Q3 2021 Herman Miller Inc Earnings Call

Good morning, and welcome to the Herman Miller, Inc. Third quarter earnings Conference call. As a reminder, this call is being recorded I would now like to introduce your host for today's conference, Kevin Veltman, Vice President and doesn't that's relations and treasurer.

Good morning, joining me today on our third quarter earnings call are Andy on our President and Chief Executive Officer, Jeff Stutz, Our Chief Financial Officer, John Michael President of North American contract that'd be probes, president and affirm and Miller retail and Ben grew and our Chief Digital Officer, we have posted yesterday's press release and our investor.

Our relations website at Herman Miller Dot com wherever their figures presented on a non-GAAP basis, we've reconciled the GAAP and non-GAAP amount within that press release.

Before I turn it over to Andy for a brief overview on the corner 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 SEC filings any forward looking statements that we make today are based on.

And as of this date and we undertake no obligation to update these statements as a result of new information or future events.

And at the conclusion of our prepared remarks, we will have a Q&A session. Today's call is scheduled for 60 minutes with that I'll turn the call over to Andy.

Thanks, Kevin and good morning, everyone and thanks for joining us today.

Our third quarter coincided with the one year, Mark and COVID-19, we have a renewed sense of optimism today and we are beginning to see a light at the end of the channel. We believe and changes brought about by the pandemic will lead to significant opportunities for us and we're confident and our there.

And what do you go on our business and continue to create value.

Shareholder.

We believe that our differentiated set of capabilities on a significant advantage.

And <unk> to serve both our contract and retail audiences and every way and everywhere they want to new business.

For the quarter, we continued to see the benefit of our diversified business model, while consolidated sales were down 11% and orders were down 13% growth.

And our retail and international businesses helped to offset the challenging near term conditions and Honda.

North American contract business.

And also continued our trend of strong profitability and delivering another quarter of operating margin expansion over last year.

And then if we benefited from the strength of our retail business.

And rapid rise and demand for home office, and certainly drove her and her retail price. This year, it's not the whole story.

We've taken a series of very deliberate actions and this business over the last two years.

And we're seeing the results with sales growth of 63% reported growth of 81% and operating margins of 20% and the third quarter.

It's a new day for Herman Miller retail and we expect to see double digit sales growth and operating margins and the low teens going forward.

Momentum is building for our contract business as well with more of our customers moving into the action phases and workplace planning.

With that being ramping up the level of urgency has skyrocketed in recent weeks and late summer and early fall have quickly become a target for many companies to return to the office.

With an industry, leading group of brands and a series of growth investments that we've made on our contract business over the last year, we believe that we're well positioned to fully capitalize on the opportunity in front of us.

It was almost two years ago that we share their strategy to accelerate profitable growth and unified family of brands.

Customer centric and digital first approach to everything we do and a renewed focus on our people our planet and our communities.

And while Covid has differently from it's all a curve ball.

We haven't lost our way and fast.

And to make it to validate it and what we'd already been working toward and we've intentionally shifted resources throughout this crisis to new initiatives through the pipeline faster.

Today, we're a more agile organization and we're poised to emerge from Covid and a position of strength and.

So proud of new way all of our people have responded to everything we've been through the share you know it hasn't been easy, but we have come so far.

We wouldn't be where we are today if it wasn't for their amazing efforts. So.

Huge thank you and the Herman Miller teams around the world and I'll turn it over to the operator for your questions.

Thank you ladies and gentlemen.

And at this time. Please press Star then one on your touch on telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

And any background noise and we ask that you. Please place your line on mute.

Question has been stated our first question comes from the line of Reuben Garner with benchmark. Your line is open. Please go ahead.

Thank you and good morning, everybody.

And Robert Good morning.

Maybe we.

We could start with the stock opened up off a little bit it's recovered.

But the two pieces.

And that I've gotten are.

I think things that you guys could help clarify here that the north American order trends down 38%.

Thank you guys report.

The home office, a little bit differently than some of your peers and so your numbers are behind what the bits and the data I think has been.

During that period, Jeff is there any way to kind of quantify what.

And that impact is and what's your maybe more apples to apples.

Numbers look like and then secondly, a same kind of clarification, you mentioned, some things like costs coming back on and commodity inflation.

And the release I think earnings estimates already have you guys been declining next year can you just talk about what you know.

That all means from a contribution margin standpoint, as we move into your fiscal 'twenty two.

Share of Ruben and good morning.

Let me try to take these and orders. So I'm glad you asked the question on the North American contract order patterns, because I do believe particularly through the Covid period debt the business data and good Dan I don't hear this the wrong way, but certainly there is different there are differences across the public company groups and are in our space.

And for how companies capture and report the work from home component of the industry and for US because we have a separate retail segment that volume runs through the retail segment. It does not run through the order.

And the orders that we report for North America, So to your point North American orders were down 38% for the full quarter and Q3, if you adjust for the component of Canada.

And of the work from home volume net debt.

Uh huh.

Debt that runs through the retail piece that accounts for about six points of the decline in North American contract. So said differently. If you adjust for that it's down closer on a pro forma basis to 32%. So let me pause there is that helpful.

Perfect. Thank you.

Yes.

To your second question and Kevin and I might ask you to lean in with a contribution margin comment here part of it gets difficult because order patterns are up so much and we've had we've had such as to kind of.

So many moving parts on the P&L with cost savings and so forth and costs coming back and which is the nature of your question, but let me just start with some clear clarifications from what we expect near term cost impact to be non talk in Q4, not not fully FY 'twenty two in this comment just to be clear.

But certainly with the rise in steel prices, our expectation is that our fourth quarter is going to feel pressure from higher cost to the tune of between three and $4 million. So that'll be pressured the gross margin level.

In addition to that we have made the decision to begin bringing back some of those temporary costs pullback of the temporary cost reductions that we implemented earlier during the pandemic I should point out that we're doing that because we have a growing sense of confidence that conditions in North America are going to improve and we're going on there.

And what we're seeing it we're not seeing and the order rates, yet, but and John can speak to this I'm sure at some point.

Some of the green shoots that we're seeing but all that being said we are bringing back some of the employee benefit costs that we had temporarily turned off expectations are and the debt will drive about $6 million of incremental cost sequentially in the fourth quarter compared to our run rate in Q3.

And then Rubin can you restate your question on I, just want make sure I understand what you're asking for on.

On FY 'twenty to contribution margin.

Yeah. So just I mean I think.

You've obviously your retail business you gave some color on what margin you know more sustainable margin level might look like going forward and the low teens and so I know that that business will on.

On a year over year basis will be under pressure, but what are these costs look like how does it impact your ability to expand margins at the inc levels or hold margins at the Inc levels and 22 for the business how do we think about what.

What that might look like with all these moving pieces.

Yes, Reuben this is Kevin so as you know revenue is an important variable contribution margin as to the rate of growth and.

Given we don't have and FY 'twenty two guide out there just consider that and the background on this answer.

The way I would think about it is over the longer run we've tended to be a business debt.

He has 20% or so contribution margin in a normal scenario next year as we bring those temporary costs that we've avoided this year back into the business. That's a variable that is not present typically in our year over year comparison, so without giving you an exact contribution margin assumption because.

Revenue does come into the equation a little bit there. We do have those costs that will feed back into the business that should be part of the math youre thinking about we'd expect those costs to kind of weave in over the course of next year fairly ratably as well.

Okay.

Helpful and maybe maybe a question for Debbie.

Obviously, our retail business has been unbelievably strong and the outlook for low teens margins I think is going to surprise a lot of folks can you just maybe go into detail. It you know what your confidence.

How confident you are that you're going to be able to grow that business double digits and sustain those low teens margins as we move into 'twenty. Two I know you guys made a lot of moves I think people looked at 2020 and thought that debt you know the benefits there are temporary but clearly you guys see something else can you just maybe elaborate on what what gives you the confidence that youre going to.

And to grow and sustain those margins.

Thanks, very much and I'd love to and so obviously I certainly want to indicate that we believe that there is a build on our business. This year due to the work from home needs and the increased spending and home and they're also indicators that those trends have some longevity to them based on and real estate data that we're seeing and other data we're triangulating from the Mark.

Yes.

Additionally, we have as you know been strategically changing the way that we run this business over the course and for last year, and we're really seeing some of those changes come to fruition and I'm also pleased to note that we're just at the beginning of those journeys and so I think Barry and then.

And then Tim that we'll continue to build with some of the strategic drivers.

The dominant drivers, our marketing assortment and weapon Huntsman and that's and then you'll see us layer it and some of that.

Physical retail strategies, as well, which we kicked off at the end of Q2 and Q3, so from a marketing perspective.

We've been moving to a seasonally seasonal campaign management of our of our marketing and our consumer engagement and.

We've brought in new talent and to the organization and are running our marketing mix and a much different way so.

Just as a point of reference our marketing as a percentage of sales in Q3 was four 8% that's down from five 3% and Q2 and guidance from six 4% last year and.

Meanwhile, we obviously add drove $80 million and increased.

Orders and a quarter.

And of that $80 million and increased R&R it's on.

And the $10 6 million came from organic traffic, so that really speaks to the effectiveness of our marketing demand and tactics and.

And specifically within Q3, we had a benefit from our holiday campaign. This is a season.

Season that design within reach brand in particular, but also you have the brands have never really leaned into aggressively and so.

And you really see the benefits of the campaign tactics coming to fruition and a big wait and Q3, and but we will continue to execute on March marketing tactics, and and a much more effective and efficient way.

And and what we've seen is our acquisition cost.

Really drive that and our acquisition cost is and how you've done under $50, it's less than half of what it was this time last year I think any retail brand with the price of those acquisition costs.

From an assortment perspective $47 million of sales and Q4, you were driven by non comp skus. So you're seeing on units our assortment units really start to build on.

And our assortment expansion is driving growth and we're only just at the beginning of that journey and Q4, you'll really see us begin to dive into the art category and.

Q1, you'll see us start to layer on a bigger effort and rugs and then we're continuing to build out our furnishings assortment across a broader range of modern style.

And also testing, allowing enough cash and carry and from stores as we grow our accessories offering as well with a goal from an assortment perspective of being a destination for decorating the home not just the source of the furniture pieces.

From a physical retail perspective, I think as you probably know we've been testing from new concepts and physical retail and.

The very end of Q2 and into Q3, we opened small format Herman Miller stores.

M, which I came into my real pre Covid very excited about it based on a couple of things the trends, we were already seeing and a distributed workplace and where more and more people were using their homes as places to work out of and therefore need.

This places to do that.

And also the trends that have been emerging over the last five or so years, and particular rins and increased desire for products that help improve your health wellness and cognitive and physical performance and our products to all of those things.

And we've opened several small format and Herman Miller stores really focused on showcasing the value proposition of our argonaut makes heating and they are more than exceeding our expectations and where can it go on to continue to ramp additional stores like that and.

And Additionally, we just launched a small format design within reach and both and South Hampton and the Hopkins and New York and also a similar version of that and our new filter and market location.

And that design within reach model and the model that showcases a localized assortment offering and Barclays that generic offering which was typically done in the past offered one offering across our entire fleet and so this is a curated and localized offering that also includes the cash and carry accessories I referenced.

And at this type of store costs are by and assess.

And of what the previous VW ours cost in terms of capital and and inventory investments for opening and.

And we're seeing from very initial but positive.

Performance from those locations. So we're really looking at how do we optimize our physical retail is a key component of the customer journey certainly what we've learnt over the last year, it's important and personal engagement with our products and our brands are especially and the ergonomic seating category, where most customers are purchasing that type of <unk>.

And that themselves for the first time and and.

Until now a procurement specialist R&R economic specialists and our corporate office has made that decision for the customer and.

And I'm going to pass this over to Brian to talk about the web enhancements that we've seen.

<unk> proved very successful thus far.

With with huge growth and.

And over 313% and the quarter on and our E com channels and we're just at the beginning of that journey with more of those enhancements coming across our portfolio of retail brands and continued enhancements with M. D. W are where we've already launched because that and slip and you want to just add some color there.

Yeah, I will thanks, Debbie and thanks for the question Reuben.

Now I want to start by just reminding everyone that we commenced and end to end E Commerce transformation for our entire group in September 2019, which is obviously very timely heading into the Covid period now as we mentioned on the last call, but the first site that we relaunched.

As part of that transformation with VW on dotcom dotcom and.

And is performing extremely well ahead.

Ahead of our expectations, we're really seeing a step change performance improvement relative to prelaunch and even when you look at the Covid period relative to prelaunch, which really gives us a lot of confidence and this strategy and our ability to continue to see step change improvement as we roll out additional thoughts on to this platform.

And I mentioned last quarter that we're seeing a significant increase in our conversion on the site, but we're also seeing significant increases across really all of our key metrics on VW auto home, including add to cut rates yet.

And as with product views site speed, which we believe is really important for our customer and we're seeing a significant decrease in our balance right. So you know just to kind of reiterate debbie's comments, we're really at the beginning of this journey.

And certainly site launches and re launches are a critical part of the strategy going forward I am excited to let you know that we are well underway and getting the new Herman Miller store ready for re launch.

And that is on track as currently for Q4 and.

And we are continually evolving our platform and ecosystem and particularly the technology providers that we work with them to really create a richer and more frictionless experience for our customers. So we're very excited about that and personalization.

Personalization is another key component.

That is that we relaunched during this quarter and we're seeing great early success on that and then just finally, you know debt he touched on assortment growth and the newness metrics and I just really want to highlight that is so important for our ecommerce business, because it's really creating a flywheel where people are finding a reason to come back and check the site more often.

So all of these things are contributing and we have a lot of confidence and the quarters ahead.

Hey, Thanks, and and Debbie and just want to add one thing what I Hope you guys are hearing from that and say we have made some pretty dramatic changes and this business and you know we've taken our lunch and the last two and a half years for this business to begin with and we had a significant amount of things, we had to get better and change and.

But these are not things that were in response to COVID-19.

Long term investment. This is the fact that we saw and distributed work coming for a while we have been working for this and these are things that will pay off and the longer and as well. So I hope you're hearing a little bit about this and understand this is not just a flash and the Pam. This is a long term change and the trajectory of this business.

Great. Thank you guys for all that I'm going to sneak one more and if that's all right.

The North American contract you mentioned.

And our alluded to I think kind of green shoots or some.

Some optimism that things are inflicting here any.

You mentioned, I think and new orders up or the pipeline for orders up substantially sequentially can you just maybe give us a little more color on what youre seeing and when when does it actually might inflect and turn into business.

For you guys I think that.

This is probably the the most concrete sign we've seen that things are turning but any more color you could give would be great.

Sure Reuben this is Jon Michael Thanks for the question.

Yes, there are a number of green shoots that we've seen emerge over the last 60 or so days.

Just to give you a few data points.

And our sales pipeline in terms of new opportunities and Q2 to Q3 of this fiscal year is up over 28% and both number of opportunities and and volume.

Mockup activity, which is where clients want to see product before they buy it and sort of a sample or demonstration usually as part of the competitive evaluation process were up significantly January year over year and doubled and February in terms of year over year improvement.

And those are obviously against pre Covid comps.

Contract Activations, which is when we let pricing for a project and then when orders start to come in against those contracts.

<unk> direction significantly over the course of Q3 and and are headed in a positive direction.

I think the.

Anecdotally the conversations with clients as Andy mentioned in her opening comments are there concrete there here and now and clients understand that they've they've been waiting they've been kicking the can down the road a little bit to see what emerges, but now they know that they need to take action.

And I think we will see from the last part of your question from an order perspective, I think we'll see that begin to build through Q4.

But really feel the impact and the first half of our fiscal 'twenty two.

Does that answer your question.

It does thank you very much I appreciate it guys and congrats on the quarter.

Thanks, Robin and thank you.

Thank you and our next question comes from the line of Greg Burns with Sidoti. Your line is open. Please go ahead.

Good morning.

Relative to some of the the inflationary pressure youre feeling.

But what are the actions that you've taken to.

To close the call.

Have you have you raise price if any.

Other.

Cost cutting measures and.

And how to think about.

The timing of you closing the debt.

Narrowing net price cost gap over the next couple of quarters. Thank you.

Hey, Greg you're breaking up just a little bit but I think your question is about price cost and actions. We're taking we are taking a price increase and I'm going to hand, it over to Jeff to give you details on that yeah, yeah. Good.

Thanks, Greg.

With respect to near term actions look with debt.

And we have and the path and we see major inflationary pressures like we're seeing with steel.

We've had success implementing price increases to help offset that that is in fact, what we're doing.

Announced a price increase and now it's not effective until the beginning of the fiscal year on the upcoming fiscal year.

But nonetheless, we've tried and tried to size it accordingly to the kind of pressure we're seeing.

I will remind and I know you realize this but just for others listening.

It's always important to remember and the contract business debt when you put a price increase and in place it's not as though you hit a light switch and immediately start to realize the benefit of that price increase that has to phase in over a period of time.

We've taken that into account, obviously and sizing the price increase so I would say we're reacting to this very much like we have and the path and we had.

The confidence of that.

It will it will be effective and.

And more broadly.

Look.

We as a company have always and I credit our operations teams tremendously with the work that they do and our supply chain folks, they're always working toward a goal of cost reductions that won't change for us we are continuing to.

Perhaps for improvements and efficiency improvements and so forth. So that's kind of part and parcel with how we do business and.

Is it.

Expected as we through the fourth quarter and into next year, No I think as Kevin pointed out.

We have these temporary costs that are coming back into the business and to completely offset those next year with efficiency improvement and Thats, probably a bridge too far and and I wouldn't want to set that expectation.

What we.

We continue to be focused on cost reductions like we always have been.

And and leaning out the operation.

Okay, Thanks and.

And the prepared remark you mentioned some easier.

Thank you Peter.

Jackson one talks about it was the Herman Miller professional could you just.

Talk about that it sounds like Youre going after the <unk>.

Smaller and to the market.

With this initiative.

Can you just tell us a.

A little bit more about what the goal is for that.

<unk> and.

And how that might increase your total addressable market and the cost base.

Yes, I'm going to hand, it off to the agreement and a second but I just wanted to touch on that innovation incubator, Greg and I think it's a really important business model that we've set out.

And you can have on when you put on new idea and the middle of a big business it doesn't necessarily get what it needs to hit flourish and thrive and we've seen by by setting up this sort of flat team and putting our new ideas.

Intuit and running them effectively and little bit separate from the rest of our business, we've seen great traction and so we did that with gaming and we haven't really touched on the gaming business or the gaming business is incredibly successful and we're excited about our partnership with Logitech G. One.

And one of the most amazing innovative and design thinking companies when it comes to gaming peripheral. So we think theres a lot of runway there and then Herman Miller professionalism and one of the other ideas that came out of that group. So then you've been pretty instrumental and that's the only way I can turn it over to you to get some color.

Yeah, Thanks, Andy and thanks for the question Greg.

In essence.

Herman Miller professional is.

And the e-commerce business for our contract business right. So I just want everyone to be very clear on that and.

And we're really committed to creating the best E Commerce experience, we can for the contract market.

So what we're working on will provide.

You know tailored b to b pricing our contract focused catalog.

Design tools professional grade falls and specifications et cetera. So we're really trying to create a custom e-commerce experience for four BTB buys and general, but particularly as you mentioned, Greg focused on our small medium business segment, which we believe has been underserved by our business historically and we're very focused.

<unk> on targeting that segment through this initiative and really in essence, what we're trying to do here is Ted Herman Miller, Dotcom, which as we all know is our most visited contract showroom.

More of a revenue generating asset.

So we are on track.

To launch in this quarter for Q4.

We're going to take a very agile approach to this business youre, starting with an M. D. P launch and really beginning to build out more and more functionality over time as we learn more from from.

And this behavior on this platform, but I really want to emphasize two one of the unique aspects of what we're trying to do here is bring the best of Herman Miller customer service and the best of Herman Miller dealer and customer service to and E. Commerce experience because we believe the future of e-commerce for our business for our customers at all.

Price point.

Customer service is a huge component of that and we feel like when we look at the marketplace right now there are companies that.

And that are doing well in terms of technical innovation and and there are traditional companies that are great from a customer service standpoint, and we really wanted to pause and.

So this is a really big focus here and as a result of that we've really part and it very closely with our dealer community on this initiatives.

And it will be very much part of this.

Obviously this site will be designed to allow customers to buy now, but if we gather information during the purchasing process that these customers would be better served offline, particularly by a dealer and we expect that this will create great data and great.

Lead generation for our dealer community as well. So we were really excited about what this could mean for our drug drought contract business not just in North America, which is where we're going to start but internationally as well.

Okay. Thank you.

Thank you and again, ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone.

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

Hey, good morning, maybe to start with on on the long term retail growth outlook, clearly a strong market backdrop and many internal improvements going on I guess thinking about the long term, maybe the three factors I'd like to get some.

Some color on this contract contributing.

Contributing to the long term growth is how much of that is same store sales growth how much of that is new store openings and maybe.

And how much of that is digital growth.

Platforms as well.

Hi, Stephen this is Debbie good morning.

So maybe just start with a reference around our same store physical retail performance and the quarter.

And our comp stores, great, 18% and sales and a 37% and orders despite traffic and store is being done and 35%. So first of all we're really pleased with the performance of our current fleet of stores.

And and we certainly driven a lot of changes and the way that we're managing those stores compensating our sales associates, how were thinking about selling the broader ecosystem of our digital expanded assortment offering through those stores and we're starting to see.

Traction and those tactics and drive improved comps and our current fleet from a long term growth perspective, and as Ben indicated across our portfolio of retail brands and we've done a relaunch of the VW are site by Herman Miller and her to come and that certainly drives.

And a good element of the growth that we're projecting over the course of the next year.

And then from a new store perspective.

Like I said very happy with the initial results we are seeing up the smaller format testing, we've been doing and Herman Miller as well as the new results. We have from our recent DW. Our openings, we are planning additional openings and the upcoming year, but we're obviously being strategic and I'd say that the additional color I can provide is that.

And artist to continue to build double digit growth, we do need some investment and the in these and the retail infrastructure and we need some investments and our go to market channels digital and physical stores, obviously being those key channels and so we're very excited about that.

Strategies that have to play so far and the traction we've got and and looking forward to continue to push it north area.

Okay, Great and then thinking about costs coming back.

Before retail solely.

It's the retail segment running full on on costs, if not maybe.

And where our costs not at what you may call full run rate and and what are the factors that would determine and bringing those costs back to full run rate.

Hey, Steven.

And let me let me jump in here Debbie real quick.

I would maybe as a general characterization I would say that the large component of the cost that are yet to return.

And not in the retail business, there's certainly it touches the retail business, but the but.

And they largely center around the North American contract business into a little lesser degree and international the components that do touch retail and.

And you can think of this as probably.

Pro rata by size across the whole enterprise is travel and entertainment right. That's an area that.

Debt that we are including in our App and our own calculus for what is yet to come back and of course through Covid.

<unk> has been significantly reduced.

In some cases to almost nil.

And now that will stay that way forever, but I can also tell you that Andy and I are pushing the organization to think differently about travel and the future and I think we've all learned.

Some new ways to do work and so with that we don't expect it to return to necessarily pre COVID-19 levels anytime soon but you can't run a global business without without some people moving around and we expect that that sort of claims.

And thats going to pick up so that is one area, where certainly the retail team will see some impact and then and then theres. Some other employee benefits like retirement employer paid retirement contributions and things that are.

And it will affect retail and Debbie please and.

Got you all for joining.

Yeah. The only thing I'd add is just most of the incremental cost that we're planning going forward as variable costs associated with sales. So sales growth are on.

Our marketing costs will increase but not as a percentage of sales just as an absolute it's bad and then our variable selling cost obviously increases.

Yeah.

Got you helpful color and and shifting to.

And maybe DW our contract how that relates to the improving North America pipeline and sentiment.

And it's DW our contract benefiting at all from this sentiment or overall do you expect as there's a shift from people going back to offices.

And maybe some incremental less focus on home spending.

Is there may be and reverse effect, where it did soften some retail demand but increases.

North American contract.

And well Stephen CDW, our contract is obviously captured and our retail segment.

And and DW, our contract around that and 30 and the quarter, that's an improvement from where its been trending and that's obviously and in perfect from where it North America contract. This trending.

What I will say is and and.

In recent weeks, we've seen similar flurry of activity that John spoke to and North America, and DW RFP and I think we are seeing VW or see improved slightly ahead on progressive North America because of the large penetration of ancillary products and that category and as companies are thinking about what return to work looks like there.

And can you give out a different floor plate format and one that includes much more community and ancillary space and.

I think we're seeing and a leading indicator and the DW RC business, there and what we might continue to see longer term I'm.

Just to touch on the other audience segments of the retail business.

We have what we call our residential consumer so that's on.

Selling and a DTC version to the M T.

And the end user.

And they actually grew 142% on the quarter and then our trade consumer also really rebounded this past quarter growing 30% over last year. So I think between what we're seeing and BWXT and trade we're really seeing.

And Tim and build and and the way that people are engaging with the lifestyle and ancillary category.

Yeah, and I think Debbie touching on a really important point that I'm sure. You all are hearing from some of our competitors as well which is.

And then need to get back to the office and the reality of getting back to the office and donning on every CEO and every facilities planner and everyone is engaging in this conversation with urgency now, but also taking a look at their environment and realizing how they need to be different with how little I'll be working on the future and there are certainly a spectrum of that but there is a huge opportunity for us.

Net and that especially with some of our ancillary businesses and our brands that we on likely WR and not one out there.

So we're excited about that opportunity going forward from the contract business.

Excellent and maybe something to add on there, which I was planning to ask it's what you were just talking about Andy is that the North America discussions right now how much of that is.

And is looking at large office changes and bigger projects, how much of debt would you characterize as more ancillary products and.

And smaller floor plan changes and and any.

Leading thoughts there on the product mix being better which may kind of helped cushion.

Pressured contribution margins with expenses coming in.

Sure.

And I think the <unk>.

Certainly is as companies are figuring out what their workspace needs to look like going forward. The focus is around the connection and collaboration.

Opportunities are spaces for deep concentration as well as connection and community.

And so when you think about those key areas.

Ancillary product plays a big part in and outfitting those types of spaces. So we're certainly seeing momentum.

And the ancillary product lines.

To your question about the size of offices and those types of things that's been an interesting conversation with clients. So I think.

To be honest with you, it's a little bit all over the board, but the early the conversation was we're not going to need nearly as much space as.

As we actually get into the planning process and you begin to bring more collaborative space into the office you find out that you may accommodate less people, but you actually need more a similar sized space because of the different type of spaces that you are creating so I think it's very fluid and and.

And it's evolving.

But definitely ancillary will play and play a significant part of the conversation and if I could just tag on to Andy's comment about Ceos I think one of the things we're seeing is.

A real a real sense of urgency or knowing that it's important to get this right.

As right as they possibly can and the first time and I think it's a real plus for the contract industry in general as well as our company that this is and this is an issue that's top of mind and the C suite and.

And and space is not always and the top of mind of the C suite, but I think it's going to play a critical role in moving forward and.

Think companies' leadership understands that.

And Steve and I would say, we're seeing you know.

Projects coming from large company, it's marketing, it's really across the board, everyone and thinking about it. So it's not just segment and in one area or another it really is across the board.

And I'd just add as companies are starting to consider a more community driven floor plate.

We're also really starting to look at and communicate what their long term policies are and where are their employees work from and we believe that's also an indicator that there is a longer term momentum and this work from home and trend that we've been seeing so we actually expect to see a second wave.

Purchasing around the category as policies and start to get the thing.

Very helpful. Thank you.

Thank you and our next question comes from the line of Doug touch with <unk>.

<unk> Research. Your line is open. Please go ahead.

Good morning, and hope you can hear me.

Congratulations on the quarter.

But and that's been a long time on.

I'm fine. Thank you Andy I Hope you are as well and Jeff I Hope you all are well congratulations on navigating.

On a difficult period.

I wanted to go back a little bit and the history, because as I remember on Herman Miller for the last decade really talked about the living office, which I think John talked about and collaboration which is which was the whole.

The whole office on contract community was talking about that and Covid, obviously makes that on a much more challenging issue and I.

I think you talked about space and <unk>.

And as I saw over the last couple of decades. So the amount of space was top of mind of at least on a real estate people and most corporations. So I really am interested to get a little more color for you on those conversations, particularly with the C suite, which I think is important question how will be office look in the future. What are you going to be are we gonna have more on.

Architecture, and go back and private office other than benching, and and those kinds of close quarters or what do you see as the future and how does your mix going to bet on and I do have some other questions.

Based upon the financials and I'm looking at.

Sure Budd this is Jon Michael.

I think theres clearly a couple of principles emerging in terms of how the new workplace is going to be planned.

One of them and it's out of what we would call de Densification and and this is a term that we're hearing a lot from the commercial real estate community as well.

And that is to your point historically the focus has been how do we get more people on the space, how do we drive down square footage per person et cetera, I think it's become clear to everyone that for both health and safety reasons as well as for the purpose of the space.

And that we've got to reverse that trend to some degree.

The other thing we're hearing a lot about is amenity rich spaces.

And that is as.

As the office becomes not a place that has to go to five days a week, but a place that I want to go too to support the type of work that I need to do it has to be a destination and <unk>.

Has to be an attractive place for for employees to want to go so I think that.

And as are our two key themes that we hear and that obviously translates into what the new workplace will look like I think every companies.

Slightly different interpretation of what that might be but I think those two themes are prevalent and and all the things that we're hearing.

Sure John Michael how does that translate into product what are what kind of products do you have to accommodate those actually I think they're very new principals as well, thank you and identified.

Yes. So the good news is many of the investments we've made over the last several years in terms of a rounding out the brands and the Herman Miller group.

On fit very nicely into the types of spaces that we are designing and seeing designed by independent designers, obviously collaborative space.

And is.

Is more prevalent so brands like not one and hay and Geiger ancillary products fit fit perfectly into those types of applications.

And certainly amenity type spaces be that coffee bars lounge areas that types of things.

And the brands, we have and the Herman Miller group as well as part of the DW our contract offering are are significantly.

Helpful. There and the other thing we're seeing is Pete.

Company is really trying to figure out how to leverage and take advantage of outdoor space and.

And and the products, we have have added through the and the portfolio. There are significant as that space becomes not just a place where people want to go and get a breath of fresh air, but actually where they may want to go and work on when the weather is just right yeah and Brian. It's interesting we've been through you know one of the Mezz.

Tragic and difficult social experiment is probably of our time.

And again what are the things. We're also seeing is that there is a real focus as Debbie mentioned on health and wellness and how things like ergonomic seating. When you are spinning and when you are focusing on work and it has gone way become really really important and so if you look at these workspaces with collaborative spaces and amenity rich environment.

And also need to include.

Library like settings for heads down and work that are really focused on how you can do that work and are in a healthy way and cause many many folks that have been working from home and perhaps for <unk>.

And people, it's been easy and for some people and that's been really hard and what separates from many people had network, especially money on kids accounts, given we can catch things like that so I think it's really a spectrum.

As product ranges and I think as John said.

We're happy with what we've got to innovate around all of these category over the last several years.

And this is all a potentially very exciting because but I'm curious if you.

Always evidenced visibility to think forward and I think it changes the nature of the Herman Miller organization I mean, you used.

And you separated retail from contract when you made the bold decision to go heavily into and you Gotta do you are but now with all of this it seems to me that there has to be emerging and my my correct reserve change and the structure of the organization can you talk a little bit about that.

And that's what I anticipate that.

Okay and not that.

And you won't talk about it or there isn't changing.

I didn't anticipate changes.

Okay.

If you could give us a little bit of a color on the international flavor of where that where that where the results were better and not so good.

Sure.

Yeah, Hey, Bob This is Jeff I'll take this one.

Well, maybe I want to start with just a shout out to the team and internationally.

They continue to perform quite well and certainly in relation to what we've seen.

In North America, I think and.

And a lot of ways day.

Made some of their own luck.

Through much of their focus and investment in the past.

18 months or so, particularly in places like Continental Europe, Western Europe, where not only do we have do we tend to sell a strong mix of seating products, which is a good thing from a margin perspective.

But also the team there has done a really nice job of trying to find new dealer touch points and.

And really spoke I would say, maybe just focusing on deeper penetration and that particular market. So so this may come to some surprise to folks, but western Europe has actually been and area of strength for us for the past several quarters and the other thing I would say, but.

Parts of Asia Pacific and not the whole of Asia Pacific, Obviously, that's a big geography, but greater China, Japan, and Australia, those have been strong markets for us.

We certainly have seen some laggards as well, maybe I should kind of flip the flip the script and talk about where we haven't seen as much on growth and strength that would be places like Latin America, Mexico or other parts of Latin America, India, the last quarter or so that that tends to be a very project driven part of the world and certainly this past quarter.

Was down but that gives you a flavor and as you walk around the globe is where we're seeing strength and where we're seeing some weakness.

Okay, and just a couple of specific questions.

Typically spend somewhere in the $70 million to $75 million a year on R&D.

If I remember right.

Or is that about what you're spending this year or is it going to come and lower than that.

Yes, I think a little lower than that but.

Don't have.

A number to give you here, but it feels like Thats a little high.

I thought you were going on with Capex with your question.

And by the way.

And that's next Jeff what trajectory we're on.

And the investing cash flow differential which was eye-popping. So what's happened to capex because we don't have the I don't think we have a detailed cash flow right now.

Yes, Kevin I don't know if you want to add any comments here certainly from a just a pure capex standpoint, $55 million to $65 million would be the kind of from your expectation, but go ahead, Kevin Yes, and we've had a little back half activity, but related to.

Particularly and exciting opening we opened up on new space and Fulton market debt.

Both commercial showroom as well as <unk>.

All three of our retail brands and the Chicago area and so the investments related to that were part of the numbers that you saw this quarter as well.

I Gotcha, and Jeff I think you own or at least you've got short term debt of about $50 million, you've paid down a lot of debt. This year, but the $50 million was kind of on the balance sheet at the end of the year I take it the 200 or somebody and that you might have already paid off this was voluntary or was not not necessarily due is that 50 million.

We're gonna be paid and the fourth quarter.

Yes.

Had we had some notes that were due beginning of March or sometime in the month of March that those were paid Budd and then as you said the big pay down that we saw was earlier in the fiscal year and that came as a result of us drawing heavy on our line.

At the early part of Covid like so many companies did as we were concerned about liquidity and once we got a degree of comfort we pay debt down so thats what youre seeing.

And you still have you still have cash you have or a repurchase authorization, but I don't think you've bought and at least as of the third quarter I said on the second quarter, you hadn't bought or New York.

Stock whats the whats the plan on that from the rest of the year.

Yeah Budd this is Kevin so definitely the goal is to.

And to not build build a trove of cash, but as we navigate towards the the end of the pandemic and look to gaining confidence in North America, and we will continue to look for opportunities to deploy that cash whether it be M&A opportunities. We have a team that continues to screen for those types of things or cash returns to investors.

There is either through dividend or share repurchases.

Okay. Thank you very much good luck and congratulations on navigating pretty.

Pretty challenging environment I think that's an understatement.

Thank you Budd, Thanks, and nice to hear from you. Thank you.

Thank you and I'm showing no further questions at this time and I would like to turn the conference back over to Andi Owen for any further remarks.

Well. Thank you all for joining us on the call today. We appreciate your questions and your continued interest and Herman Miller and we're looking forward to updating you again next quarter and hope everyone stays well and take care. Thank you.

Ladies and gentlemen, thank you for participating on today's conference. This does conclude the program and you may all disconnect everyone have a great day.

Thank you.

Yes.

And then.

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And.