Steelcase Inc (SCS) 2020 Q4 法說會逐字稿

Good day, everyone, and welcome to Steelcase's Fourth Quarter and Fiscal 2020 Conference Call.

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

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

Thank you, Kevin.

Good morning, everyone.

Thank you for joining us for the recap of our fourth quarter and fiscal 2020 financial results.

With me today are Jim Keane, 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, Jim Keane.

Thanks, Mike, and good morning, everyone.

I want to start by recognizing this is an extraordinary time.

This call this morning is about our financial results and the things we are doing to prepare our economics to weather the crisis.

But before we do that, I have to acknowledge this is, first of all, a human health crisis, probably the worst in our lifetimes.

People are suffering all around the world.

And some of you might be worried about a friend or family member who is personally affected by this.

And if so, I truly hope they recover quickly, and I hope everyone else stays safe.

Okay.

In a few minutes, I'll share what we're seeing and doing in our business in response to the COVID-19 coronavirus outbreak.

But first, I want to provide some highlights regarding our recent financial results.

Our fourth quarter results were better than our expectations and capped off a great fiscal 2020, a year where we made progress against our strategic growth initiatives.

It was our best year in nearly 20 years in terms of revenue and operating income.

Our adjusted earnings per share growth of 34% in the fourth quarter brought our full year growth to 25%.

The $1.50 per share is well ahead of the $1.20 to $1.35 range that we targeted at the beginning of the year.

Our divestiture of PolyVision led to a large gain being recognized in the quarter.

But strategically, the divestiture enables us to provide greater focus and resources on our growth strategies, while also letting PolyVision operate with more focus under their new ownership.

It also strengthens our current liquidity level, which, although not the intent of the divestiture, further strengthens the company.

I want to thank all the employees of PolyVision that were part of Steelcase for so many years and wish them continued success.

And we are now a customer of PolyVision and will continue to sell certain of their products to our customers.

Our organic revenue declined slightly against the prior year quarter, which had grown 15% against the previous year.

On a 2-year stack basis, our organic revenue was up 14%, so we feel very good about how our top line performed.

Overall orders grew 7% organically on top of 5% growth in Q4 last year.

That's global, so it includes APAC, and it's 12% 2-year stack, and it's through February.

So our orders were still very strong through the quarter.

We improved our operating margin by 210 basis points compared to the prior year, in part due to the PolyVision gain, but more importantly, because we had a great quarter in EMEA.

I'm very pleased with the progress we've made in that business.

I've told you before, we have dedicated teams working on a number of opportunities across every area of our business.

And this quarter, we got a taste of the benefits.

EMEA delivered over $8 million of operating income this quarter, which was close to a $7 million improvement versus last year.

For the full year, EMEA delivered nearly $10 million of operating income or 1.5% as a percentage of revenue.

And again, that's really because of a very strong fourth quarter as all our actions were starting to come together and showing results.

In the Americas, our 6% order growth for the quarter is driven by our ability to bring innovative, competitive solutions to help our customers modernize their workplace to compete for talent.

This order growth rate surpasses the industry growth rate of 4% over the last 3 reported months through January.

As we've continued to strengthen our portfolio of solutions through new product development, partnerships and acquisitions, we were able to grow faster than the market.

Our acquisitions continue to contribute to our overall growth as they collectively grew their revenues by over 10% this fiscal year.

We are pleased with the execution against our revenue synergy strategies for the acquisitions.

Together with the core Steelcase portfolio, the acquired businesses broaden the way we can address our customers' needs and it also helps us serve entirely new customers.

So it was a really good year and a really good quarter.

The results show that our strategies are working, and we're executing those strategies very well.

Our customers see our solutions as relevant to the problems they are facing.

Now I'm going to switch to the things we're doing to prepare our business for the next phase of the COVID-19 crisis.

And really, what we're preparing for is the potential economic impact on Steelcase of the actions that are being taken by local, state and national governments here in the U.S. and in the rest of the world.

Those governments are doing what health experts say is necessary to flatten the curve, and we totally support those efforts and those orders.

The purpose of a corporation is to do the right thing for all stakeholders at times like this.

Okay.

So COVID-19 started for us in China, where we have a factory and lots of customers.

And so we were already quite familiar with the crisis in January and February.

Our factory closed for the Chinese New Year and had to stay closed for a couple of extra weeks.

And when it reopened, we adopted social distancing protocols and ran at partial capacity, gradually working our way up towards normal capacity in the last few weeks.

Our office-based people work from home, and now they're mostly back in the office, also practicing the local version of social distancing.

We saw some shipment delays in February when customers had closed their own offices and were unable to do installations.

Importantly, we saw delays, but not many order cancellations nor longer-term project cancellations.

Now we're starting to ship some of those orders we had to delay.

And what's interesting, I think, is we continue to quote our new business, and we continue to be awarded new business that will be installed later in the year.

I'm sure the overall Chinese economy will be weaker for a while than it was.

I'm not saying we're back to normal yet, but it's perhaps not as negative there as you might think.

That said, we don't know if the experience in the rest of the world will be like China.

Italy was probably the next hardest hit area along with South Korea initially, but we have relatively low sales in those countries.

We saw some modest impacts to our supply chain, but nothing significant.

As the virus began to appear and then spread in the rest of EMEA and in the Americas and was starting to appear elsewhere in APAC, we had already learned a lot from our China experience, and we knew what to expect.

Still, the scale became global and so we organized an ink-level crisis response team.

Dave Sylvester led it at the beginning.

And as year-end approached, we transferred the overall role to Sarah Armbruster, another of my direct reports.

Sarah is using a team of team's approach.

At a central level, she and a dedicated team set principles, share information, establish multiple workflows and coordinate actions where needed.

She and that team rely on a large number of specific local leaders to make local decisions as quickly as needed.

It's been working really well.

I'm really pleased with how we've managed this, and particularly, how we've been able to stay ahead of it.

For the last few weeks, I've also been working on almost nothing else.

I'm connecting with Sarah and the team throughout the day to help with certain decisions and workflows.

I'm also connected with other companies through my role on the business roundtable COVID-19 task force and with similar groups here in Michigan.

We're learning from others, and we're sharing our own best practices to help other companies who are seeing it for the first time.

We are also helping our health care customers get ready for what's next.

In just a few days, our teams have codesigned and delivered furniture-like products to create safe barriers between administrative workers and potential patients.

Within the company, we've been focused on 2 objectives.

First, make sure our people are safe.

We've taken actions all around the world to restrict travel and adapt social distancing, for example.

We've installed screens to protect factory workers where needed.

We've adopted a voluntary work from home policy, while also keeping our offices open as an option for as long as we can.

We have implemented protocols for when people are sick or have been exposed to someone who is sick or when people are being tested.

And it's worked.

As of today, across 13,000 employees, I am aware of less than 5 cases that are either confirmed or presumed positive.

Second, we have to make sure we protect our business, and that starts by taking care of customers.

Our operations teams have done a terrific job adapting our supply chains and keeping our commitments despite a lot of upstream disruption.

Orders keep coming and remained relatively strong through the beginning of March, and upstream activity around new projects has also kept our people very busy.

Of course, when we are forced to suspend operations in a particular factory, there's not much we can do about those products.

Or when a customer cannot take a shipment because their offices or schools are closed, there's not much we can do.

And increasingly, we're finding ourselves in those situations.

This is why we could see a temporary but significant drop in our revenues and cash receipts.

For that reason, protecting our business also involves maximizing our liquidity and conserving our capital.

We've done both.

We ended the year with our highest year-end liquidity in over 10 years, just over $700 million, and still, we decided to fully draw on our $250 million credit facility.

Dave will talk more about all of that.

To conserve capital, we started cutting back on discretionary operating expenses, and we're really reducing plan to capital spending.

We are also reducing people-related expenditures, and that starts with me temporarily taking a $1 base salary and members of the senior executive team temporarily reducing their pay by 60%.

Our Board of Directors also temporarily reduced their cash retainer to 0. We are reducing other people costs through actions like temporary layoffs associated with plant closures and through significant temporary pay reductions and shorter work weeks as described in our earnings release.

The specific actions vary a lot across countries because of local laws.

What we haven't done, and this was quite purposeful, is terminations.

We see this as a temporary situation, and we want to take temporary measures so we protect employees and our relationships with customers and suppliers and continue work on product development and all the other initiatives that have been working so well.

We have a great team of people, and we want to keep that team together.

Those actions are expected to add up to a significant reduction in our use of cash.

We want to put ourselves in a position where we will emerge strong, competitive and ready-to-serve customers when we're able to bring our factories back to full production.

We've modeled weeks, we've modeled months and we've modeled quarters.

We don't know how long it's going to last.

But we're in a very strong position, and we've taken some bold actions very quickly.

We will continue to adapt as needed, but I feel very good about the decisions we've made and how we're managing this.

Yesterday, the Board of Directors declared a dividend of $0.07 per share.

The fact that we declared any dividend at all reflects a recognition of the strong quarter and year we just delivered.

Shareholders should participate in that.

But at the same time, it's a significant reduction, and that's meant to be consistent with our objective to also conserve capital, given the uncertainty of what's ahead.

We're not providing revenue or EPS guidance of any kind today.

There are just too many unknowns.

So next, Dave will provide information about orders, backlog and lots of other information that I hope will be helpful to you.

Dave?

Thank you, Jim, and good morning, everyone.

My comments today will include details related to our fourth quarter and full year results, plus some remarks about what we're seeing in the business currently, including some comments related to the developing impact from COVID-19.

As Jim just mentioned, we had a very strong fourth quarter.

Relative to the estimates we provided in December, fourth quarter revenue of $946 million was $16 million higher than the top end of our guidance, and the $0.39 of adjusted earnings per share exceeded our estimated range by $0.05.

For revenue, the 3% organic decline in the Americas and 8% organic growth in EMEA were better than we estimated due to several factors, including favorable pricing benefits associated with our list price adjustments and the related migration of customer contract pricing, strong project and day-to-day business and stronger-than-expected revenue from our owned dealers and direct services businesses.

Asia Pacific finished below our estimates due to the initial impacts of COVID-19, which reduced shipments in China at the end of the quarter by approximately $7 million.

Our reported earnings included a $21 million gain on the sale of PolyVision, plus net tax benefits related to being able to carry back the capital loss from this transaction against previously recognized capital gains.

These benefits, net of related variable compensation expense, had the effect of increasing earnings by $0.16 per share.

For adjusted earnings, we exceeded the top end of our range by $0.05 due to the revenue strength I just reviewed, plus we had favorable gross margins and lower income tax expense compared to our estimates.

For gross margin, our sales organizations around the world have worked hard migrating clients to more current price lists, which contributed to the better-than-expected price realization in the quarter.

You'll recall that inflation was well ahead of pricing for much of fiscal 2019.

In addition, our operations teams did a nice job managing direct labor and overhead costs during the seasonally slower periods of January and February in the current quarter.

Across the segments, EMEA was the most significant contributor to our better-than-expected adjusted earnings performance.

And I should highlight, the 4.5% operating margin for the quarter includes $1.8 million of variable compensation expense related to the PolyVision divestiture, which reduced their 4.5% operating margin by approximately 100 basis points.

Lastly, income tax expense benefited from the reversal of a valuation allowance recorded against net operating loss carryforwards in the U.K., plus we recorded some other net discrete tax benefits during the quarter.

Diving a little deeper into the year-over-year comparisons, we grew revenue by $34 million or 4% in the quarter, which was driven by $48 million from an extra week of shipments.

On an organic basis, revenue declined 1% compared to a very strong prior year.

For example, the organic decline of 3% in the Americas stacks on top of 17% organic growth in the fourth quarter of fiscal 2019.

Beyond the strength of the prior year, the year-over-year comparison was also impacted by the unfavorable shipment timing we mentioned last quarter, which included the impact from the timing of Thanksgiving as the holiday fell into the first week of Q4 this fiscal year compared to the last week of Q3 in fiscal 2019.

In EMEA, organic growth of 8% was driven by our largest customers, and the decline in the other category was driven by the shipment delays related to COVID-19 in China.

For adjusted earnings, the $0.39 in the quarter compares to adjusted earnings of $0.29 in the prior year.

The year-over-year comparison reflects the benefits of improved pricing, lower commodity costs, the extra week of shipments, favorable tax expense and benefits from gross margin improvement and cost reduction initiatives, partially offset by the impact of the small organic revenue decline and higher interest costs related to our higher level of debt.

As it relates to orders in the quarter, the 7% order growth strengthened through the quarter with December being relatively flat, January coming in at plus 9% and February posting growth of 12%, and that's adjusted for the impact of the extra week.

We achieved these growth rates despite the other category posting a decline, as Asia Pacific was down approximately 25% in January and February, which we largely attribute to the initial impact of COVID-19 in China.

It's also important to note that the strengthening trend in Q4 this year was in comparison to a weakening trend in the fourth quarter of the prior year, wherein December grew 12%, January was up 7% and February declined 3%.

Moving to cash flow and the balance sheet.

Cash flow from operations was very strong in the fourth quarter, reaching $142 million and exceeding the prior year by nearly $60 million.

The year-over-year improvement was driven by the strong earnings growth in the quarter, plus targeted improvements in working capital.

Capital expenditures were $24 million in the quarter, bringing the full year to $73 million.

We returned approximately $17 million to shareholders in the quarter through the payment of a cash dividend of $0.145 per share.

Yesterday, we announced a $0.07 dividend for the fourth quarter, which will be paid in April and represents approximately $9 million reduction from the dividend paid in January.

We did not repurchase any shares in the fourth quarter.

But during the first few weeks of March, we repurchased 3 million shares for approximately $38.6 million under the 10b-5 program we had in place that has now been completed.

As Jim mentioned, our liquidity position is very strong.

We had more than $700 million of liquidity at the end of Q4 between our cash and COLI balances, which is the highest level of liquidity in nearly 10 years.

We have no near-term refinancing needs.

Remember, in the fourth quarter of last year, we issued $450 million of 10-year senior notes and repaid our $250 million notes that were due in 2021.

And last month, we renewed and expanded our 5-year global credit facility, which totals $250 million and has a $125 million accordion feature.

From a cash perspective, we do not have any plans for additional share repurchases, and we are significantly reducing our spending, as Jim mentioned, and we described more fully in the release.

But we will be funding seasonal disbursements in the first quarter, including our annual employee bonus programs and profit sharing plans.

As a result and out of an abundance of caution given the uncertainty related to the spread of COVID-19, we chose to further strengthen our liquidity by borrowing the full amount currently available under our new credit facility for $250 million.

We also decided to retain the full proceeds from the sale of PolyVision, and therefore, we did not retire the $41 million of debt we had initially planned.

We estimate approximately 70% to 75% of our cost to sales before variable compensation expense varies with revenue, largely direct labor, material, freight and distribution costs.

And approximately 10% to 15% of operating expenses before variable compensation expense also varies with the overall level of activity in our business, largely from travel and entertainment costs, contractor temporary labor and other discretionary items.

Variable compensation largely varies with our level of profitability, given our historical emphasis on ROIC as a target metric.

Beyond these variable costs, employee expenses represent the largest part of our fixed cost structure, with occupancy and other costs representing a much smaller portion.

And Jim summarized our actions in the Americas targeted toward reducing our run rate of employee costs.

As we look ahead to fiscal 2021, while the potential impact of COVID-19 does not provide us the visibility to estimate an outlook for the quarter or the year, I will share that our backlog at the beginning of the quarter was approximately $585 million or 17% higher than prior year.

But we expect a significant portion to be delayed due to the disruption related to shelter-in-place restrictions in various places.

As a reference point, last year, our beginning backlog represented approximately 60% of our first quarter revenue.

Through the first 3 weeks of the fiscal quarter, we estimate our revenue was approximately 10% higher than it was at this point last year.

Our organic order patterns have been relatively flat compared to the prior year.

We have, thus far, not seen a significant number of customer project cancellations, but we have seen some requests to pause projects and some time lines have been pushed out.

And these patterns can be expected to change as more communities move to shelter-in-place requirements.

And lastly, our mock-up levels and customer visits are down versus last year, as you might expect.

The recent drop in the price of oil is also a new consideration that could have an impact on our results.

Approximately 3% of fiscal 2020 revenue in the Americas was in the energy vertical market.

Our business in the Middle East, Central Asia, Russia and Africa markets can also be impacted by the price of oil and represented approximately 7% of our EMEA revenue in fiscal 2020.

Lastly, approximately 5% to 10% of our fiscal 2020 cost of goods sold in the Americas is linked to petroleum prices, for example, plastics, transportation carriers and fuel expenses.

So while demand could be impacted, deflation in this commodity category could provide some offset.

I also want to provide some other data points to take into consideration as you update your financial models for next year.

Our fiscal 2020 adjusted earnings of $1.50 per share excludes the gain on sale of PolyVision in the fourth quarter.

However, there are a few additional items, nonrecurring in nature, that happened in the year that we've highlighted in our earnings releases, which had the effect of increasing our earnings by approximately $0.11 per share after taking into consideration the related variable compensation and income tax effects.

They include the additional week in our fourth quarter which had an estimated $0.03 positive effect on earnings per share.

Our effective tax rate benefited from a favorable geographic mix of business and some net discrete tax benefits, which together lowered our effective rate below our ongoing estimate of 27% and increased earnings by approximately $0.04 per share net of related variable compensation expense.

And lastly, with the divestiture of PolyVision in the fourth quarter, we have deconsolidated their results, which had an approximate $0.04 positive effect on earnings per share in the fiscal year.

So for purposes of building your year-over-year models, we think $1.39 is a good estimated baseline for recurring earnings per share in fiscal 2020.

Lastly, a couple of other data points for your fiscal 2021 modeling.

We expect interest expense to approximate $31 million for next year, assuming current levels of debt for the entire year, including the recent $250 million draw against our line of credit.

And as I said earlier, we continue to estimate our effective tax rate will approximate 27% for the year.

And as it relates to uses of cash, we typically expect capital expenditures to fall within a range of 2.5% to 3% of sales, but this year could be lower as we are delaying or canceling several longer-term initiatives in light of the growing uncertainty.

From there, I'll turn it back to Jim.

Thanks, Dave.

We're taking the actions we believe are necessary to prepare for various scenarios.

We have a management team that has successfully navigated through previous disruptions.

I have one of my top leaders focused entirely on managing our COVID-19 response, and Dave is focused on keeping our liquidity strong.

We have teams in place that are evaluating our supply chains on how best to meet customer commitments.

We'll continue to navigate the short term while keeping an eye towards being positioned to take advantage of the longer-term opportunities we see.

From there, I'll turn it over to the operator for questions.

(Operator Instructions) Our first question comes from Reuben Garner with The Benchmark Company.

So maybe we'll start with the moves that you made.

You guys obviously are in good financial shape coming off a very strong year.

I was a little surprised at the extent of the moves that you've already made.

Can you talk about the thought process that went into that and how long you kind of assume that the production would be down and how long this would kind of last that made you go forward with these moves?

Sure.

So we've been planning for various scenarios for quite a while.

Again, it helped that we knew what was coming from our experiences in China.

The situation, and I'll just maybe add a little bit more color on it, the situation in Asia when we saw the China plant shutdown for the Chinese New Year and then get extended, is that the China plant was temporarily paused and then running at lower than full capacity as it ramped back up.

But meanwhile, our plants in Malaysia and in India continued to run completely unaffected, and we were able to make a lot of transitions in our supply chain to minimize customer disruption.

The scenarios that we've imagined for Europe and Americas might be different.

As the virus spreads throughout these regions, it is possible that we could see all the factories in EMEA shut down at the same time.

It's possible we could see all of the factories in the Americas shut down at the same time, obviously, a much bigger part of our business.

We don't know that that's going to happen.

And if they do, we don't really know for how long.

Just one illustration of that.

Our Malaysia factory was shut down a few weeks ago through -- and it was announced to be through about the end of March.

And just today, it's been now extended out through mid-April.

So as these closures happen due to government orders, we realized that they may not last -- they may last longer than people are saying.

So as we considered our alternatives, we have to imagine this scenario where we could have multiple factories not manufacturing product.

Now we have about a week of finished goods typically.

So if a factory like Grand Rapids factories are no longer able to operate, we may continue to ship finished goods for about a week, and then revenues very quickly fall to 0 and cash receipts after that could fall to 0 as well.

So those are some of the scenarios we were modeling.

It's why we knew we wanted to move very quickly and very decisively.

But I will say as well that these are -- that although these are significant measures, they're also temporary.

And so if it lasts a few weeks, if it lasts longer than that, we're ready to adapt.

Great.

That's very helpful.

And so how much -- given that they're temporary in nature, how much did they save you on a -- however you want to put it on a weekly, on a monthly, on an annualized basis?

I'll let Dave fill that question.

Yes, Reuben, we're not going to provide that today.

We're just not ready.

The numbers are moving around so much, so fast.

This is Americas or U.S.-only at this point and involves layoffs across our direct labor force and some of the hourly folks that otherwise support manufacturing and distribution, and then significant reductions in pays and hours across the salaried workforce.

So you know the Americas workforce or the Americas business is our largest segment.

And I tried to give you some color around variable and fixed costs with the largest portion of our fixed cost being employees and employee cost.

And in the release and in our comments, we summarized how we're reducing those.

We're just not going to be able to provide specific numbers or ranges at this point, given how quickly this is moving and changing and the fact that we just implemented it within the last 24 or 48 hours.

Yes, I totally understand.

So just on the production that's currently shut down, what percentage of your -- I mean, I guess, in the Americas, what percentage of your current capacity is off-line?

And are you -- have you filed for any potential waivers for any of those facilities?

Have you -- are you still waiting to hear back if you have?

Yes.

So I'll talk about the waivers and the degree to which we can continue to operate.

So in Michigan, for example, and every state is different, every state has its own rules.

But in Michigan, we are allowed to continue to operate to the extent we are serving essential industries like health care.

And the Michigan rule is very clear about -- this is about protecting human life.

And so we're making sure we're honoring that, both in terms of the specifics of the order but also in the principle of the order.

So we are continuing to serve health care customers.

We are continuing to do actually real-time co-design and special kinds of products they need just for this crisis as well, and we'll be able to continue to do that.

To be able to do that, we are -- have to be named as a key designated supplier by these health care customers, and we are getting those designations.

And then we have to provide the employees we have working on those specific projects with the paperwork they need to be able to work.

So we are -- we have done that, and we are continuing to do that.

And we would imagine that it'll, again, be different in different parts of the country, but that's basically how it works.

I'll let Dave see if he has an estimate for the percentage of capacity affected by this.

I don't -- I mean you -- if you wanted to try to estimate it from previous disclosures, you could look at square footage of facilities that we've disclosed back years ago when that [reps] required disclosure.

But I'll just remind you that we have 2 plants in West Michigan, a plant in Athens, Alabama and 2 plants in Mexico, 1 in Tijuana, 1 in Reynosa.

I think you're familiar, we make our seating in Reynosa and its component parts are connected to a global supply chain, which include our factory in Malaysia, and we make tops and other products in Tijuana.

Athens is a large desking and storage facility.

Similarly, in Grand Rapids, we do storage and other component parts, and then we have our wood factory here in Grand Rapids.

So with the 2 factories closed in Grand Rapids and Athens and the Mexican facility still being open, they can still be disrupted even while they're open because of their supply chain linkages to either our Grand Rapids facilities, third-party supply chains that may or may not be disrupted or our global supply chain, like our factory in Malaysia, which is currently closed and has been -- the closure has been extended, as Jim just said, through the middle of the month.

Got it.

That's all very helpful.

And I'm going to sneak one more in.

Sorry about all the short-term questions, but obviously, it's all top of mind right now.

I wanted to try to get one bigger picture question.

A lot of folks obviously working from home now.

What impact longer term do you think that this virus could potentially have on the industry, how people work, where they work, what kind of impact it could have post the pandemic when we actually get past it?

Sure.

So it's a good question.

And I will use that to talk a little bit about how we could imagine coming out of this crisis.

So again, we've experienced this already in China, where people are coming back to the offices and people are coming back to the factories and business is beginning to resume.

Although it is important to note that it's not coming back to the way it was before, not exactly.

So as people come back, they're far more aware of infection control.

They're far more aware of social distancing protocols.

There's not a lot of gatherings of people.

They're doing things on an ongoing basis that we're all still just getting used to here in the U.S. and in Western Europe.

And so I think you enter a kind of a period of new normal.

So as it relates to what that means for offices, first of all, we learned that in China that the idea of working from home when everyone is forced to, is not as great as people might think it is.

So we know from our own research and from, again, the experiences in China that there's a lot of issues with that.

The people experienced loneliness, they've experienced a sense of separation.

Some of the work can be done without nearly any interruption, but there's a lot of work that can't be done as productively when people aren't together.

Studies by other people have pointed out the same thing, a significant loss in productivity when people are working remotely.

And so I think everyone is going to be glad to be able to come back together.

And it doesn't mean that remote work or work at home will go away.

I think it will -- people will have gotten used to it or have learned how to do it better.

But I think people also understand there's a big difference between the level of productivity and competitiveness.

If you're trying to develop new products, if you're trying to serve customers, it's just not the same when everybody's at home.

So that's the first part.

Secondly, which is maybe more short term, is as people come back to work, whether it's coming back to factories or it's coming back to offices, it won't be because the virus is gone.

It's because the health care system has now been able to scale up, and we've been together able to flatten the curve enough that the health care system has been able to respond and manage the virus on an ongoing basis.

So factories will have to -- all around the world, not just our factories, but everyone's factories will have to be reconsidered to think about how you improve safety and reduce the risk of infection.

Offices will go through the same thing.

A lot of our customers are already trying to think about, how do we think about how our offices have to be changed so when the first people come back, they feel safe.

Some of the offices that exist around the world are very dense and have embraced products and solutions that have maximized density with very little separation between people.

So we would expect that a lot of customers are going to have to reconsider that, and that will be probably the first wave of opportunity.

The second wave will be around, I believe, collaboration.

How do we make it a better experience for people who work remotely?

So every meeting has people.

In the future, they will be physically together, but we'll continue to have people that are connecting from other places around the world.

Through this crisis, from the CEO down to everyone in the company, everyone knows the state of their ability to support remote work right now.

And I believe there'll be a new sensibility about that, the new series of expectations that people will have around how remote work should be done more productively and also how the workplace could be a safer place to be.

So we think there's a lot of opportunities for helping clients already think about those things, and we're continuing to bring out more of the research we've done in the past as people use this pause that a lot of people are feeling in their businesses and begin to think about what's next.

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

In terms of EMEA, do the work rules there limit your ability to act as decisively as you did in the Americas?

Or do you have a plan of action in place that maybe might take a little bit longer to roll out for that area too?

So the workloads are different in every country.

And so any attempt that we'd make to generalize it would fail.

I'd say they're just different.

So for example, in the U.S., we are all used to hear the idea that the way the government supports businesses through a period like this is government -- is that people are often laid off and then the state unemployment benefits begin to respond.

And so that's related to some of the actions we took yesterday.

As our people are temporarily laid off, the State of Michigan has an unemployment system that has been extended specifically for this crisis.

It's been enhanced for this crisis, and our people will be able to take advantage of that.

In countries in Europe, it works differently.

So in some of the countries, the employees stay on the payroll albeit at a lower rate and then the government reimburses the company instead of the employee.

And so it looks different and it is different in each of those countries.

And so we take a very local view of that.

We've been working through those things as we've actually faced the situation.

So as I mentioned, as of now, we have -- our plant in France is closed and our plants in Spain and the U.K. are likely to go through that very shortly.

Our plant in Germany and in the Czech Republic continues to operate.

So each country is different and we handle it differently.

Okay.

And obviously, you don't know how long these mandatory shutdowns are going last.

But once they are lifted, how fast can you spin up your operations in the Americas and the U.S.?

What's your expectation to kind of getting back to normal?

So it's a good question, and we're -- I have to be frank that I'll tell you what I think, and then I'll also have to admit that we never actually had to do this before.

The idea that you would bring -- we would bring a factory down for a summer vacation in the past and bring it back up.

But we had much less notice this time than we do normally.

So what we expect, though, and this is one of the benefits of the approach we took.

By shifting our salaried workforce, including a lot of the people who work on order management and so on to a part-time or a 21-hour basis, it allows us, even during the -- this period when the factories have been paused, it allows us to begin planning and resorting our production schedules.

So what could happen as we come out is that customers who want to receive the orders in a different way than we were expecting when we were coming into the crisis.

You might have some parts of the country that released their ability to receive and install furniture earlier.

And so we may have to kind of reprioritize and resort.

That's exactly -- there's a lot of complexity behind that, but that's the kind of stuff we'll be doing.

But we also believe, if you go back and say, what did we learn in China is that, factories come up gradually over time.

It may not be that we bring the factory from 0 to 100% on day 1, and maybe we start bringing certain lines up, we begin preparing for certain products.

So that's all ahead of us.

It's still speculation, but I'll just give you a few of the scenarios we're thinking.

Okay.

And Dave, in the press release, you mentioned some potential working capital or inventory issues.

I don't think you mentioned them in your prepared remarks, but what's the status of maybe the inventory that's getting built up now and what kind of levels you expect to have to carry in the interim while this is all playing out?

Sure.

From an inventory perspective, I think you're familiar that, first, we're made-to-order, and with the implementation of Lean in our global supply chain, we carry very low inventory days.

Raw material is quite low and finished goods, as Jim referenced, is in the approximate range of about a week of finished goods that's either at the end of the manufacturing line or in between the plant and the distribution centers or sitting at our regional distribution centers.

What we imagine is we've procured material for production next week.

So that inventory is on its way.

Of course, we're working with our supply chain to try to slow it down, have our suppliers hold it, cancel those orders, delay those orders, et cetera.

But some of that is just normal flow.

And it's on its way to our factories or it's inventory that we're going to be obliged to take.

And our finished goods is sitting in our distribution centers in many of the parts of the country where we are shut down.

So I think what you're going to see is the inventory levels are going to -- are likely going to build, especially relative to the volumes that we're producing simply because we're in a shutdown mode.

That's about all I would say relative to that.

On the other parts of working capital, where receivables are pretty good, have been good up until recently and really haven't changed much in any kind of significant way.

But you can imagine if our dealers are not able to ship and deliver and collect revenue, then it could, in some ways, disrupt our inflow of cash receipts related to receivables.

Now we've got terrific incentives that are available, that have always been available to our dealers to get early payment, and we hope those will continue.

And in some circumstances, we're also considering expanding those to really encourage our dealers to get deposits or early payment from their customers in order to keep the cash inflows on our existing receivables coming in.

I'll also just add to that.

As we're focused on the closures that happened in Michigan this week, we continue to run that really huge factory in Alabama and 2 factories in Mexico, and that can change any time, but we have no way of really knowing what could happen with the government order, but we're running production in Alabama.

We're shipping production in Alabama.

We're running production in Mexico.

And so the scenario we're talking about is the potential scenario that all the factories can be closed at the same time.

But we're open for business, and we're running a lot of production today.

Our next question comes from Steven Ramsey with Thompson Research Group.

I guess to pick up on the dealer conversation.

Is dealer health good broadly in the Americas?

Are there bold measures that dealers are having to take to survive?

Are you concerned about the viability of dealers in this time period?

Or does it depends on the time frame of this whole thing?

So overall, dealer health is really, really good.

We just had the best year in 20 years, which means our dealers also had a really good year, collectively.

So compare -- if you had to pick a time, and you would never pick a time to have something like this happen, but if you had to pick one, people are, I would say, are very, very strong right now.

We've gained market share in orders, as we said over that last quarter.

We shipped a lot of product.

We've been responding to the opportunities in the ancillary.

The acquisitions are doing well.

So our dealers are in very good shape.

And when we call our dealers -- and we have a phone call that our head of sales and his team do every single day just to check in on the top dealers to see if there's anything changing because the situation is changing quite quickly.

It's really remarkable.

And yet if you sit back and think about it, you go, yes, I guess that's what I'd expect.

So if you talk to a dealer who might be in a market that's closed.

So some of the West Coast markets where these orders have gone in place and the dealers can still operate to serve health care customers, but they've really had to adjust their business.

As those orders have taken hold, they're definitely feeling some effect of that, but they're in pretty good shape.

And we haven't heard anything concerning about that.

Meanwhile, dealers in other parts of the U.S. have had literally no impact.

I mean, they haven't had the orders in their states.

If anything, they're calling us, asking us, can we please ship the product that they've ordered so they can deliver to their customers and our inability to now manufacture those products in certain places becoming the number one issue they're facing.

It's just our ability to ship.

So this is still a very localized kind of thing, state-by-state.

And I hope that helped to answer your question.

Dave, I don't know if you have anything you want to add to that because we also have a lot of people in the finance group monitoring dealer health.

Yes.

No, I won't repeat anything Jim said.

I agree with everything.

I would just say that if you used 2008, the financial crisis, 2009 as a reference point, I was so impressed with how our distribution channel handled that significant dramatic drop in revenue that hit everybody.

It showed how variable their cost structures are and how quickly they move to adjust their fixed costs.

So I know they've been through it before, certainly not a pandemic or anything like this, but they know how to manage their business quite effectively.

And as Jim said, they just finished the best year in maybe 20 years for them as well.

I guess shifting to EMEA.

Order is strong there.

What drove that?

And kind of in conjunction with oil prices coming down, are those orders being pushed out?

And is demand still fine there, even though oil certainly has an impact on certain areas?

This is Jim.

So I'll start just by talking overall about EMEA.

So the -- I'd say what's happening there is that coming together of all these things we've talked about now for the last couple of years.

We have, first of all, done a lot to enhance our product portfolio, to update it, to broaden it, have a lot more relevant current products to sell today than we had a few years ago.

And secondly, we've done a lot on the manufacturing side to improve our quality, improve our on-time performance.

We've had issues sometimes in the past, but we've had a really good run here of consistent performance that gives dealers and customers a lot of confidence during -- the way I want to -- I'll remind you, there was already a period of uncertainty, and we had a lot going on in the world before this.

So I'm very happy about that.

Second thing is that we opened the LINC a few years ago, and we've been sharing with all of you the number of customers who have come to visit showcasing the LINC.

It's really kind of a -- not just a experience that is about our business in Germany, it's about our business across EMEA and across the world.

And that has helped us convert a lot more potential customers into customers.

We've won new business, and we can attribute it specifically to experiences that customers had in the LINC, not because of the building necessarily, but because of our people.

The way we are able to interact with people in an environment like that helps clients understand how the research translates into better ideas for office spaces and helps us compete more effectively.

So I'd say it's products, it's operations, it's the LINC.

And then we've won some really key customers over this last year, and that volume is continuing to build, and it's starting to show up in the results.

So nothing really, I'd say, specific to the fourth quarter.

It's more the culmination of things that a lot of people have been working on over the last several years.

And Dave, I don't know if you have anything specific about the Middle East and oil prices for Europe, for EMEA or not.

Well, we tried to -- I sized this in my remarks.

It's not the largest piece, but it is an important piece.

And historically, it's been one of the more profitable areas of our business.

So I wanted to, at least, give some color and remind about -- people about that.

The only other thing I maybe would add to what Jim said about the overall region is, and he certainly hit on it a bit, is the leadership around -- the sales leadership around the region is really -- is terrific.

Take the U.K. as an example, to be reversing a valuation allowance against the net operating loss tax carryforward in the midst of Brexit, it is almost counterintuitive.

But the results that we've been achieving in the U.K. have just been terrific.

And I think that's a function of the leadership throughout the region, including in the specific markets.

Great.

I wanted to shift to the day-to-day business and try to get a little bit of a picture of the demand that is out there aside from -- and maybe if possible, kind of aside from the issues going on, but how is day-to-day business holding up in recent weeks and can you talk to that by segment or geography?

Yes.

Unfortunately, Steven, I don't have weekly split of revenue.

Mike was able to cobble together kind of what our weekly revenue was looking like through the first 3 weeks compared to last year, which I referenced, was up nicely.

But I don't have the breakdown on a weekly basis of whether it's day-to-day project, et cetera.

What was interesting is through Q4, our growth or the success was driven by day-to-day and project business.

The other -- another data point that's kind of interesting is, it is pre-COVID-19 coming into the Americas, but we did have nice opportunity creation in our pipelines late in the fourth quarter, which helped bring the full fiscal year to reflect growth.

Now again, that's project activity in our CRM tools.

So it's only a portion of our overall business, meaning, day-to-day business is very important.

But before this thing had really spread significantly in the U.S., we were seeing nice opportunity creation, and our pipelines were improving coming into the fiscal year.

So that's another reason why I think it's important that we manage the short-term like we're managing while simultaneously preparing for reentry because when we do come out of this, I do think there's going to be a level of pent-up demand.

Our organization -- everything we hear from our people is they are still very busy working from home, working on projects that are still in flight, whether they're planned in the near term or later in the fiscal year.

Great to hear.

Last thing from me on -- I may have missed this in the prepared remarks.

What is maintenance CapEx levels?

And are you pondering going below maintenance CapEx levels even as long as there's left?

Well, it's a good question.

And yes, in this time period, we do think different about maintenance kind of CapEx.

If you went back and looked at previous downturns or financial crisis and looked at the level of CapEx that we had in those periods, it was quite low, less than $50 million a year.

And so we know how to do that, and we're -- we've looked at every single relatively large capital project to ensure that we want to make a decision on whether we move them forward or we slow them down or stop them.

I think our maintenance CapEx is going to behave like it did in the financial crisis.

You'll see it come down considerably, but we're also going to protect some of our investments in new products and growth ideas because, again, we do think we'll emerge from this thing at some point, and we want to come out strong when we do.

Our next question comes from Bill Dezellem with Tieton Capital.

I'm curious relative to your supply chain, when it -- I guess if you were in need of building product today, say, with Alabama and the Mexican facilities, where are your biggest supply chain bottlenecks?

And then in China when you ramp back up, this is my second question, were your delivery requests or your -- your, I guess, bottleneck to ramping that facility?

Or was it the workers being able to or choosing to return to the plant that created the bottleneck in ramping?

Yes, this is Jim.

So I'll start the -- I'll answer those questions, and maybe Dave can help me if he has other ideas.

So the -- on supply chain, our supply chain is pretty broadly distributed.

Up until, let's say, last week, and then frankly, I don't have an update in the last 2 days from the most recent announcement.

Up until last week, we've done really well in being able to continue to meet customer commitments without disruption despite changes that were happening in other parts of the world.

So we do have some suppliers of -- that are based in Asia, based in China, other parts of Asia, of parts and other components that are kind of upstream of what we do.

And some of them did experience disruptions.

And in most cases, it was a slowing of their capacity over.

It might have been a delay or it might have been a reduction in their capacity.

Our teams were able to manage their work in process so the [product] that was on the water, weeks of inventory, buffer inventory, and we were able to work that down in a way that we had very little customer disruption when you get down to the end of finished goods.

And our operations teams are continuing to do that sort of thing.

Now it's not perfect.

You can have sometimes a situation where there's a particular supplier that makes a particular thing and if they can't make it, then you can't make that particular product.

There's also opportunities sometimes for customers for us to go back to them and say, "Hey, you ordered this product," and that product means they have a longer lead time now.

But there's these other products that are similar that we could switch order from the first product to the second product, and they can make that choice themselves.

So that's the way it's worked up until now.

Again, it could be different as of today on March 25.

But as of a few days ago, I've been really, really pleased with the adaptability and the flexibility, agility of our supply chain.

And your second question about -- in China, did we find, and in Asia, did we find it was our ability to produce and deliver?

Or was it the ability of customers to receive delivery or is that our ability to produce?

Again, here, what's interesting is, I think it was both and they both stayed largely in sync.

Much of the production we make in China is for customers in China.

So as we were coming back and operating at partial capacity, they were as well.

There were definitely some customers who asked us to hold products that were ready to be shipped.

There were some that asked us to delay production on things because they weren't ready.

But we had other customers who we asked for their patience while we caught up.

But from what I understand from our teams over there, it was largely in balance.

So if we take it overall, it was largely in balance that there was neither one side nor the other side.

They kind of went down in sync and they came back in sync.

That may not be the same in other places around the world now as this happens, but that's what we experienced there.

(Operator Instructions) And I'm not showing any further questions at this time.

I'd like to turn the call back over to Jim.

Thank you.

Stay safe, everybody.

And thank you for your interest in Steelcase.

Ladies and gentlemen, this does conclude today's presentation.

You may now disconnect, and have a wonderful day.