changing the way they lay out the office.

Are they talking about doing that later this year?

Is that a next year thing?

Is that just a down-the-road hypothesis at this point?

Just talk about your confidence level and how it's moved over the last few months based on your conversations?

And that's it for me.

Yes.

I'd say, if you went back 2 months ago, you just have to remember where we were back then.

This is like end of April, we were in the middle of a firestorm, not just in the furniture industry, not just at Steelcase, but every customer was going through this.

Suddenly everyone was working from home, people weren't even allowed to go into their own offices in some cities.

It was -- things were on very tight lockdown and so conversations were all happening with customers who are also at home, and they were in no position to be thinking about anything at that point.

So today, it's very different.

They're beginning to operate their offices.

People are coming back into the office.

People are beginning to ask those questions.

So it is a very different situation.

So you asked about my confidence and how it's changed.

We weren't having much time to think about it.

When we were focused on making sure we could keep customer commitments, adjust the lead times.

Every day we'd solve one problem, there'd be two new problems to solve.

So we weren't thinking all that much about the long term.

I go home at night and I'd read my news feed, which would have article after article about how working from home is the next thing and the office is dead and all that.

And as I said earlier, this is only the 20th year I've read articles like that.

Whenever something like this happens, you see those articles.

In the last several weeks -- and our customers are reading those articles.

But in the last several weeks, you're seeing different articles.

You're seeing articles now talking about the impact on people of being isolated working from home from a kind of a human perspective.

And I guess, people are having technology problems, but [I think the] technology -- and I'm sorry about yours this morning, Reuben, but I'd say the technology part for most people has gone than it would have gone 5 years ago or 15 years ago or 20 years ago.

But the human part isn't.

People are dealing with all kinds of things.

And we've done large surveys to see what people are actually feeling as they've been working from home.

In the first couple of weeks, you have this kind of momentum.

And everybody's like, okay, we got to do this, and we're all in this together, and we're just going to figure it out.

But as time goes by what the surveys show is that frankly, people at the top of the food chain, the CEOs and the executives, the people who are in this room with me, we have -- we're blessed with homes that have dedicated spaces in which we can work.

If you work for Steelcase and you can use the employee discount, you've got great home office furniture.

And most CEOs and executives are in that state.

So from the C-suite, the perspective is this has been fine so far.

But if you were 25 years old or 30 years old, you might be living in a studio apartment in an urban environment.

And that studio apartment was not intended for you to be the place where you were going to be spending 8 hours a day, every day of the week or 24 hours a day, which is really the way it's working for a lot of these people, or you've picked up and you've moved home, which a lot of people have done because they just don't have room.

So they went home -- they're working from parents' home is the thing nobody is talking about.

And that can't last forever.

Believe me, that's not the dream of a lot of 25-year olds to move home with their parents so they can keep working.

So as time goes by, people are getting really fatigued with this.

And so our customers are also hearing that.

And so if you say my confidence, my confidence has actually been the same all the way throughout.

But if they track the trend, they go amongst our customers and their people, the momentum is actually shifting back now.

We had a customer, I just heard about this yesterday, a customer that we were doing a work-from-home program with -- it was going to be a large-scale work-from-home program.

They called us just a couple of days ago and said, you know what, we're not going to do it.

We're going to get people back in the office.

And I think that is beginning to happen now.

So again, we're not against work from home.

Just -- I don't want to finish with that.

The work from home is a good idea to provide people flexibility to be able to do that from time to time, it helps them balance work and life.

There are certain kinds of work activities for individuals, they might be able to do better from home.

They might just need a break.

But when you're in the office, you're connecting with people, you're building relationships.

It gives senior leaders an opportunity to, not just leverage the culture, but build the culture, invest in the culture.

And coming out of this crisis, I think everyone is feeling that.

We got to get people back together.

We got to rebuild a sense of who we are collectively.

And we got to get busy again, working on creativity and innovation.

Those are the things that we haven't heard as much about.

It's impossible.

You can measure productivity, by the way, on process work.

You can't measure productivity on things like creativity and innovation.

Eventually, it shows up in your stock price.

But you can't measure it over a few weeks, and you certainly can't measure it in a crisis like this.

So our confidence remains high that people will do that.

In terms of when will they make the investments?

That's probably a tougher one to say.

As momentum shifts from thinking about investing and working from home towards investing and working in the office, it will be sooner rather than later.

I think also -- there is probably a sense there for a while.

We just have to get through a few months of this, and then we'll have a vaccine and it will be done.

I think a lot of people are realizing post vaccine, it will be a lot better, but it won't be perfect.

So we're still going to have to make changes in the workplace to have a place that is safe and feel safe to our people, just as people have done in their factories.

A lot of these changes are going to be, maybe not as significant and severe as they have to be here in the short run, that they are going to have to sustain beyond in January or February.

And I'll stop there in case you have a follow-up, Reuben.

There are no further questions in the queue at this time.

I would now like to turn the call back to Jim Keane for closing remarks.

Thank you, and thank you all for joining our call this morning.

We -- I'll just close by wishing you all a safe and relaxing 4th of July weekend.

Thank you.

Talk to you next time.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.