Q4 2020 Herman Miller Inc Earnings Call
[music] good morning, and welcome to the Herman Miller fourth quarter earnings Conference call. As a reminder, this is being recorded I would now like to introduce your host parts.
Today's conference, Kevin Feltman, Vice President of Investor Relations and Treasurer.
Good morning, everyone. Joining me today on our fourth quarter earnings call, our Andy on our President and Chief Executive Officer, and Jeff stuff, So Chief Financial Officer.
We have posted todays press release on our Investor Relations website at Herman Miller Dotcom.
Some of the figures that will cover today are presented on a non-GAAP basis, we've reconciled to GAAP and non-GAAP amounts in a supplemental filed it can also be accessed on the website.
Before we begin our prepared remarks, I would like to remind everyone that this call will include forward looking statements for information on factors that could cause actual results to differ materially from these forward looking statements. Please refer to the earnings press release as well as our annual and quarterly FCC filings.
Any forward looking statements that we make today are based on assumptions as of the states and we undertake no obligation to update these statements as a result of new information or future though.
At the conclusion of our prepared remarks, we will have a Q and a session. Today's call is scheduled for 60 minutes with that I'll now turn the call over to Andy.
Good morning, everyone. Thanks for joining us today.
This past quarter.
That's clearly a challenge on many fronts not just for us as a business.
But for all of that as a global community.
I think also with the house and economic impact because like 19 I.
I can French racial and justice in our society I.
I've been so proud to see the people of Herman Miller step up to provide necessary equipment for frontline workers and medical professionals.
I see them show tremendous support.
Colleagues and community and upholding the values of inclusion in the quality that we all from here.
At the end of our third quarter, the covered 19 pandemic with junk ticketing and patch region outside of China.
During the fourth quarter, we experienced significant disruption most of our business, including full or partial shutdown of a major manufacturing location and retail studios.
At the moment you want me to go here.
Cautiously optimistic so we appear to be on the path of restarting the global economy.
Except for limited distribution capacity into warehouses in Mexico, our manufacturing a distribution facilities a back online and all other retail studios and outlets open in some capacity.
I can move for but we are focused first and foremost on keeping on please see as we adopt new health protocols with her facilities we open.
With that as a backdrop I'll begin today outlining the state about business and then sure I perspective on the future.
I'll, then turn it over to Jeff in cabin for additional information on a quarterly results and outlook. So where are we now clearly our fourth quarter results reflect the unprecedented challenges from the cup igniting pandemic when magnified by the manufacturing and retail facility closure and much of the quarter.
As a result, you experienced a year on year decline consolidated net sales of 29%.
On an organic basis, excluding foreign currency transaction and the impact at acquiring consolidating intra indoor pay and not one sales for 35% below last year.
New orders received in the quarter were down 19% compared to prior year on a reported basis and down 25% organically.
That said, we can confidently say that our diverse business model has and will continue to enable us to meet our customers, where and how they choose to work in future.
Customer demand in our retail and international segment highlighted the power of its diverse model in the fourth quarter.
Thank you Brad based economic disruptions caused by size containment efforts.
New orders in our retail segment were down just 5% compared to prior year.
Particular, our ecommerce platforms worth bright spot with orders up 123% over last year.
These results demonstrate the success of our digital marketing strategies and the ongoing transformation of our ecommerce platform.
The transformation has included detailed customer journey mapping the development of Litch, new content and expansion of tool to help customers envision or spaces.
We also launched a next generation video chat platform.
Well at the paid by the months financing program that helps our customers expand the power of their hardened dollar.
Given part of my becomes taught me for design within reach Hi, and haven't dollar Dot com is focused on home offices.
Okay, particularly strong category during the quarter.
What is that 126% over last year.
Port of working from home.
Our International segment also delivered better than company average order results.
We continue to watch opportunities to expand our market share Anglo a global dealer network.
We were very encouraged to see hate another strong relative performance compared last year with orders coming in only 6% below the prior year ever again, we tell activity help hey brand feel strong relative performance period.
Moving forward, we expected to be a great addition to a famous brand with a focus on accessible modern design could those office and residential and why.
At the consolidated level reporting about pushing out of $2, a 95 cents in the fourth quarter.
Islam, who to certain restructuring impairment and other charges during the quarter.
On an adjusted basis, which excluded beside him.
Reported earnings per share of 11 cents for the quarter.
But it's also fiscal year net sales totaled 2.49 billion.
Decreased 3% from last year I recorded basis.
An organic decline of 6.5 person.
On a GAAP basis reported a loss per share a 15 cents in fiscal 2020, while adjusted earnings per share totaled $2.61.
I think they don't like innovation through the crisis in the near term economic disruption I past experience advocating difficult period, serving us well.
Acted decisively during the quarter implementing a range of actions to help maintain our strong liquidity position.
We initiated and completed a $59 private placement debt issuance.
Temporarily suspended our share repurchase and dividend program.
Andrew Downey available capacity on a revolving line of credit I think the cautionary not sure.
At the same time, I mean, if somebody very difficult, but proactive adjustment to our cost structure.
Temporarily suspended our corporate retirement contribution.
Full year 21 bonus program and also instituted wage increases.
We also would you pay for the majority of our salary does have a 10%.
Overall cash compensation for the leadership team was substantially Ricky.
The combination of salary reduction and essentially the bonus program.
We also made it difficult decision to try to lower our cost structure languages inside the bank workforce by approximately 400 associates through a combination of voluntary and involuntary terminations.
Well, we continue to system sales and earnings guidance given him a many uncertainties surrounding demand level.
We expect that these actions will contribute to operating income de leverage in the range of 25% to 30%.
As part of that see leverage expectation, we do you plan to want to digital investments in the near term.
And Weve a critical to capital I think fully honor momentum in this area.
No extra simply put.
Continue to engage with us and listen to a customized to aid them in responding to the new reality arising from the pandemic.
We know that home offices will play an increasingly more important role in the lives of workers across the globe.
Within that redefinition wise opportunity and we believe we can capitalize a direct to consumer channels that we felt.
As an initial cap with launching a major redesign of our DWR ecommerce site in July that will be the new standard for E Commerce experience.
Yeah, we watch will significantly improve a customer on my experience condo conversion rate.
Through the use of Richard visual content enhanced wish list functionality and approved searching filtering tool.
Work will enable us to reach more customer that's the right products.
How can we envision their home and create an integrated experience reserving working in place.
We're also moving towards our launch into the game.
We combined our knowledge of economics in partnership with larger tax technology expertise.
Talented digital TV filter over the past 18 month is developing dedicated web site and we are getting positive traction with game Influencers in sports teams to support this new opportunity.
We expect to be tough first product category later this summer.
We're having numerous conversations with her contract customers about how we can help them reconfigure there obviously.
At the became attorney to work.
Highlighting how they search on how to put up basis for optimal performance and safety.
And showcasing product offerings that can help customers in preclinical distancing.
And content and separation to their work space as.
Well also beverage that have the network an extra one designers and their in house design capabilities to move with speed and agility to deliver me solution.
Against this backdrop, you're more confident in our long term strategic priorities than ever.
Focusing on becoming a customer centric digitally enabled business not just in some sectors, but across the entire enterprise.
Well be better enabled and ready to serve our customers.
As you look to the future. He believes that the my husband, our spaces will have to be characteristic.
First a knowledge in research.
To support customizing imagining there were shared workspace.
Second a broad product assortment capable of serving customers across a variety of floor plates an application.
Third.
Global multi channel distribution capability to reach the business.
Actual customers.
Our strategy positions us well on all of these brands and we believe we can emerge from the pandemic and stronger leadership position in the markets that we serve.
Our research and things are deeply involved with their customers, helping them to envision more short term.
The big teens back to the office.
That same time, you believe yasir philomena critical component and driving team performance in the long run.
Helping customers think about the possibilities of how their space that can drive greater innovation and collaboration.
He said Kushan been crude helping develop work from home solution for corporate customers.
And exploring the potential expanded you took office location model in future.
Our leading brands and expansive product assortment of a broad range of categories and price points.
Office and residential audience.
Finally, our global multi channel business model, including industry, leading digital capabilities helps us needle customers.
Already work.
Yes.
And she'll and play.
That's great change comes great opportunity left to explore how to sell what lifestyle and where we sell it.
To conclude my comment I'd like to remember our friend and colleague very Griswell, who passed away unexpectedly earlier this month.
Very joined our board in 2004, and helped us navigate never enough to challenging and exciting situation.
Always pushing us to be better.
Incredibly supportive and helpful to me as I joined the business a couple of years ago.
He was a lifelong champion a conclusion diversity.
And gave back in so many ways.
He's a good role model for me and many others and we will Miss his tremendous contribution to our board.
Now turning over to Josh for more information on our financial results.
Thank you Andy and good morning, everyone.
With our near term demand picture this quarter impacted by the disruption to business operations from cope with 19 consolidated net sales in the fourth quarter, a 476 million.
29% below the same quarter last year on a reported basis.
35% below last year organically.
Reported orders in the period of 535 million were 19% lower than last year on reported basis at 25% below the prior year organically.
Within our North America contract segment.
Sales were $276 million in the fourth quarter, representing a decrease of 37% from last year.
You orders, a 304 million in the quarter were down 31% compared to last year.
Order levels for the majority of project size category, then sectors were down year over year.
Our international contract segment reported a 13% decrease in sales to $115 million in the fourth quarter.
New orders of 124 million were 11% above the same quarter last year.
Reported sales and orders reflect the impact of our recent stuff acquisitions of Hay and not want.
On an organic basis, which excludes the impact of these acquisitions net sales and orders in the international segment decreased 41% and 19% respectively from the fourth quarter of last year.
Our retail business segment reported sales in the quarter of $85 million, which were down 19% compared to the same quarter last year.
You orders in the period of $107 million were only down 5% on a year over year basis.
The positive relative performance from our retail segment highlighted both the importance of the ecommerce channels that we built across the design within reach Okay, and Herman Miller brands as.
As well as the ability to support our customers during a time, where they are focused on their home environment.
From a currency translation perspective, the general strengthening of the U.S. dollar relative to Europe, all levels was a headwind to sales growth this quarter.
We estimate the translation impact from year over year changes in currency rate had an unfavorable impact on consolidated net sales were approximately $3 million in the period.
Consolidated gross margin in the fourth quarter was 34.9%.
And included a favorable adjustments totaling $900000 related to initial purchase accounting for our investment in hey.
Excluding this item gross margin was 230 basis points lower than the 37% reported in the same quarter last year.
The loss of production leveraging our manufacturing and distribution facilities was the primary driver up that pressure on gross margins during the quarter.
This loss of leverage was partially offset by favorable shift in product and channel mix. This quarter given the increase in demand for task seating both in our international and retail segments.
Operating expenses in the fourth quarter of 155 million compared to $183 million and the same quarter a year ago.
The current quarter included $6 million, a charges primarily related to discrete costs associated with the cobot pandemic.
Excluding these special charges.
A year over year decrease in operating expenses of $32 million resulted mainly from proactive move that we initiated across the organization to manage costs as well or lower variable cost during the quarter.
These decreases were partially offset by the impact of consolidating hay and not one operations this fiscal year.
During the fourth quarter, we recognize pre tax asset impairment charges totaling $205 million related to goodwill.
Good name assets and right of use assets associated with dime design within reach the Harold pay and not one brand.
We typically perform our annual impairment test for intangibles during the fourth quarter and due to the impact of Colbert on business results, we identified additional indicators of impairment to consider.
As a result of this analysis, we determined that future forecast the sales and profitability no longer supported the carrying values for these assets and recorded noncash impairment charges to adjust the assets to fair value.
Now despite these accounting adjustments to fair value each of these brands remains core to delivering on our broader strategy going forward as they are leaders and their spaces.
Provide important capabilities to meet the needs of our customers in the future.
Restructuring charges recorded in the fourth quarter totaled 17 million.
As Eddie mentioned the program of voluntary and involuntary workforce reductions during the quarter was necessary to align our cost structure to better reflect the current demand environment.
These costs, primarily related to severance outplacement and other costs associated with workforce reductions during the quarter.
On a GAAP basis, we reported an operating loss of $211 million quarter.
Compared to operating earnings of $57 million in the year ago period.
Excluding restructuring impairment and other special charges.
Adjusted operating earnings this quarter were $16 million.
By comparison, we reported adjusted operating income of $67 million in the fourth quarter of last year.
Effective tax rate in the fourth quarter was 14% and excluding the impact of adjusted items. The effective tax rate was approximately 48% in the fourth quarter and 22.5% for the full year.
The tax rate for the quarter included both provision to return adjustment and the accrual of withholding taxes related to plan repatriation of cash with certain foreign jurisdictions.
And finally, the reported net loss in the fourth quarter totaled 174 million or $2, a 95 cents per share.
Compared to earnings of 46 million or 78 cents per share in same quarter last year.
On an adjusted basis earnings per share of this quarter totaled 11 cents compared to adjusted earnings of 88 cents per share last year.
With that I'll now turn the call over to Kevin to give us an update on our cash flow and balance sheet.
Thanks, Jeff.
We ended the quarter with total cash cash equivalents, a $454 million, which was 343 million higher than cash on hand last quarter. This increase was primarily related to drawing $265 million on our revolving credit facility during the quarter.
Out of an abundance of caution and cash proceeds from the issuance of $50 million.
Placement notes during the quarter.
No spear interest at a fixed rate of 4.95% in mature in May 2003, given our existing private placement notes that mature in March of 2021. The purpose of these notes is to set aside funds to repeat those notes when they come due next year, while avoiding the make whole provisions that would be required in order to.
Pay those notes.
Right the challenging demand environment during the quarter, we generated positive operating cash flows from operations $30 million.
Capital expenditures were $13 million in the quarter and $69 million for the full year.
As part of managing our cash flow as we look ahead to fiscal 2021.
We expect capital expenditures in the range of $50 million to $60 million.
We had previously announced a deferral of the quarterly dividend payment to shareholders of record as of February 29, 2020.
Due to our strong liquidity position that dividend, which was originally scheduled to be paid on April 15 2020.
I'll be paid on July 15, 2020.
The company will however, maintain a temporary suspension of future dividend payments and share repurchases given the ongoing uncertainty caused by Copel at night.
We remain in compliance with all debt covenants and as of quarter end, our gross debt to EBITDA ratio was approximately 2.1 to one which is well below the 3.5 times racial required by our lending agreements.
If the precautionary excess draw on our bank credit facility of 265 million is excluded from our debt balance our pro forma gross debt to EBITDA ratio would be 1.2 times.
Given our current cash balances and cash flow from operations, we remain well positioned to weather the near term market volatility and meet the financing needs of the business moving forward with that I'll turn the call back over to Jeff.
Okay. Thank you Kevin.
As Eddie mentioned the rapidly changing situation thrown in global mitigation efforts around cobot 19 make it too difficult to estimate the near term impact on our business and as such we are not following our typical practice of offering sales and earnings guidance for the first quarter.
But with that being said there are couple of data points. We think are important to emphasize as you consider developing your own revenue estimates for our business in the upcoming quarter.
As we've highlighted with just a few exceptions, we entered the first quarter with our manufacturing distribution in retail operations back on line.
This is important as from a lead time perspective, it should allow us to respond to customer demand in a manner and timing more consistent with past periods.
Bearing in mind, we believe recent demand patterns become the most relevant data point, we have to estimate near term revenue opportunities.
As noted earlier orders in the fourth quarter at the consolidated level were down 19% from the same period last year.
And through the first three weeks of the first quarter, new orders are down closer to 29%.
There's also discussed earlier, while we're not providing sales guidance at this time as you consider how to model profitability for our business. We expect that the combination of natural variability in our business.
And the cost actions that we've taken as well as a fairly stable commodity picture will result in approximately 25% to 30% operating income de leverage.
Well this will not necessarily being eaten walk from quarter to quarter. We would expect this outcome overtime. If we experience a recessionary period of similar depth and duration to the past two recession.
With that additional commentary and I'll turn the call back over to the operator, and we'll take your questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one key on your Touchtone telephone. If your question. That's been asked where do you wish him with yourself from acute please press the pound cake.
First question comes from Stephen Ramsey with Thompson Research group.
Good morning.
I guess.
Maybe to start with.
Kind of how you guys interpret orders, but the composition of recently placed orders baby in the quarter and the evolution of the last three weeks that you just talk to Jeff.
What does that tell you about.
Maybe medium term demand and what does it tell you that how.
Companies will spend on their offices and how you need to shift to adapt to that spending.
Hey, Steve and good morning.
You know if you look at the order trend I think what we saw at the very beginning of the koby crisis with people sort of taking a pause and trying to figure out what they were going to deal with her offices and also quite frankly, how long it was going to laugh.
I think watched the crisis sort of unfold, we've had a lot more outreach from our customers around how they can actually short term transition their spaces for safety as they start to bring back their employees.
In waves.
And our economy starts reopened so I think we've had a little bit of an exact we've also had some large order shift we haven't had too many cancellations that we had half Hudson timing as people wait to figure out what do you want to deal with their floor plates and I am going again, just to add onto the playoffs and I'll, let Sheila I know that Debbie pro.
It was our president of retail has joined us for the call as well if you have any specific retail questions for her Jeff what you that's not yet thanks, Hey, Steven.
Yeah, I think the only a dead I think that's absolutely right. The only thing that I might add to that is and this is you know anecdotal, but I think it's a bit it it's worth highlighting that as we look at the funnel.
Project opportunities, we're fairly encouraged I mean, the final has held up quite quite well and just to remind everybody. These are project opportunities that we have not necessarily want but that we're tracking and that is a really good sign I think any point around.
You know a lot of reschedule activity I mean, we have seen some cancellations that's been more of an edge condition not a not a trend which has been encouraging and the reschedule.
Border ship date has occurred because either our factories were closed for a portion of the quarter or of course, our customers are facing a lot of it seemed as types of disruption and it's one of the reasons why I think when you look at our backlog is up nicely year over year I think it's worth maybe mentioning as well that you need to be a little.
Cautious when you look at that backlog in assuming that it's necessarily going to schedule and ship in a manner that that would be more traditional for our business just because of the type of reschedule activity that we've seen but when you net it all out.
You know, we actually feel really good about the continued opportunities and a lot of inbound calls from customers, maybe a little more color on the composition of orders I mean as you heard from their prepared remarks.
The retail business has been.
A real real kind of re a sunshine for us in a sense that we've seen a spike in demand in some of those work from home categories. In the business has responded really well and as David said Debbie down the line and she can answer any.
I see the questions you might have there in terms of the pacing of orders through the period.
Really we the order entry trends declined as we moved through the fourth quarter, perhaps not surprisingly as more of our customers. Just like we were kind of dealing with shutdown orders in the month of May we were down about 20% and as I said not prepared remarks, that's consistent with what we saw in the first three weeks of for.
First quarter.
Yes.
Great and the layout of the the funnel.
That you're looking at.
Projects that you're hoping to go after.
For the orders.
That you've already booked.
It does that tell you that.
Companies are intending to stay in offices and maybe even expand the space that they will need to accommodate social distancing and are you seeing any.
Friends or changes on.
Open office space.
And in Q.
Any trends there that you're seeing that would play out over the medium term.
Yes, Stephen I would say that it is that a broad range I think in general what we've learned from our research with our existing customers and also potential customers.
Is that the office is not going away what people Miss most about working from home is other people. So things like collaboration I projects are people need to creatively work together.
That's sort of in between moments in offices that build relationships and build culture and don't identities.
I think that people are missing and working from home. So we definitely see the office based continuing and actually most of our customers due to I know we've had a couple of better said, hey people are going to work from home from ever Forever.
Also see that as an opportunity because we think where we are uniquely set up.
People sort of working from home office situations really well and we are doing that now digitally Anthony our dealers.
So we think it's a combination we had some customers he said listen I'm sticking with the floor plate I had pre Tobey. This is temporary once we get a vaccine we're going to go right back to where we where we've had some that have said, let's put up barriers.
It's create space between people, let's use different content, let's look at materiality and what kind of finishes can we put on things are easy to clean.
As for the open office set up we have people that are still very very interested in it. It's really just about spacing between people. So it really runs the gamut. We also have people that are saying hey, how the workforce has been distributing for a very long time, we think that will continue so perhaps we'll have regional working hub.
Do you see amount of people in our headquarters, but what we are finding I said its people, bringing people back to the office now see where people can be in the environment. So it's much harder to restrict your space and your real estate when you need more space for fewer people could we aren't seeing a dramatic trend in real estate in size and lease rate action.
But you had anything to that Africa. The only thing I would add Andy is maybe a reiteration of some of your comments on on the prepared remarks and that is because of the change that Andy described we we're big believers that there are going to be some winners and losers and given the magnitude of change that's occurred and I think Herman Miller.
Is really well positioned we have that we think our three of the key elements going forward, we've got knowledge and research and skill set in terms of internal to our business that are dedicated to consulting with customers and creating spaces that are unique in served their unique needs. We also have the products to serve as Andy.
There's lots of different potential setting a alternatives that companies are going to be looking forward. We have a very wider array of product and then perhaps most importantly, we have the channels to market to serve those customers via traditional offices.
Can't get home setting and what we think it likely more of a hybrid model going forward or you're going to see need in both of those places.
Great. Thanks for the color.
Thanks you.
Our next question comes from urban burdened with the benchmark company.
Thank you good morning, everybody.
Rubin.
Let me.
So maybe.
Just on the topline in the near term.
So your your your order.
Commentary for the first three weeks it sounds like it's maybe softened a little bit that's a little bit surprising to me.
Can you just I guess walk through what you're seeing there by segment.
Is it mostly in the North American contract business, where the where the weaknesses and then maybe Jeff you said that the backlog.
You wouldn't necessarily look at that like a normal period, but it sounds like your lead times are back to normal. So could you just walk me through I think in the past, we've kind of assume that 85% of that backlog ships in the next quarter or what's the what's the right way to think about it now and you know what are you seeing from a from a cancellation point.
Or rescheduling standpoint, more recently that has you concerned that that backlog won't ship like it normally does.
No no no from Rubin.
And let me just be really crystal clear I wouldn't want you to interpret that comment we believed that the backlog represents orders that are going to ship I mean, so don't don't hear that we have not seen cancellations.
Up orders, we've seen some I don't mean to apply that there had been on but it has not been it has not been the norm. What we have seen is a fair amount of.
Customers, calling and saying hey, we need to move the timing of this one because we're either dealing with our own closure situations and so my only point would be and that you can actually that is exactly why our backlog is up as much as it is to close the fiscal year, because you know the order entry was down throughout.
The entire fourth quarter for us and so normally you would think thats, what the road your backlog, but because of those reschedule.
This call that we were getting it just kind of pushed a lot of those order that on ships to closed the quarter. So that's my only caution as I just think in this current environment, we believe we're going to get through it.
And you think these are good orders and they're going to shift but.
But I just im cautious because of what we experienced in the fourth quarter and you know we're still seeing lots of states that are.
And region overall for that matter that are in this kind of emerging early emerging phase and I think you're going to continue to see some some delays and some of the order timing to your to your first part of your question on the timing in the kind of the papers I do want to clarify we haven't seen.
Erosion in order entry to begin Q1 from where we close to the fourth quarter. In fact, if you look at the entire months of May we're fairly consistent.
The weakest area for the business has been in North America. So from a from a segment perspective, we've seen the most significant declined in the North American contract business.
Our retail segment has actually been quite strong as I mentioned on the call. We were in relative terms down only 5% for the fourth quarter.
And we've seen.
A pretty positive signs to begin he wanted to early and then international is fairly consistent with the made trending as well. So I don't think him I would characterize it as erosion in the first.
In the first three weeks a quarter, it's more that it's kind of consistent with what we've seen in the last five weeks of the quarter to close the period, Yeah, and what I would add to that Rubin as you look at international in retail Center, China, and many of our sort of Scandinavian countries are a little bit further along on the virus, Kurt and we really started to see them.
Kind of insulin and their recovery process than we've seen orders continue to increase there. So I should look at weekly order trends across international the latest four week trends in those regions are still well ahead of eight and 13 week trailing trends.
And China's even further along not only showing an improvement in trend over the last fruits of orders are going ahead of prior year levels as well so.
Were actually pretty optimistic as we move forward.
And that sort of trends.
Okay.
Very helpful and maybe.
You brought up home office doing well can you can you talk about.
I assume we're going to see most of the impact to that in the near term in the retail business have you seen any signs that that your customers from a corporate standpoint have been investing more looking for ways to invest in.
Setting up their employees with with home offices, how would we think about you guys benefiting from a trend like that is it more likely to come on the retail side in the near term and then longer term, there's an opportunity from north American contract to participate in that.
That trend.
Hi, Brian This is debbie crops nice to be with here. This morning, I'll speak to this a little bit John's what we saw in the fourth quarter or work from home product, which is inclusive of our task seating desks and other peripheral products or the office was up 126% to last year. So we saw a huge organic less than that.
So we optimized rapid digitization.
To make sure that we did engage with that residential home office consumer directly in a more meaningful way and the last weeks, we've launched an insight access program. That's designed specifically to support our contract clients.
And there are work from home me for their employees. So we are utilizing the distribution and fulfillment network. We have developed for the residential retail channel against these new classic client needs.
So we think we keep rouven it'll benefit not only the retail channel, but we'll be able to capitalize on our fulfillment expertise and capability there, but also we're able to use.
The insight access program, that's quite easy and digital for all of our corporate clients that are offering reimbursement in stipends for their work from home employees today.
And just in terms of longevity of trend.
We're hearing from our contract client, we're really looking at supporting a more meaningful shifts into work from home to the end of the year likely through they pay period in which we have a vaccine. So we believe we have no certainly several months if not through the end of the calendar year to optimize this organic lift.
Great that's very helpful and the so the trend that you saw of home office business up over 100%. That's that's been relatively sustained gear even recently in.
June.
Yes, absolutely.
Okay.
Last one for me the.
So one thing to add to that you know a lot of corporations are many of our contract customers are just now beginning to work through what their work from home policy for their employees is so are they going to reimburse I think in a stipends, though we were actually a little bit I had ever contract customers and starting to get ready for that so we anticipate they'll they'll be a second.
Wave as people start to reimburse for people, who have more longer term work from home situation, sorry to interrupt you better.
None of that's that's great.
Last one for me kind of a two part question. So the gross margin performance in the fourth quarter was.
Very strong.
Can you walk through kind of the puts and takes and.
How you got there and maybe how to think about that as we move through the next few quarters and then in that same line. The the operating income deleverage the 25% to 30%. I mean, you were you were kind of already there in the fourth quarter and you.
Amended additional cost saving efforts there towards the ended the quarter is that just some conservatism there and you know there's upside to that target or can you just I kind of missed the part Jeff where you explain why that might stay in that range, even though you've got other savings that its can you just repeat what you said there.
Certainly, yes, so let me let me first speak a little bit to the to the puts and takes too.
I'll frame this for you.
In year over year terms Rubin just to kind of I know, we can do this any number away sequentially or year over year, but I think year over year bulky to the easiest way to think of it so de leverage we as I said in his prepared comments was the was the big factor.
We had much lower production naturally in the fourth quarter, we figure that was you know.
Attributed to about 330 basis points of decline year on year.
In the gross margin and other a couple of positive commodity continued to be a favorable in the in the environment has stabilized a bit.
Principally referring to steel, but there are other categories that.
Hip have had worked in our favor as well and that was about 30 basis points.
Year over year improvement, obviously, you know we've anniversaried much of that what has been a tailwind to gross margins for for that for our business for the last year, but still we were encouraged.
You know if we look ahead for commodities I would just say right now it feels stable.
That could change of course, but if anything I think the spot rate for steels down a little bit than the average price we paid enough in the fourth quarter. So there maybe a little bit of.
A little bit of further upside there, but at least stability is in our near term expectations and then pricing I would say net pricing benefit from the price actions that we took most recently in January combined with the fact that we have seen a little bit of a channel mix shift in the business in a bit of a product mix shift that's been favorite.
Well I mean, as we talked about this the increase in activity in retail our international business saw a fair amount of task seating.
Mix in their business and that it.
He is a high margin category for us and the combination of those couple of factors was helpful.
Initiate a number of cost reduction actions in the quarter.
We didn't get a full quarter benefit from them necessarily.
But some of that flow through on overhead spending that was a favorable as well and then I think looking at the other way we had some puts and takes that that kind of balance things out so leverage around 330 basis points on negative commodities about 30 basis points positive pricing and mix I'd call. It 150 basis.
Points up year over year improvement and then the balance of the of the difference were just a you know some puts and takes we get book some inventory reserves.
For for inventories at year end here, we had some purchase accounting noise as I called out on the script, so thats kind of though the walk year over year on gross margins.
The de leverage I think we were Kevin keep me honest your 26% de leverage or something like that in the fourth quarter, Yes is that right yet so.
Right in the range that work that we're talking ruin I'm not going if I'm not going to sit here and and say that it's necessarily conservative I would tell you that it's not and it's never it's never a straight line walk right. It's so much of this as you well know depends on the short what kind of revenue boost you get in the short run or how.
Much revenue goes away quickly.
In relation to your fixed overhead costs and we've been really deliver to try to pull those costs down as far as we can.
While at the same time protecting some of those critical investment areas for the business that we think are so important in the long run so we're going to stick with the range. We gave its going to move around a bit up and down and if we get some upside in the revenue.
We can do a little better than.
Towards certainly toward the lower end of that and if we if we don't see the revenue volunteers quickly, we still think that that offer into that range is reasonable.
Thank you guys. Good luck.
Hey, thanks.
Our next question comes from Redburn source of Dougherty and company.
Morning.
So a couple.
Alex on the work from home.
Strategy so.
This is going to be.
Multi prong strategy with.
Platforms across DWR.
Hey, Herman Miller or is there going to be.
Centralized.
Consumer would find Herman Miller's work from home.
Products I just want to understand.
How you're approaching the BDC aspect to this market and how it consumer.
Well interact with the brands.
Hi, there. Good morning. This is Debbie and so what I would say taught me, saying as we're really managing our three retail banners paid DWR and then Herman Miller consumer.
The portfolio strategy, but each brand has a unique custom audiences. So each brand will offer a robust work from home assortment.
And yes, overall overall surfaces and help supporting work from home. However, on our Herman Miller website, we will be offering a range of product from.
Hey, and VW, our proprietary products as well so what we can offer comprehensive.
Offering of good better best pricing.
Across desks and task seating.
We believe that will effectively support customer needs, regardless of which I'm tracepoint architecture.
Okay. So you feel.
Yes.
The necessary price price points to meet.
That that market demand.
Product perspective is there any holes or any areas, where you feel like you too.
Yes.
What's new product road map looks like.
To serve.
The work from home trend.
And weve been able to so I would call a lot of product holes by consolidating the assortments across the brand into that haven't mill RP could see offering.
In terms of having a more opening price point ask or more opening price point task seating.
Our HAE product specifically has helped fill that fill that gap on where of course, all with evaluating our assortment offering as more and more people have demand. When I was her work from home product will be developing into new product. They're also opportunities develop into new products outside of I'm working specific tasks and I'd like to color or.
Coming gaming Assortments, specifically, whereas more people are spending more time, a holden this is a really.
Compelling time for us to be lunching gaming seating. This summer we launched our first feet in partnership with watch attack. So we're really looking forward to thing how that impacts our overall business as well.
Okay.
When we think about the work from home.
<unk>.
I would assume.
The dollar spend for employee for a home office.
There's going to be lower than a typical workstation.
Contract workstation and office.
Do you see workable.
Be additive.
So the overall.
Market opportunity neutral or negative how do you see that.
[music].
Hey, Greg This is Jeff I would say.
We need to see how things unfold here a bit I think our hypothesis is and there are some evidence to support this in its early days, so I want to be really cautious.
But the hypothesis is we do believe that.
Companies, they're going to need offices, and the question will be to what level do they need to be reconfigured and to what level do is there any any reality to what has been a lot of conversation around the potential for companies to maybe move out of class a office space in large metropolitan areas and into into more.
Kind of outside of the city center and satellite kind of hub and spoke type models and if we if we feel that.
We fully expect that we're going to see a fair amount a refresh it does business and that's going to help offset what would likely otherwise be a lower spend per for home office users I think thats, probably a fair.
Assessment.
In general, but I do believe I think our strong believes that this is not going to be a one or the other it's going to be a hybrid and we think that's why we that's why we emphasized the importance of players in our industry that not only have.
The product and not only have the the knowledge and know how to consult with customers, but also have the various channels to market to serve boat.
So we think it's a particular opportunity for a company like Herman Miller, who is positioned well on all those fronts.
Thank you.
And I'm not showing any further questions the far more turn the call back over to our hosts.
Great I when I, thank everyone for coming today, we've demonstrated an ability to Herman Miller, hopefully not only whether economic disruption, but emerged stronger on the other side and I believe this time will be no exception.
How did you built for the future and the dedication of I'm pleased to put our customers at the center of everything we do.
It's a really strong foundation as we move forward.
Thanks for joining us we appreciate your continued interest in Herman Miller, and we look forward to updating you again next quarter. Thanks, everyone.
Ladies and gentlemen, I suppose conclude todays presentation. You may now disconnect have a wonderful day.
[noise].