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SCS Steelcase

Participants
Mike O'Meara Director, Investor Relations
Jim Keane President & Chief Executive Officer
Dave Sylvester Senior Vice President & Chief Financial Officer
Steven Ramsey Thompson Research Group
Reuben Garner Benchmark
Greg Burns Sidoti
Call transcript
Operator

Good morning. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the Steelcase’s Third Quarter Fiscal 2021 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question-and-answer session. [Operator Instructions] Thank you. Mr. O'Meara, you may begin your conference.

Mike O'Meara

Thank you, Sharon. Good morning, everyone. Thank you for joining us for the recap of our third 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 third 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.

Jim Keane

Thanks Mike and good morning everyone. I'm going to start by talking about COVID and the impact on our business and how it affects our outlook. But before I do that, let's recognize that the second wave of COVID is first of all, a human crisis. And I want to start by acknowledging that many of you may have been touched by COVID either personally, or through family or friends. COVID has affected all of us and it has affected every business. But it is particularly relevant to our industry, because of the effect on office space work.

So, it's worth spending some time on it. A quarter ago, we could see the second wave developing in America's southern states and parts of Europe, and it was clear the economic effects would continue for a while longer. At Steelcase, we moved quickly to implement contingency plans to reduce headcount and other costs. But even at that point, there was hope the second wave could be controlled similar to Germany's results up to that point.

In fact, through early September, we have seen increased interest among U.S.-based companies in returning to the office, with some expecting more of their workforce back by November. And for some companies, January 1 was their expected start date. That's where we were when we spoke to you last time. Unfortunately, as we all know, the second wave got worse. By October, many northern states and parts of Europe were also seeing very high case rates, and in recent weeks many places have implemented lockdowns and other restrictions.

Of course, our customers put off their plans to return to the office, with many now talking about sometime next summer.

Our orders and shipments weakened, as you would expect. This isn't true for all customers. Everyday we are shipping furniture to small and mid-sized businesses to education, healthcare, and many others. What we believe is particularly true for large corporate customers in major cities and I believe this is a larger part of Steelcase's business and for the industry in general.

I think we did a good job managing through the third quarter. Clearly, our orders and shipments were weaker than we would like. But because of tight controls over spending, our profits were better than they could have been.

Our people around the world, continues to do an amazing job keeping our business healthy and agile. The fourth quarter is going to be challenging, as we get to the bottom of this crisis. We've taken additional steps to reduce production hours in the U.S. to better match capacity with demand, and we continue to work on additional fitness opportunities globally. We believe these actions will help us breakeven at the net income level, which I think is reasonable at the bottom of an extraordinary crisis like this. It could have gone farther with cost reductions, but we want to stay invested in product development, and I want to strengthen customer relationships for reasons, I'll discuss next.

As we all know, the world got some good news this quarter related to the vaccine. We already have multiple vaccines proven to be much more effective than anyone who's predicting, and some of those vaccines are already shipping around the world, and are already being administered.

While there were questions initially, about how many Americans would get the vaccine, the most recent surveys are actually quite encouraging.

For our customers, this brings a lot more clarity about the end date for this crisis, and allows them to plan with more certainty, when they will return to the office. We're already seeing some customers beginning to restart activities on projects that had been idled during the crisis. If it's true that Steelcase was hit harder by COVID because of the impact on our large corporate customers, then we potentially also have the most to gain from the certainty that comes with an effective vaccine. These large corporate customers are strong financially, they will get through this, and they are preparing to accelerate out of the crisis. CEOs have kept a very close eye on the vaccine development, and their confidence in their own business outlook as measured by the business roundtable is up significantly in the most recent survey. These CEOs have major investments in real estate, and they want to put those investments back to work. The focus of our conversations with these customers is how the workplace can help them rebuild employee relationships, rejuvenate the culture, reenergize teams and help everyone reconnect with the purpose of the organization.

While everyone acknowledges, more people will continue to work-from-home than before. The focus is on how to make the workplace a magnet, how to draw people back to their offices.

So it's the preferred place to work. We believe as customers prepare their plans, many will realize their offices need to be updated and that starts with safety. Offices will be opened and yet, not everyone will be immunized, so many customers will need to rethink high density areas and our data shows, there are a lot of high density areas.

Our work with MIT is also helping us understand how furniture design can play a role in reducing the spread of pathogens, and we expect to have new solutions ready for our customers to address those challenges. Offices will also need to be updated to improve productivity. Many people who have been working in a dedicated home office for the last few months aren't going to accept going back to a work environment, where they can't avoid interruptions and distractions. The office needs to step it up and provide better places to support focused work.

Some customers are already anticipating these needs and will update their spaces before they reopen, and that could mean improvement in our orders and shipments in the spring. Other customers are more likely to return employees to their existing spaces, assess the situation, and then make adaptations in the summer and fall. Either way, as offices reopen, we see more opportunities for us to address emerging needs, specifically related to the realities of a post-COVID workplace. We already have a lot of products that can respond to these and other emerging needs, but we've been anticipating these needs, and have prioritized investments in new products that respond specifically to the kinds of opportunities, we expect to see emerging during the recovery. We're also continuing to strengthen our approach to serving work-from-home needs from both consumer perspective and to support programs set up by our B2B customers for their employees. We saw record sales during Q3 through our online stores and through the various third-parties who sell our products. This is still a relatively small business for us, but we significantly increased the resources we have working in this area. And I personally participated in most of their daily meetings over the last few months to make sure they had access to everything they needed. I believe there are very few product gaps we need to address. But we do have opportunities to improve our logistics and to tailor the end-to-end experience to better match consumer expectations.

In fact this week, I'm personally assembling and installing an order I placed for my home, so I can see firsthand how we might be better. Work-from-home is surging this year for obvious reasons. But once we get through the surge, we believe it will still be more important than before, because more people will choose to work-from-home from time-to-time and will need higher quality for ergonomic furniture.

Of course, as more people work-from-home, the office will need additional updates to support more remote meeting participants and more individual video meetings.

Before I turn it over to Dave, I'll talk a bit about the cyber attacks we announced through an 8-K earlier in the quarter.

Our lawyers tell us we were hit by a novel day-zero attack orchestrated by very sophisticated actors. Their plan is to encrypt all your data, destroy your backups and collect a ransom. None of that happened.

While we were initially penetrated and some of our network systems were compromised, our IT team caught it early, and our layers of defense were able to stop the attack. And we were able to restore our data from backup. Many of our systems were completely unaffected and we are not aware of any loss of sensitive customer or employee data.

You know from the headlines that a lot of companies and even government bodies are recovering from similar attacks by similar actors. We've been told by the experts that we did much, much better than most companies facing this kind of attack.

Our IT team did an amazing job and I'm very proud of them.

So we got through it, but the big issue for us was time, the time it took to shut everything down, to search all our systems for any remnants of the attack, to harden certain systems based on what we learned from the attack, and to restore all our systems simultaneously. That took about two weeks and our factories were largely idled during that period. Then we had to start operations back up and that took even more time, because deliveries and production schedules had to be completely reworked.

Our systems are not designed to stop and start like that.

So we went through a lot of disruption and while we are completely caught up as of this week, that was a long time to be in a state of recovery. Unfortunately, the event also caused a lot of disruption for our dealers, as a lead plan deliveries and installations.

While customers were understanding it was frustrating for them as well, because it took time for us to get them reliable delivery dates.

During that time, our lead times for new orders were longer than normal of course, and we may have lost some discretionary business.

So we don't think this was significant.

We are estimating we incurred about $6 million in incremental costs in Q3, which is significant, of course, but not material to our results.

As we mentioned in the release, we had about $60 million of shipments that originally would have shipped in Q3 that will end up shipping in Q4, but that's just timing. Whenever anything like this happens, we pause afterwards to capture learnings and to take actions to make this better.

We are already going through that process, and will be a better company because of it. Being a better company also includes our commitment to supporting the environment through aggressive goals that include reducing our carbon footprint to third-party verified science-based targets. We're doing more to build diverse teams that reflect our communities, ensuring equitable access to leadership opportunities across Steelcase and curating a culture of inclusion. And we're developing updated goals consistent with that work. We received some recognition this quarter for our leadership in these ESP areas. The Wall Street Journal names Steelcase as one of the 100 most sustainably managed companies in the world, and Newsweek recently included Steelcase and its list of America's most responsible companies for the second consecutive year.

Beyond the recognition, beyond the fact that it's good for business, these are just the right things to do.

Now I'll turn it over to Dave to cover the financials.

Dave Sylvester

Thank you, Jim, and good morning, everyone.

Before I get into the details of our financial results this morning, I'll start by summarizing a couple takeaways. The adjusted operating income of $11 million and adjusted earnings of $0.08 per share in the quarter, were pretty remarkable.

Given the significant increase in COVID-19 infections and continued global economic uncertainty, as well as the cyber attack encountered, during which we temporarily shut down most of our global operations for approximately two weeks. We believe the resurgence of COVID cases had an impact on our average weekly orders in the Americas, which softened in the third quarter compared to the relatively stable demand we experienced throughout the second quarter, and which we expected would continue into the third quarter. Historically, we've seen demand strengthen in the fall, as customers complete projects and renovations in advance of calendar year end. The softening demand patterns in the Americas contributed to revenue falling short of our expectations. EMEA of order patterns were also softer than we expected, but they did reflect a modest seasonal improvement compared to the second quarter, adjusted for the large education project awarded in August. In Asia Pacific, order patterns were soft during the beginning of the quarter, but improved toward the end of November, and resulted in a backlog going into the fourth quarter, that was on par with the prior year.

In addition to the pandemic impacts, approximately $60 million of revenue was delayed into the fourth quarter, due to our temporary operation shutdown during the cyber attack.

We also incurred $6 million of incremental costs in the third quarter, driven by related overtime and logistics inefficiencies, our response and remediation efforts and investments to strengthen our defenses against future attacks. Despite these challenges, we posted adjusted operating income of $11 million, and adjusted earnings of $0.08 per share, reflecting approximately $92 million of savings from cost reduction actions, and lower variable compensation expense, compared to the prior year.

We also had some additional discrete tax benefits in the third quarter, which I'll cover in a little more detail in a moment.

Lastly, our liquidity remains very strong at $652 million, which includes $168 million of COLI balances. And there are no restrictions on our ability to borrow under our $250 million global credit facility.

Moving into more of the detailed drivers of our financial results, I will start with the sequential comparison of the third quarter versus the second quarter. Adjusted operating income decreased by $93 million, largely driven by the $201 million reduction in revenue compared to the second quarter. Recall that summer quarter benefited from a strong beginning backlog of customer orders, which exceeded the prior year by 11% and had accumulated, while our manufacturing and delivery activities were restricted during the spring, plus the second quarter benefited from the strong summer seasonality of Smith System. The ratio between the sequential reduction and adjusted operating income, compared to the sequential reduction in revenue, or 46% detrimental margin, was relatively high due to the following items.

First, the second quarter included a number of favorable items, which were previously disclosed and included $4 million of land gains, strong COLI income, which exceeded deferred compensation expense by approximately $3 million versus more closely offsetting each other in a typical quarter, strong operational performance across manufacturing and distribution due to the high-level of volume we were producing during the summer, and second quarter variable compensation expense benefited from not being accrued until we had first offset the adjusted operating loss in the first quarter, and began to exceed our return on invested capital target thresholds.

Second, the sequential gross margin comparison was impacted by seasonal shifts in our business mix from the education sector in the summer, to the government sector in the fall, plus, the gross margin related to the very large project in EMEA was lower than our overall average during the third quarter.

Third, our salary costs in the third quarter were higher compared to the second quarter, due to the full restoration of pay for most of our global salaried workforce, partially reduced by the benefits related to our workforce reductions in the Americas. Fourth, we incurred incremental costs in the current quarter related to the cyberattack. Compared to the prior year, our third quarter adjusted operating income decreased by $64 million and our revenue declined by $338 million.

Beyond the divestiture of PolyVision last year and some operational inefficiencies related to the lower volume and the impact of the cyberattack in the current quarter, the year-over-year comparison reflected approximately $56 million of savings from cost reductions, including approximately $20 million of lower employee costs and essentially eliminating travel, events, contracted services, and other discretionary spending and a reduction in variable compensation expense of approximately $36 million.

Before I move to our liquidity, I will cover the income tax benefit recorded in the quarter, which totaled $6.3 million and was largely driven by benefits available under the CARES Act.

We expect to record a tax loss for U.S. income tax purposes during the current year. And the CARES Act allows for a five-year carry back of that loss, which includes taxable periods when the federal rate was 35% versus the current rate of 21%. Restructuring costs and tax planning strategies completed during the third quarter contributed to the projected loss we intend to carry back, and therefore we recorded the related tax benefits in the third quarter.

Our liquidity of $652 million at the end of the quarter remains very strong and compares to $684 million at the end of the second quarter. The $32 million reduction during the third quarter was driven by a reduction in customer deposits, which accumulated under an incentive program offered to dealers earlier in the year, as well as the funding of restructuring costs recorded in the second and third quarters.

Moving to our outlook for the fourth quarter, we are projecting approximately $650 million of revenue, modest operating income, and breakeven earnings per share.

Our revenue estimate represents an organic decline of approximately 28% compared to the fourth quarter last year, which included $48 million associated with an extra week of shipments due to the timing of our year-end and PolyVision prior to its divestiture. The estimated revenue decline of 28% is better than recent order patterns as our beginning backlog of customer orders totaling $545 million was 15% lower than the prior year and included approximately $60 million of shipments delayed from the third quarter due to our temporary global operation shutdown. Much of that backlog is expected to shift in the fourth quarter along with a portion of the orders we will receive in December and early January. The earnings estimate also reflects projected operating expenses of between $180 million to $185 million and projected interest expense net of investment income and other income net of approximately $5 million. The estimated operating expenses in the fourth quarter include investments in new products and other growth strategies targeted toward the recovery as well as stock compensation expense related to discretionary incentive awards issued by our compensation committee at the beginning of the year, which will be expensed when the committee exercises its discretion to assess the performance under those awards. In closing, our performance in the third quarter was pretty remarkable in light of the circumstances. We delivered positive financial results during the resurgence of the pandemic, substantially completed our restructuring actions, and managed through a cyber-attack and our liquidity remains very strong. Demand pattern softened in the third quarter, but with the initial approval and release of vaccines, some of our customers are reactivating idled project opportunities.

So, they will be ready to return to their offices next year. And we are very encouraged by the strengthening CEO sentiment Jim mentioned in his remarks. From there, we'll turn it over for questions.

Operator

[Operator Instructions] First question comes from Steven Ramsey. Please go ahead.

Steven Ramsey

Good morning. Thanks for taking my questions. I guess on -- a few questions on conversations getting more positive. I mean, can you maybe just share more detail and elaborate -- and maybe sharing what the factors are that will -- that customers will convert from talking to placing orders?

Jim Keane

Yeah. This is Jim. The conversations take lots of different forms and I had lots of opportunities to be connected with customers over the last several weeks. And I'd say something they're all different and we have some customers who already have firm plans in place as I said 90 days ago to come back to the office, increase the percentage of people in their offices in November, or plans for January.

So for those customers, they had their plans in place it delayed them, but they're kind of ready to re-implement them.

For other customers who didn't have those plans, so they never kind of reoccupied their office. What we're hearing is that they're being asked questions by their leaders.

So if you're the head of this, I was speaking to the head of facilities earlier this week, about one of our largest customers, and he's been getting asked questions by his C-suite about, what's next? What's our plan? What are we going to do? When are we coming back? What -- how do we prepare offices? What does it mean for some of our real estate metrics, utilization metrics, and so on? And turning to us to say, how do we think about those? How are other companies thinking about it? So, it depends on the state of the customer. But I -- but all those conversations I think are positive, because people are moving from the state of like, how do we get people to work-from-home effectively, which is really a lot of the conversations for the last few months to now how do we come back to the office effectively. And we have a lot to say about that, because we did occupy our offices.

We have 60 plus percent of our people back in offices here in Michigan. We did so safely. We learned a lot. And we have a lot to share about that experience. And then, of course, beyond just the reoccupation of the office, there's, how do you sustain productive work? What happens after all of that? How has COVID change the workplace permanently? And for a lot of customers, they really want to talk about that.

So, they may be less interested now in temperature checks and symptom checkers. And we're interested in that.

I think, the way that the conversation has changed is really -- as I said in my remarks, because of the vaccine.

Before there was a lot of uncertainty about when exactly would this happened, people had planned June of this past year, then they push that back to September when the schools would open, then they said, okay, well that didn't work out.

Let's think about November, and maybe January at the latest.

So, a lot of customers they've been moving at this stage, their own dates back, back, back, a month at a time.

Now with the vaccine and a clear timeline, the timeline that you all read about is the one they're reading about, which is that now we're -- we have the immunization going on of health care workers. And then, it is going to be the next wave, which are people in nursing homes. And then, it's people who are pretty -- these in conditions are older than a certain age, essential workers, but by the time we get to March and April, it begins to open up more broadly to the workforce.

And so people are saying hey, by summer, we're going to have a sizable percentage of our workforce, inoculators immunized. And the world will begin to shift, not just in the workplace, but outside the workplace. Restaurants and entertainment and travel and so on will begin to reactivate. And then we’ll have new expectations.

So, I think the best doing is tightening up the timeframes, at the wait area for anyone say is September 1st or the last few weeks.

So that tightens up the timeframes and gives people more certainty. That's probably the biggest change and with that certainty comes more urgency. I've noticed before what those conversations were interesting to clients.

Now they're actually writing stuff down, because they have plans, they have put together and they have to submit.

Steven Ramsey

That's helpful color. I guess, kind of, the next level question, I would have there is on these pause projects that are being discussed again, how much of the project makeup and composition of different products within the projects? How much of those are the same as they were? How much are those being edited to reflect social distancing and a new workplace post-pandemic? And I guess, even broadly can you get a feel for, if these projects are larger or smaller in dollar terms or if the product makeup has better margins?

Jim Keane

Yeah.

So it's too early to say from any kind of facts here in the Americas or Europe.

And so, my comments here would be more speculating based on the conversations we're having clients what we expect would happen.

So I just want to be clear about that. What we can say is, in Asia, where people really went through the first wave and they haven't had the same kind of second and third waves in places like China that we've had here, in a lot of those places project businesses is back, is relatively strong, surprisingly strong actually considering the COVID is not over and we still have a global economy going on. And for – in talking with our colleagues there, I'd say, the projects are remarkably similar to the kinds of things we would have worked on before. They have not done a lot of changes to projects that were plan based on a post COVID world. But I think it also – coming from a different starting point.

So in a lot of those places, they're moving from office environments that were actually quite dated, and they're moving towards modernizing them.

So it is already a major leap forward for them towards a new kind of high performance, high productivity work environments. They're not moving from super high density work environments to something else. It's not the same kind of starting point. But – but our colleagues there would say, it's surprising that the projects are largely the same as what was planned before. My speculation for Western markets, the Americas and EMEA is that we're going to see a customer segmentation, we're going to see some customers who are going to bring people back to the office. They're going to assess the situation and they will continue to do projects that are largely similar to what they did before, albeit with some common sense adjustments for density on those new projects. And probably with an understanding that, it – the office as a magnet, means it has to be appealing to their workers and so turning that act.

I think that's – that's probably a fairly significant segment to kind of largely business unusual informed by the crisis, but nothing radical.

The second segment, I think is a group that are trying to meet I think real estate. How do we think about real estate differently in a new world? This is particularly true for customers in very large cities who are thinking maybe we don't want to have all our people in one spot in downtown big city. Maybe we need to have that -- the slightly smaller space, and then we have satellite offices out in the suburbs to reduce commutes, and to provide more flexibility.

And so, we're hearing a lot of that and we're reading a lot of that, but frankly haven't seen a lot of it yet. But that segment is likely to emerge and may continue to emerge as leases expire and they have freedom to make – to exercise some of those options. And that's fine for us, that's change and change is good.

The third segment is a segment that I mostly been referring to, which is the segments that is – is we've been using this time to rethink their space, and they are making changes, they're talking about changes to change the way they think about density for individuals, change the way they think about privacy and freedom of -- from distraction and interruption for individuals in the workplace. And to rethink their team spaces, the client I was talking to earlier this week was all about that, wanted to know more and more and more about what they should be doing, not crazy radical ideas, but practical ideas that could actually be implemented. And we think there'll be a significant segment like that.

So its kind of a long answer, but it's also kind of a complex answer because it's real. This is our – our customers are coming back in different ways, and they have different mindsets and we're serving each of them based on what they need and what they want.

Steven Ramsey

Very helpful. And last question for me, just some clarification to understand in Asia Pacific, orders not as strong, backlogs still flat year-over-year along with the strong pipeline to things maybe pointing in different directions in there -- in that commentary, so can you just elaborate what's going on in Asia Pacific looking forward?

Jim Keane

I’ll start and I’ll let Dave add detail.

So, I’d say overall, if you were listening to our conversations for the Asia team, it's relatively upbeat. I mean, there's a lot of positives, a lot of positives in the pipeline that's developing, a lot of positives in the win rate, a lot of positive energy. But the recovery is not as smooth continuous line. There's lumpiness because we've seen some big projects and we can get some big orders and then a month later we might not have that.

So it's a big lumpy on the way back, but overall, I’d say the tone is very positive. And it is positive across a number of the countries in Asia.

So, we’re feeling pretty good about that. Dave, do you want to add more?

Dave Sylvester

No, I don't have anything to add.

Jim Keane

If our whole business is like Asia right now, this would be a different kind of conversation, so we’re feeling good about that.

Steven Ramsey

Excellent. Thank you.

Operator

[Operator Instructions] Next question comes from Reuben Garner with Benchmark.

Reuben Garner

Thank you. Good morning, everybody. I wanted to start with the cost structure. Dave, last quarter you provided a kind of a breakeven point at the operating income level, I think of about $650 million in revenue and it looks like even with some investments in new products and even with some maybe costs associated with the cybersecurity attack, it looks like your breakevens a lot better than that now. Can you talk about what differences you're seeing there? And then in total for this year, what kind of cost savings have you guys recognized from your moves?

Dave Sylvester

Well, let me talk about the breakeven to start.

I think, what I said last quarter is playing out in the fourth quarter. We said, our adjusted operating income breakeven point was approximately $650 million of revenue and in fact, we're guiding the fourth quarter to $650 million and modest operating income.

I think, what you saw in the third quarter was the fact that we understand our operating expense estimate. Coming into the quarter I think, our guide was 180 to 185, and we came in less than that in part, because the cyber attack slowed down some of our spending with our systems being down for a couple of weeks and lots of eyes being focused on that, defense and recovery.

Some of our spending activity was slowed down, and we knew we were shifting some revenue into the fourth quarter, so we tightened spending controls as best we could as well. I still think the breakeven is around about $650 million. Currently, it may be a tad less, given the modest operating income we're expecting in the fourth quarter. And the year-over-year…

Jim Keane

Can I add just one thing to that?

Dave Sylvester

Yes, sure.

Jim Keane

The decision to close our America – U.S. factories for weeks and month is also something that's going to help us in this fourth quarter. But when we think about breakeven, we don't think about breakeven after taking actions like that because that's something fairly extraordinary and something we wouldn't try to sustain.

So, it's something we can do to temporarily reduce breakeven, but it's not something to consider permanent.

Dave Sylvester

From the year-over-year cost savings, it's hard to give you a full year number, because it's changing each quarter or it's being driven by different things each quarter. Back earlier in the year, it was driven off of salary reductions and us pulling back on a lot of discretionary spending. Throughout the second quarter, we continue to have salary reductions and we've further pulled back on discretionary spending.

Now we've reinstated salaries, but we reduced our workforce and we've sustained the level of discretionary spending reductions. And I'll refer you back to my comments around year-over-year, this quarter $92 million of cost savings, $56 million of them coming from lower employee costs and travel and events and contract services, discretionary spending, and $36 million coming from lower variable compensation expense. That's a big number.

Reuben Garner

And so -- yes, no, it is, and I guess my follow-up to that is, so how -- as we're thinking about the go-forward and I know a lot of it's going to be dependent on the growth environment, but how would -- if you're an investor or me, how do you think about those costs coming back, what needs to come back in order for growth to be there, is it possible, we see the cost coming back before the growth does, because you have to bring some of the expenses back in order to drive the growth?

Dave Sylvester

Well, I think, certainly, some of them are going to come back. I mean, T&E right now is virtually -- it's almost zero. And we need to get our sales -- our sales people want to be with our customers face-to-face and as soon as they can, I'm sure some of that will restart. But I also think that business travel likely isn't going to be what it was for several years. Maybe even, if at all, there are lots of articles being written about what will business travel look like in the future, but I do think some level of travel and entertainment is likely to come back. And, certainly, as our top line grows and our bottom line improves, our variable compensation will come back as well.

I think, what you're asking is that, might we’d be ahead of the revenue growth or might we’d be ahead of revenue growth and investing a little bit, that's really going to be on product development and positioning ourselves for the recovery and that's what you're seeing a little bit of now, where we initially guided for some incremental spend in the third quarter, didn't fully play out. We're guiding again for that in the fourth quarter. Because this is very, very targeted forward things that we think are going to make a difference in our differentiation as we come out of this thing in quarters to come.

Reuben Garner

Great. Thanks, Dave. And since you guys last reported, there's been some talk of another industry participant, put out an estimate for what they thought might not be coming back in terms of office space and I think it was a pretty, pretty big number, might have surprised some people. I'm just curious to get your thoughts, Jim. I'm sure you saw it. What do you guys think about what percentage of the office might be gone for good? And does that change, and I guess, then a related question, what are you guys doing on the work-from-home front, it sounds like you think it's going to be more important factor longer-term? Are you guys changing any of your go-to-market strategies or marketing or anything else on that side of the business?

Jim Keane

Yes.

So, let's talk about the first part and come back to the work-from-home part.

So the clients I'm talking to for the most part are not considering any major reduction to their footprint. I do hear some of them talking about it, as I’d say, if they're in big cities and thinking about shifting from large cities to suburb spaces, they may not reduce their total square footage, it might reduce their cost a bit.

You hear some that are speculating about, hey, clearly, what work-from-home does, we might see a need for less space, but it's too early to know for sure. But those statements don't make the headlines. Nobody writes articles about people who think that things are going to stay pretty much the same, the articles givens in about people with more radical ideas.

And so I think that the majority of customers are not thinking about radical changes like that. And I'll tell you little bit about why.

So, if you imagine that in the future that most people working in offices will still work-from-home, let's say, a day or two a week.

So that's maybe 25%, 30% of the time. It's tempting if you're kind of tracking -- if you're in charge of real estate costs so you have a goal to reduce real estate costs next year, you’ve got 25%, 30% fewer people in the office, and I've got this much space times 25%, I should be able to save that much space, right? The problem though is that it's not evenly distributed.

So, when people say I want to work-from-home a day or two a week and you ask them the next question, which is like, well, which day would you want to work-from-home? A lot of them answer Fridays, and we've seen this ourselves, summer when we had people back, we had people in the office. We didn't make it mandatory. People can work-from-home if they want to.

Our occupancy in the office on Friday was far lower than it was on Tuesday, Wednesday, Thursday.

And so if you're trying to find real estate and you realize that 25% might be working from home, but if most of them are picking Friday that doesn't help you reduce your real estate on Tuesday, Wednesday, Thursday.

So, you still have this peak holding problem and that that will only go away if you tell people that you have to work-from-home on Monday.

You have to work-from-home on Tuesday.

You're working from home on Thursday. That's not what they want. That's not what they're asking for in the surveys. They want flexibility to be able to balance their home life with their work life, family needs, and so on.

So, I think a lot of people are getting that kind of reality check. It's unlikely we're going to be able to recapture a lot of real estate savings, because there's a bit more work-from-home.

In terms of our work-from-home business, yeah, absolutely, I've made some comments in the remarks, but we've significantly increased the number of people working on that part of our business.

Our attention is getting across the company. I feel pretty good about our -- the product part of our business model there. We've been might be some opportunities for us to add a few things, but we're really pretty well covered and the AMQ acquisition actually helped us quite a bit as well. The big opportunity, I think, is really the rest of the business model.

So, everything from making it easier for people to find a products, to know our brands, to know our product, select our products, all the way through ordering specification and then delivery installation.

We have an opportunity -- we have a great business model, but it's all set up for business-to-business.

So, our product is ordered by dealers who understand our products, this is what they do all day long, you just specify order to showcase products, and by dealer and sellers, who have installed products for years and years and years. And they’ve installed, they're getting an installation of desks in our building, there are going to be 500 desk of requests a couple weeks. They're not looking at the instructions.

So, when we get to a consumer model you have to think about everything from how packages arrived, how they're open to, how people find the instructions, who they call if they have a question. And we have that -- we're good, but we have an opportunity to be a lot better.

So, those are some of the areas that we're putting focus on and continuing to look at other ways for us to bring our products to market. We don't have retail stores, but we have -- there are a lot of other options, because we're not in competition with people who have retail stores.

So, we have opportunities to partner with people who already have distribution and they want to be participating more and work-from-home.

So, these are some of the things we're exploring.

Reuben Garner

So, Jim would it be fair to say that your total addressable market coming out of COVID could potentially be even larger than it was before with the office -- essentially consumers might need two offices now, more often than not, and if you guys are increasingly going to participate in the work-from-home now, it could make your whole market bigger. Is that a fair statement?

Jim Keane

I think the change is always good for us. The thing that is always -- our product last forever, I think you guys know this, right.

So people are using products they bought from us 20 years ago. And as we come out of COVID because of the work-from-home, but also because there's other thing I talked about, there's going to be more energy around change, and that's just always good for us. Even, if I go back 15, 20 years, workstations were bigger, everyone had their own desk.

So in the last 10 or 20 years, we've absorbed hoteling where people share desks in the office, and desks are smaller than they were before and the panels aren't as high as they were before. And yet, despite all that, if you did the math, well, it must be a much smaller market than it was before. But every time they change from one stage to the next stage, it created a new ways of reinvestment in the office that wouldn't have happened otherwise. That's maybe the way to think about the addressable market here, it's not the size of the market, but it's the degree of change within the addressable market that will fuel our demand. I will, however, accept your question that yes, I think that's true.

I think people are going to continue to work in more and more places. They're going to be working at home as well as in the offices and within the office, they're not just going to be sitting at their desk all day, they're going to be sitting in conference rooms, they are going to be in ancillary spaces.

And so there'll be a lot more opportunities like that. I will -- the one caution I'll put in here is that our market share is much higher in supporting work in offices than it is work-from-home.

And so, as that shift happens, we participate in it, it does broaden our addressable market, but we won't capture -- we’re unlikely to capture the same market share in work-from-home as we do and work from office.

Reuben Garner

Maybe also…

Jim Keane

And one more thing. I only have one more thing to this question. I like the addressable market question, and other ways to thinking about our addressable market is also to the breath of products we offer.

So the AMQ acquisition as I mentioned before, helps us to address the market. The price points that are lower than where we normally participate in and also different ways of buying, since -- these are customers who are not thinking about four to six week lead times and 12 week long project planning windows. They wake up on a Monday, we're going to get some new furniture in here and we want it by next Monday.

And so five days shift is really critical aspects of the AMQ business model and its helping us reach a whole bunch of customers that we never really addressed before. It's customers that many of our dealers served, but they serve them through other people's products.

So that's been a really nice addition to our portfolio. Smith System, which was the addition of key to aid education on top of high school and college, which we have served before is another nice addition, because schools are changing, people are going to think about what's the future of education coming out of a post-COVID world, so we see a lot of opportunity there. Orangebox, which added a lot of ancillary products, but also added times. We see price is being super important coming out of COVID, because more people will want the ability to go into a space, close the door, have a video conference for 30 minutes or an hour, and then come back out of that pod, it's not a private office, its really a place you go to work for a short period of time. And it also has other benefits in terms of pathogen control and so on.

So we think a lot of the things we've invested in over the last few years have improved our addressable market and are quite relevant actually to this post-COVID world.

Reuben Garner

Great. Very helpful, Jim. Thanks for answering my question, and happy holidays and stay safe everybody.

Jim Keane

Thank you.

Operator

[Operator Instructions] We have a question from Greg Burns with Sidoti. Please go ahead.

Greg Burns

Morning. When we look at the work from home opportunity in some of the investments you were talking about making, have you considered acquisitions to accelerate that strategy?

Jim Keane

We always look at acquisitions every time we think about any strategy.

We haven't -- I wouldn't want to zero in on this particular one.

So I'd say, for everything we're doing, investments in our core, thinking about our ancillary, thinking about the investments, the acquisitions I just mentioned. We never look at growth opportunity, we start by thinking about how do we want to -- what do we want to play and how do we want to win and acquisitions are just one part of that. But I think -- for now, I think in the work from home business, our number one opportunity is to better serve the markets who are already serving and I think there's a lot of opportunity for us to grow our business, just doing better what we're doing today, but I'm not ruling out anything.

So there's opportunities for us to scale that business up. But I think it's wise for us to learn as we go.

Greg Burns

Okay. And can you talk about inflation and steel has increased in price recently and I know I've heard others talk about freight.

So, can you just update us on an inflationary driver’s in the business?

Jim Keane

In general, let say maybe get specific so, yes, right now there is definitely some upward pressure on steel because there is kind of an acute shortage of steel and freight because there is a surge of product coming from Asia and there's a shortage of containers on the water. And then even in domestic shipping, there's shortages of drivers, shortages of carriers and therefore upward pressure on freight costs. And although -- in your question, I think it's probably going to be in the context of our costs, but I also would certainly go -- by the way that's really good news because that means it is demand for steel, that's good news and there is demand for new product that's good news for the economy.

So the price is going up because demand is being supplied and its driven by both sides of that equation. Steel perspective, the supply side as we have to deal with, the fact that prices were so much lower last year that -- that some of the nodes took capacity offline.

Some of them pitches plan maintenance, some of them had events that caused them have unplanned downtime. And now they're trying to bring it up because as demand began to surge, prices began to rise and it began to make sense for them to bring it up, but they can't bring it up overnight.

So depending on whether they had completely shut down their mills, they had gone sort of a one shutdown. It takes some more or less time to come back up.

So we have this shortage and we have this price impact. We're watching very closely working with our suppliers. And we don't -- we don't think the steel part is going to last, like a year. I don’t think people sort of talking about it, but that maybe something that we have to deal with here for the coming month. Dave, do you want to add that.

Dave Sylvester

No.

Greg Burns

Okay. And especially when we look at your backlog, how much that backlog includes maybe longer dated stuff that got delayed during -- because of the pandemic like projects that got pushed out or maybe tied to your new office buildings being built or anything like that? Like is there a building number of longer dated backlog that's just kind of just waiting here for the pandemic to end or that ended in the summertime like, where we might see a little bit of a snapback in the second half, where some of this gets falls out of the backlog.

Jim Keane

Well, I wonder if you're referring to our project opportunity pipeline.

Our backlog is largely short-dated projects that are going to ship most of our backlog we expect to ship in the fourth quarter, but the project opportunity pipeline, I don't know that we have that granular detail that gives you an indication of how much states back, six months, 12 months, 18 months.

So I think, it's -- we've seen opportunity creation be pretty steady, certainly lower than last year, but be pretty steady.

So the fact that we're generating steady new opportunities that are coming into that opportunity pipeline, I think is an indication that that's certainly post-COVID project thinking or project opportunities. Does that help?

Greg Burns

Yeah, yeah, yeah, I mean, I guess I was, I guess this falls into this category, but I was just wondering if there was a – maybe don't know that granularity, some kind of a number of projects in that opportunity pipeline that you know like are going to ship, they're not like stuff you have to go out and win that you're seeing and talking about. But like it's been kind of won the awarded, but it's just sitting on hold because…

Jim Keane

Right.

Greg Burns

… there's been waiting and then maybe you get a little bit of relief, and that at the beginning of the recovery, you see that kind of give you a little bit of initial boost?

Jim Keane

Yeah, so I think in a lot of industries when projects are awarded to a competitor, those competitors may count that in their backlog. In our industry, lease expense base, we don't count that until the orders actually placed. And the difference between those two points is like they might call us -- they might call us in January that we won. But they haven't actually picked the surface materials, they haven't picked the specific products that they're, they want. There is fabrics, and finishes, and sizes, and options. And until all that’s decided, they've actually literally placed the order, we don't count it into backlog.

So I bet it's pretty clean. It's really stuff we're going to ship in the next six weeks definitely.

Greg Burns

Great, thank you.

Jim Keane

Yes.

Operator

[Operator Instructions] And we do not have any telephone questions at this time. And Mr. Keane, I will turn the call over to you.

Jim Keane

Thank you. And I would like to end this morning by thanking all of you for your investment in Steelcase and the time you took to work with us this year to understand our business. From all of us here at Steelcase, we wish you and your families the joyful holiday. Stay safe, everyone. And we'll see you next year.

Operator

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

You may now disconnect.