Q2 2022 MillerKnoll Inc Earnings Call

January 4, 2022

Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.

[music].

Yes.

Good evening and welcome to the melanoma second quarter earnings Conference call. As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference Antonella female Vice President of Investor Relations.

P M.

Good evening. Thank you for joining our call we have posted the press release on our Investor Relations website at Herman Miller Dotcom wherever any figures are presented on a non-GAAP basis, we've reconciled the GAAP and non-GAAP amounts within the press release I would like to remind everyone that this call will include forward looking statements.

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

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, Vince and Hello, Hi, everyone and happy New year, joining me today are Jess that's our CFO, John Michel our President of the American contract organization, Debbie Propst President of global retail Crystal did our group presidents and anal and Kevin Veltman, Our senior Vice President and our integration heat I performance.

Quarter demonstrates the power of never know and the strength of both our strategy and our business fundamentals.

Bringing together the basket, how minimal or no we've created a stronger and more resilient organization built for long term success.

Throughout the quarter, we built positive momentum and continued to see strong demand around the globe order levels were up in all four reporting segments again this quarter, both our retail and our contract business has continued to grow and we're bringing new customers to our brands with growth initiatives like gaming store and studio openings and then expand.

<unk> e-commerce presence.

As it relates to this last point this past quarter, we launched new Herman Miller ecommerce sites in France, and Germany, and both have exceeded our early expectations for sales and order activity.

And we've leveraged learnings from our previous website launch is to create an exceptional online shopping experience for consumers in both countries and will continue to benefit from our growing digital presence around the world as we move forward.

That said, we're facing many of the same challenges as the rest of the industry, including inflationary pressures supply chain challenges and labor shortages.

We benefit from the increased size and reach of our larger organization and we're leveraging our global distribution production design and build capabilities to combat all of these pressure.

When we leaned into the expertise and partnerships that exist across our collective of France. They build inventory positions of select high demand products and increase our shipping capacity and making further progress in our integration journey and we remain focused on unleashing the power of all of our classes of friends at the close of the second quarter, you had implemented 43 million.

And run rate savings and we remain confident that we will deliver on our cost synergy target of $100 million within two years of closing.

In fact, as our teams completed integration planning, we've identified additional synergy opportunities and we now expect to increase run rate savings to $120 million by the end of year three this.

This meaningful progress along with our robust integration doesn't that gives us confidence that we will achieve our planned cost synergies, even with the inflationary and supply chain pressures that we're contending with everyday.

We've achieved several important and symbolic milestone during the quarter, we finalized the company name change in her officially operating has never know where also trading under a new stock ticker ml can we completed the important work to Peter and you never know organizational structure, which involved so I can talent and integrating the teams into a new operating model designed to capture it.

Fishing fees across the organization, while also strengthening the unique position of each of our individual brands.

One of the most compelling reasons for creating them at all with our combined portfolio and distribution network.

No we'll have the largest and most capable dealer networks in the world our customers will have more choice in terms of both product and partners and our dealers will have access to and a comprehensive suite of products and services in the industry, enabling them to sell more and better meets the needs of every customer.

Could you even know when they'll do and that work is our top priority and we are well on our way we have Miller knoll dealer pilots in process in both Texas and Arizona.

We use what were learning these pilots to inform the plan operationally I think the phone network, which is on track to occur by mid calendar year 2022.

Well the world continues to wait and see the full impact of the crime variance shaking your variance feels like the new normal Trust, our research and customer feedback tells us that executives across a variety of industries that still have a strong desire to bring their teams back together this year and what's more most employees want the flexibility and the option to return to the office as well just have to see.

Democracy left in 2020.

Players recognize their workplaces need to be re imagined and redesign to meet the changed expectations as opposed to pandemic workforce.

<unk> is the leader in providing adaptable solutions to create innovative productive environment for their workplaces and the homes about client we have the insights the.

The surfaces and the tools to help our customers create high performing spaces that fault for their unique needs.

So we're continuing to collaborate with experts from around the world to make both returning to the workplace and working from home healthier and more productive and we're using our own firsthand experience is with hybrid workplaces and a global impact partnerships to inform the future of work.

Our business is strong.

Confidence, but there was tremendous opportunity you had some of them are known.

All of our stakeholders, so with that I'll turn it over to Jeff who will cover a bit more about other thoughts before we cut out for your question.

Thank you Andy and good evening everyone.

During the second quarter, we drove growth across every segment and every region of the business, we were able to leverage the breadth and depth of the organization to combat some of the macroeconomic pressures we faced in the quarter.

Even with those challenges, we had a strong quarter and we're confident about the future, including our ability to deliver on the cost synergies associated with it.

Yes.

Consolidated net sales of just under 1.03 billion were up 64% on a reported basis and 11% organically over last year.

Our ability to ship orders this quarter was impacted by the supply chain disruptions that our industry faces.

Which we estimate adversely impacted net sales by approximately $50 million in the quarter.

Orders in the quarter of $1 $6 billion were 84% higher than last year.

On organic basis orders of $796 million, reflecting sequential improvement of 6% compared to the first quarter and were up 26% over the prior year.

As mentioned earlier, the strong demand was seen across all reporting segments.

Global retail had another strong quarter with orders of almost 21% over the prior year and sales growth of approximately 18%.

The Americas contract segments saw strong demand in all regions and sectors with notable momentum in the middle and southern regions of the U S.

Net sales in this segment increased 4%, while new orders improved 29% on a year over year basis.

The segment reported a similar growth rate when you were on your sales and orders increased 5% and 30% respectively.

No workplace and residential categories contributed to this growth in the quarter.

The international contract segment.

<unk> saw strong orders and sales across all regions and brands with orders up 30% in sales up 23% over the same quarter last year.

In Europe, including the UK was especially strong with orders in Europe up 42% over last year.

Adjusted gross margin was 34, 8% compared to 39% last year.

Similar to what we reported to you last quarter the year over year margin decline was driven by the impact of rising commodity costs, particularly steel.

And other inflationary pressures in the categories of labor and transportation.

In response to these margin pressures, we've been aggressive in the area of pricing, having implemented or announced multiple contract list prices change me.

Well, we have realized some of this benefit to date the impact has thus far been limited and will take time to layer into our results.

This has been contemplated in our outlook for the third quarter.

Now with that said you should note that these increases are ultimately geared to offset the cost pressures that we're seeing across the business.

And in the meantime, we're carefully managing what we can control across the business as.

As we work to mitigate the impact of the macroeconomic pressures.

Adjusted operating margin in the second quarter for the consolidated business was five 9% compared to 11, 7% in the prior year.

And it's worth highlighting that our global retail business has continued to deliver solid profitability. Despite the underlying cost challenges and tough year over year comparisons that segment is facing in addition to order growth of 20%. The retail segment reported adjusted operating margins of 11, 3% this quarter.

We reported a consolidated net loss per share of 5%.

On an adjusted basis, excluding special charges associated with the integration of no earnings per share in the second quarter were 51 cents.

So with those brief opening comments, we'll now turn the call over to the operator will take your questions.

I will tell you your question press the pound key please standby, while we compile the Q&A roster.

Our first question will come from Steven Ramsey with Thompson Research Group. Please go ahead.

Hi, good evening.

Maybe just to start with on organic orders.

How much of this.

Is pricing driven and how much of it is volume and how do you expect that to play out in the next several quarters I guess, what I'm getting at is if Jeff you could share a little bit more on the pricing commentary and how that flows through.

Ported results.

Well good evening, Stephen good to hear from you a happy new year.

Yeah, Let me, let me I'll start with maybe just didn't the order trends in the quarter because I think the crux of your question is.

Have we seen meaningful pull ahead in order activity in advance of some of these increases and you know what.

It was really encouraging for US is as you looked across each of the three months of the quarter order pacing was actually remarkably consistent and so from my perspective.

You know for the for the increase that we had in the October November timeframe. There was not a meaningful pull ahead impact from that increase.

Intra quarter orders for example in the Americas, where.

We started off 22%. We were we were kind of mid to high 30% growth in October and in Hy 'twenty close to 30% in November for a total increase in the quarter of 29%.

The knoll business wasn't even more consistent than that close to 30% almost on the nose each of the months of the quarter International similar retail had some movement in the quarter and Debbie can speak to this.

To go further but it had more to do with the timing of some of the promote promotional event. This year versus last year. If you adjust for that tier two retail order activity was quite consistent so what I would tell you Stephen is that the price increases in in early into the summer months and then again in October November time frame didn't seem to have much impact on what I will also meant.

Is that the increase that we have planned for January February time frame, we did start to see some of that pull ahead in in the last couple of weeks.

But it's not out of line with historical levels.

Let me pause there that's helpful on the on the order trends.

Yes, yes that is and then was trying to get a sense for in that orders dollar number.

How much of that is is pricing driven and and kind of try to get a sense for in the next couple of quarters. If the price increases you have successfully implemented start to impair.

Impact results.

Yeah. This is the this is the the challenge and again, we've got to talk about this in two pieces. We have the the positive side of this is the retail business. We fully expect that we'll benefit from price actions much sooner than the contract business and as we've talked with you in the past right. It's just a different animal in the retail business on the call.

<unk> side the challenge that we have and this is I think pretty consistent from what we're hearing across the industry.

We're somewhat a victim of the good news in terms of the solid demand demand has outpaced our ability to produce and ship by such a margin debt by such a wide gap that the backlog we have it's going to take us a little time to work through it and that backlog currently as it exists today has I would say a mix of the last two price increases.

And it obviously, none of the increase that that will go into effect. This month and in February so the punch line to this.

Is this going to take US we think you know a good part of the second half of this fiscal year to work our way through that and they're in Brexit, There's just not a tremendous amount of pricing benefit in that backlog, there's some and it won't ramp up as we move through Q3 and into Q4, particularly the later part of Q4, but really it'll be kind of early early.

Next fiscal year, where we really start to see the benefits of that flow through retail is a bit different I think our expectations at the retail side of the business, we're going to see gross margin improvement steadily increase as we move through the back half of the fiscal year I think in rough numbers gross margins for that business, where maybe just under.

44% this quarter expectations as we can move that.

As much as a couple of hundred basis points or so over the over the spread of the next six months and then improve it from there.

23.

Okay. Yes, that's that's very helpful. And then on that orders and shipments gap is the growth rate of borders.

Even beyond the quarter is it still exceeding shipments and to add onto that is the rate of shipments.

Going to increase at a faster pace than orders.

In the next in Q3 or is it a little bit beyond that that this pace of shipments can accelerate and reduce that backlog.

Well I'll give you I'll give you.

My thoughts on this and then Chris and John Please feel free to chime in if you have views on this Debbie I assume again, the retail visit a little bit different.

I think Steven from my perspective.

First of all we've not seen a meaningful change in.

In demand since the end of the quarter. So that's a positive right December in fact, we saw some as I mentioned, we have what we believe to be some pull ahead of order activity in December that would be ahead of that January price increase so the momentum continues in its Ben.

Marketable when you consider the effect of Covid and some of the disruption that that seems to be creating socially around around the world yet yet demand has been really really strong and it's pretty broad based.

Your question about will will orders will revenue and orders converge I mean, you know we don't know that of course, I think our expectation just based on conversations with customers. What we're hearing from design firm.

They're busy and there's a lot of companies are still kind of formulating their plans for return to office as.

As we move into even mid calendar 'twenty two so I think our expectations right now are for continued momentum on the order front the challenge for us is throughput.

Or at the labor driven and we're doing a whole raft of things as you would hope to try to improve our ability to ship more it's going to take us a little time to do that but that's all that's really among our chief focus is as a business. The leadership team right now John and Chris That'd be feel free to add.

Thanks, Jeff.

Hi, This is John I think I think you said it well, Jeff I think our expectation in terms of order pacing based on some of the leading indicators that we see is we expect the order pacing to continue.

On a on a pretty robust pace and I think to your point from a production perspective.

We have the capacity from a production perspective to match from a from a revenue and an order perspective, but as Jeff said Theres a number of factors impacting our ability right now whether thats impact of Covid.

<unk> chain issues et cetera, et cetera, but as those hopefully smooth out over time.

I think we would expect production and then revenue and orders to be more closely matched.

Yeah.

Yeah. The only thing this is Chris the only thing to add.

Steven is that our our production output and recover.

Cover the international business.

It is increasing and so we are we are shipping out more than we did sequentially.

And.

The good news and also the challenge is that the orders are continued to increase even faster rate. So we'll keep the production output.

Output growing and it may be that in the future will be at the same.

Right.

As the orders, but in the near term while the supply chain challenges are here, it's clear that will be slightly constraints.

And then on the Okay, I'll say that the business.

Backlog is historically high largely due to longer lead times than expected on third party.

<unk> product.

And so sales as a percent of demand in Q2 with 84%, we expect that to improve in Q3 and have seen some improvement there in that ratio in December right.

Great. That's helpful. That's helpful and one more quick one maybe to add on to residential with the strong results. There can you kind of ballpark or quantified dull residential in relation to Herman Miller residential and if the trends are as good there and.

The factors that may cause any gap between the two.

Yeah.

Yes.

This is Chris I'll take that one so the trends are just as good in fact that transferred Knowles residential business are quite strong.

You could expect with <unk>.

Power off now Miller Knoll, and DW R. N e-commerce, so clearly the the.

Former Herman Miller residential business is larger than the former <unk> business, but the normal business on the residential side is increasing dramatically.

Okay.

Great. Thank you.

Thank you. Our next question will come from Reuben Garner with the benchmark company. Please go ahead.

Thanks, Good evening everybody.

Hey, Reuben.

Hum.

Maybe let's start with the guidance. So can you can just can you walk us through the bridge from what you just reported in the earnings to the guidance for Q3, it looks like a similar topline number I think if I'm looking at this correctly and so.

So when show margin pressures there mix in there or is the price cost situation getting worse before it gets better can you just kind of go through the puts and takes.

Yeah, Great question, Ruben, let me start.

I'll start with Theres some commentary I think both in gross margin and operating expenses that stand out here that I think are worth highlighting.

And by the way all of this all of this.

Commentary on our outlook and this is true while we're not guiding for the full back half of the year one of them I might mentioned one of the potential benefits of having this strong backlog headed and it kind of a strange benefit of some of the production throughput issues. We're having is that it does by perhaps a little bit of time, just if we can see some.

Input costs come back in line or in favor now we don't expect that in a meaningful way around the steel from but there are all kinds of other cost pressures that we're facing.

We may actually be able to benefit from that particularly as we move into Q4, but set that aside for a minute our guidance for the third quarter from a gross margin standpoint, we've got you know we guided to a range of 33 to 34 two at the at the midpoint of that you're at.

$33 seven so that's a deep that's a that's a sequential decrease obviously from what we just reported.

A couple of large factors there that are.

Impacting us there really commodities and freight.

And labor the same the same major drivers that we saw in Q2, we are expecting continued pressure, particularly on the commodities front.

We estimate about 60 basis or basis points from commodities, that's principally steel prices, we're still believe it or not working our way into the elevated full market price of steel and without making predictions I would tell you that if steel prices were to stabilize where they are now where as we work through Q3, we're kind of fully baked.

Into the into the market price of steel so that would be a benefit for us as we move forward beyond Q3, so commodities are 60 basis points.

Freight and transportation and labor account for we estimate about another 30 basis points of pressure.

And then that really tells the story there are some other moving parts, we think mix might be a bit adverse just pure product mix across the business, but we think that pricing benefit from our recent price increases will help offset that so that was kind of neutralize one another but that's those are the major moving parts in our assumption around gross margin at the mid <unk>.

Point of the range that we're guiding.

And then operating expenses, you'll see that we're guiding an uptick here again at the midpoint of that range just for narrative purposes were moved.

That puts us at about $310 million.

There's really kind of four main categories.

Moving parts there. The first one is really a bit of a phenomenon related to Q3 and often the early part of Q4, it's really more of a timing issue with some of our calendar year benefit program. The accounting for those programs tends to front end load. Some of those are calendar year base and it tends to front end load some of the call.

Costs associated with those with those benefit programs things like vacation accruals and health savings account programs to be more specific so that accounts for maybe upwards to $5 million of the sequential increase the benefit there is that.

That tends to even out as we move through the course of the calendar year. So we should see the opposite effect of that as we move towards back half of calendar 'twenty two.

Instead of incentive bonus plans, we expect might be a tick higher in the third in the third quarter as we are.

Move toward measuring ourselves against the back half targets that we've established investments in retail digital.

Program marketing.

Dollars, we expect to increase a bit to help continue to drive momentum in order activity and then this last one I'll mention to you is in our guide we're going to do everything we can to manage this one but there is some incremental selling related expenses, including <unk> that are.

Are a factor in that as well and offsetting all of those those items, which if you were to say all of what I've, just said call that $20 million.

It is an estimate we expect to layer in incremental synergies related to the integration work that we're doing so the net change there at the midpoint is about $16 million.

Okay, perfect and just a quick clarification there.

On the synergies.

Are those showing up.

All in the no.

Quote unquote segment or are they spread out over the different businesses, how is that being recognized or laid out as you recognize them.

Hey, Reuben this is Kevin.

Synergies are coming really across the patch across all of the businesses as we've looked at how do we bring Miller and all together and so you see some of the benefits from synergies hitting each of the segments.

Okay.

Next question for me is on.

The international profitability can you talk about the difference for you guys in your international business I assume that a lot of the inflationary pressures that they're facing or that you are facing in the Americas are similar.

Our inputs are.

Assume steel is as an example elevated in Europe as well, how how you were able to maintain the margins over there what are the differences in the business model is anything else that you can add.

Yeah Kristina.

And then.

And then you chime in if you don't mind, Yes, Reuben you know the one thing I always this is actually something we're super proud of I mean, the international business has been.

Signing star in our in our business for.

Several years now and it's really showing up in a big way in the last couple of quarters. There are some differences and I think Chris will probably unpack some of these.

A little further but in terms of the cost pressures.

Placed very precious and supply chain pressures that we're feeling in North America visa B outside of North America, what we in fact really aren't feeling the same magnitude of commodity pressures internationally as we're seeing in North America, and then you add to that the fact that the labor constraints that we're feeling in our production.

Our facilities in North America are not nearly as significant in our international operations and then Chris would be probably the last thing I'll say is.

We tend to have a fairly favorable overall product mix with our international contract business. It tends to tell us a bit more towards seating, which is a good thing in our business.

Task seating is a high margin product and for many many years that would that's always been true for the international business, but for so many years, we didn't have the kind of the base level of volume pushing through those factories to really be able to leverage those overhead costs and in recent years, we've seen a real change the volumes have grown those our operations teams have done.

Really at work there they are much more efficient now and that's <unk>.

Translating to better profitability.

Chris go ahead and add whatever you'd like.

That's hard to add much to that Jeff that was pretty comprehensive the only thing that I might add.

Note that the.

Sales in the quarter.

As a percent so because we were able to get.

Our better labor position.

And actually we were able to get increased throughput through the factory. So we also.

To protect.

But are there still is there still increased costs and things like that but.

To grow.

Which helped.

Okay, I'm going to sneak one more in if I can.

Uh huh.

But back to the Americas the pricing the backlog situation I think you mentioned profitability in the backlog being.

Somewhat constrained is there a point, where maybe you don't take as many orders.

Because youre not able to keep up and the profitability isn't as attractive as it is normal or do you view it as a longer term positive to just take anything that you can at this point, how do you guys.

The way that.

Yes, I'll, let John.

Add any any insights.

He's closer to that to the customer side of things than I am but what I will tell you is that with this with our most recent price increase as I mentioned in my prepared remarks, I think it's super important that that you all.

At least are on the same page with us that we've geared these price increases.

With the idea that commodity.

Input costs labor costs, while while they likely are going to remain elevated that they stabilized, but not if it does not assume that they come back down now that could happen in some cases and in that case, we think we benefit from that but we hear these price increases such that they are set to ultimately off.

What is currently a very elevated cost.

Environment, So orders that we take from here forward will largely be reflective of the series of price increases that we've put in place and we actually feel quite good about about taking that business.

John Please.

Yes, hi.

Hi, Reuben, it's Jon Michael I would just add to what Jeff said I think in the short run as we're waiting for the price increase impact to begin to layer into new orders.

The other way, we address those challenges through our discounting methodology.

And just making sure that from a from a day to day discounting perspective, looking at accounts and project et cetera that were being.

We're being smart about our discounting methodology and making sure that discounting methodology will obviously over time begin to regulate demand in such a way that it matches our ability to produce.

So I think it's just one more lever.

That we pull to try and to try and balance out those two.

Yeah.

Great. Thanks, guys.

Thank you. Our next question will come from Budd buckets with water Tower Research. Please go ahead.

Good afternoon.

Happy new year to everybody.

Okay.

Hi, Jeff and I look forward to a.

A year, where the pandemic receipts into the background and I hope we will get there.

Uh huh.

Forgive me for going on.

The cost issue.

I was trying to make sure I was trying to understand how to walk from.

The margin profile, we had let's just say in Americas, which I think was down.

700 basis points I think we're showing to you all.

And gross margin.

What's the walk to get you to from 35 six truck.

98%, how much of that is cost.

How much of it or other things.

Yeah.

Well Budd this is Jeff.

The.

Let me, let me first talk at the consolidated level and my caveat here would be.

<unk>.

The categories of commodities freight and labor are most acute in our north American manufacturing operations and so it's a consolidated level in Q2 from a year ago tell the Q2, we were just reporting we had 240 basis points of commodity pressure year on year, we had 90 basis points of free.

Transportation pressure, we had roughly 90 basis points of labor and overhead pressure.

Mix accounted for another close to 50 basis points and on that point in particular, I would remind you that we benefited last year with tremendous.

Task seating mix, particularly on the retail side of the business. So that one is a little less tied to the Americas segment.

And then we've got some but not not a terribly meaningful amount of price benefit that helped to offset that to the tune of about 30 basis points. So Budd I guess, the best way I can answer the question in quantity and quantified terms just to talk about it consolidated but what I would just emphasize as commodities. If it's 240 basis points at the consolidate level, it's more than that.

The Americas segment level, and the same would be true for freight and labor.

I totally understand that I was just trying to trying to reconcile that to the 60 basis points and I think it was 30 30 30 for freight labor and transportation that I heard a few minutes ago.

Yes.

By the way, but just so that we're not talking past each other I was just giving you the walk for Q2 year over year.

My earlier comments were.

With respect to our guidance going forward.

Into Q3 and that was that that makes sense to you right. So in other words, we think we're going to get another 60 basis points of pressure from commodities as we move from Q2 into Q3 and that's at the consolidated level, but my comment we feel still <unk> 40 or incremental to the $2 40.

It would be it's incremental yeah, another 60 basis points over and above what we felt in Q2.

So then that that would be that would get you to.

300 basis points in the third quarter, that's what I'm trying to that's what I was trying to work through.

Yeah Okay.

That's great that's very helpful and I do want helpful and I do understand that the Americas is significant.

Meaningfully more than the pressure elsewhere.

I don't want that used to attract.

The fact that.

For my follow up.

Make sure I'm going to talk about the backlog and it looked to me like orders outstripped.

Revenues of sales by 130, or so million dollars. So that's just added to the backlog that goes out in the back.

That's correct yeah, our backlog ended the quarter at $9 67, and Youre absolutely right. The change from beginning of quarter was about that $130 million.

Okay. So at the beginning backlog was $1 67.

And ending but ending backlog was 967 okay.

Okay, and that is a $130 million higher than where it began okay.

Alright, and Thats, Bernie and I appreciate that and obviously best of luck and best wishes to everybody going forward. Thank you.

You as well bye thanks.

Thanks, Pat Thanks.

Our next question will come from Greg Burns with Sidoti and company. Please go ahead.

Okay.

I just wanted to follow up I guess again on the price cost gap, you're seeing is there any way you could quantify.

What it was this quarter or what you expect it to be next quarter end.

Over what timeframe given the price increases that you're layering in when do you expect that to be completely offset.

Yes, Greg good evening.

I'm going to.

Let me take a take a stab at your question I think this is what you're asking me and I'm just going to kind of recap a couple of the numbers that I just mentioned in terms of basis point impact on gross margin.

From year ago levels, we had about 30 basis points of improvement due to net price benefit.

Yet we saw a pretty meaningful decline in overall gross margin performance and so that 30 basis points was not enough to offset all those other pressures that I mentioned commodities freight labor and so forth does that is that helpful.

Yeah, I guess I mean, I'm, just kind of wondering what's the path there.

Do you expect the gross margins in the third quarter to be the low and then given the price increases if everything else stays constant should we see kind of a.

<unk> sequential increase in gross margins over the next.

Two quarters like how when do we get back to neutral.

Yeah, No I think.

That's the second part of your question is it's a great one and I would say if you. If you allow us to just assume for a minute that we don't see further degradation in the cost environment, which are already pretty at a fairly elevated level. Then I think it would be fair to expect improving margin profile moving out of Q3 into Q4 and beyond.

And certainly we expect that in retail and there's no reason to believe that as we as we improve our ability to ship more product work through this backlog, we should we should feel even more pricing benefit.

Flow through now it's not going to be a rapid improvement we don't expect but what you should see improvement I think if you want to think of it in terms of pre pandemic margin levels are versus where we are today you'd probably argue on a on a pro forma basis for the consolidated business.

A more a more.

Accurate pre pandemic gross margin level would be somewhere around 37%.

That's kind of going back to FY 19.

We fully expect that with the pricing that we've done we can we can work our way back there and in fact, it won't be until the early part of FY 'twenty three likely but we think late Q1 into Q2 of next year, we should be able to get there and arguably better than that given the performance of retail.

And and frankly, the underlying cost performance in the synergy work that we're doing.

Okay.

And can you just talk about how you.

Hedge steel or.

How are you.

Purchases, just because steel come off pretty meaningfully from the peak.

Sure.

At least from what I'm tracking so can you just talk about how that potential benefit might flow through like do you buy it.

Six months out like how does that work.

Yes.

Generally speaking, Greg we don't really formally hedge with like derivative type hedging steel steel prices, but what we do is we buy on a lag to the market and because we buy a decent amount of steel we get a bit of a discount off of the published.

Price of steel.

So youre right steel has come down off of the highs I think the latest don't exactly quote me on this but it's something just north of $2000 a ton.

For steel it was as high as Kevin you might have the number 21 or 'twenty 100, plus so it has come down a little bit but.

What we do is we buy on a lag so it tends to be about.

Three months about 90, 90 days and as a result, we kind of in a period of inflation.

We lag into that over the course of many months and then as prices start to come back down the opposite happens that we it takes us a little while longer to work to stabilize and then start to realize the benefits of a declining steel market. So that's why I mentioned earlier I think if you assume for a minute that steel stays roughly where it's at today we should.

Good.

We should kind of level out or if you will peak in Q3, and then from there we should start to see some relief from steel prices.

Okay.

Lastly in terms of the dealer the network integration.

Can you just talk about what.

It's involved in the.

The pilot programs you have going on in Texas, and Arizona is that just allowing them to sell the full.

<unk> products across all the brands like what what is involved in those and are you seeing any early benefits from from those.

Sure I'll take that one this is Jon Michael I think we've we've seen a number of benefits before I get to that though in terms of what's involved.

It's really working through the readiness and training.

Both the Miller nail Miller Knowles sales organization as well as the dealer sales organization. So that the legacy Knoll dealers are trained up on the Herman Miller products and how to go to market and position the products and Conversely, how the legacy Herman Miller dealers are trained up on the knoll products.

And how to go to market and really what's the what's the compelling value proposition for the market for customers for Influencers et cetera of this amazing collective and portfolio that we have right now.

We've learned a lot in in both instances in terms of what works and what we need to improve upon in terms of training sellers to get them ready and also really making sure. The support staff that supports them interior designers project managers et cetera.

The speed as well so I think it's really informed.

A lot of the work that we're doing for our broader readiness and rollout over the next several months and we're looking forward to it and I know the dealers are ready for it.

Okay, great. Thank you.

Yeah.

Thank you. Our next question will come from Alex Fuhrman with Craig Hallum Capital. Please go ahead.

Great. Thanks, very much for taking my question. It looked like retail continues to show really strong growth can you talk a little bit more about what's been driving that growth in terms of E Commerce and your stores and how long do you think that growth can continue into 2022 and <unk>.

Beyond.

Hi, Alex this is debbie thanks for asking.

We're really pleased with the continued growth we're seeing in our retail segment.

Dominant.

Drive our <unk> growth has continued assortment expansion and we're seeing growth across both the brick and mortar and e-commerce channels and across all of our breadth and width of assortment expansion being the predominant growth lever. They feel like that will continue to be a scalable opportunity for us coupled with optimize.

Some of the other investments that we're making in our business.

I like that.

P less some of the marketing investments, we're making on CRM.

We're using customer data.

Five our marketing performance.

And ongoing investments in the overall infrastructure to improve customer service. So we continue to work with retail growing at double digit comps and we're excited and confident about that.

Okay.

Thank you. Thank you very much for that and then a quick follow up if I if I could just how much of that double digit growth as you look or do you expect to come from e-commerce versus continued brick and mortar growth and presumably opening more stores over the next few years.

Yeah.

Could you to open stores at about the pacing that we have been opening stores.

We opened an additional two historic in Q table open three more in Q3.

And the confidence that we have from the store performance as we open them remains very strong and.

These stores predominantly through the Herman Miller brand are really proving to be a strong sign of customer acquisition farro, allowing us to engage with new audience. As a result of some of the Adjacencies, we have with the store and so we're engaging with customers who care about their physical wellbeing and their overall physical performance and those are customers that we believe we can.

To engage it beyond the pandemic trends.

So we will continue to invest in your stores.

And our base business remains very strong we had double digit comp.

Comp growth as well as double digit total growth. So the improvements that we're making in our site experience and our marketing optimization in our Assortments are driving the base business as well.

Yes.

Great. That's really helpful. Thank you very much.

Thank you. Our next question will come from Rudy Yang with Bank. Sir. Please go ahead.

Hey, guys happy new year, and thanks for taking my question.

So I guess just on run rate synergies, you're now expecting $120 million after year three.

Is that more because of greater success than you initially expected and recognizing those synergies this quarter or where theyre separate opportunities.

Covered and I guess, if that's the case could you provide some more color on what is now expected to help drive that additional $20 million.

Yes, Rudy this is Kevin so as the teams have been working through the integration planning our original targets were for the $100 million by the end of two years after close.

And as we've talked in the past a lot of those savings were coming from org structure in procurement types of savings as the team Doug again, they started to look deeper into other categories like manufacturing or logistics.

Some other procurement opportunities that maybe have a little longer lead time and so.

As we looked at it we identified we actually see a $120 million of opportunity, but that incremental $20 million as some of those longer lead time opportunities in the manufacturing areas or supply chain types of areas.

It was a grounds up review by the teams looking at not just what could they do within two years, but where there are opportunities if given a little more time that we could get after as well.

Got it I appreciate that and then secondly, just to kind of get a little bit more color on retail order patterns I guess I'm just curious as to how the patterns in terms of product mix have changed as hybrid working has emerged over the last year.

Are you seeing customers now accepting reality of work from home more and as a result, they are kind of pulling the trigger on a more central products, such as heating, which obviously is a higher margin product for you guys or our ancillary and other alternative home office products, starting to I guess now become more popular.

So in the retail business, we have seen a decline in our overall performance.

The percent of our total business year over year, However that is more than offset by our gaming business, which is with NFC. Thank asset great. Obviously, just targeting different audiences.

However, we're really pleased with the growth that we're seeing in other in some of our other core categories predominantly.

Australia seating and dining in outdoor where we have very high penetration.

Private label products within those categories.

And there are some great opportunities in terms of margin enhancement within those categories as we continue to localize our sourcing capabilities.

So despite the fact that we have a slight decline and trip performance briefing.

And we are very confident in the growth that we're seeing in the rest of our categories, which are double digit growth across all of those categories with the exception of rux at 9% growth.

Great. That's super helpful. Appreciate it thank you guys.

Yeah.

Thank you I'm showing no further questions in the queue. At this time I would now like to turn the call back over to management for any closing remarks.

Thank you and thanks, everybody for joining US today, we really appreciate your continued interest in them all and we look forward to updating you again next quarter, how can here hi, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

[music].

Yes.

Okay.

[music].

Good evening and welcome to the melanoma second quarter earnings Conference call. As a reminder, this call is being recorded.

Now I'd like to introduce your host for today's conference and Cinderella, PLO, Vice President of Investor Relations and X P. M.

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

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, Vince and Hello, Hi, everyone and happy New year, joining me today are Jeff Stutz, our CFO, John Michel our President of the American contract organization, Debbie Propst, our president of global retail Crystal did our group President still are known and Kevin Veltman, Our senior Vice President and our integration neat I performance.

In the second quarter demonstrates the power of melanoma and the strength of both our strategy and our business fundamentals.

Bringing together the best of her minimal or no we've created a stronger and more resilient organization built for long term success.

Throughout the quarter, we built positive momentum and continued to see strong demand around the globe order levels were up in all four of them reporting segments again this quarter, both our retail and our contract business has continued to grow and we're bringing new customers to our brands with growth initiatives like gaming store and studio openings and an expanding.

E Commerce presence.

As it relates to this last point this past quarter, we launched new Herman Miller ecommerce sites in France, and Germany, and both have exceeded our early expectations for sales and order activity.

Learning from our opinion website launch is to create an exceptional online shopping experience for consumers in both countries and will continue to benefit from our growing digital presence around the world as we move forward.

That said, we're facing many of the same challenges as the rest of the industry, including inflationary pressures supply chain challenges and labor shortages.

We benefited from the increased size and reach of our larger organization and we're leveraging our global distribution production design and build capabilities to combat all of these pressure.

When we leaned into the expertise and partnerships that exist across our collective us land.

They build inventory positions of select high demand products and increase our shipping capacity, we're making terrific progress on our integration journey and we remain focused on unleashing the power of all the back left with brands.

At the close of the second quarter, we had implemented $43 million in run rate savings and we remain confident that we will deliver on our cost synergy target of $100 million within two years of closing.

In fact other teams completed integration planning, we've identified additional synergy opportunities and we now expect to increase run rate savings to $120 million by the end of year three this.

This meaningful progress along with our robust integration road map gives us confidence that we will achieve our planned cost synergies, even with the inflationary and supply chain pressures that we're contending with everyday.

We've achieved several important and symbolic milestone during the quarter, we finalized the company name change and our officially operating at low or no. We're also trading under a new stock ticker for MLK and we completed the important work to Peter Niemela, no organizational structure, which involves selecting talent and integrating the teams into a new operating model designed to capture it.

She sees across the organization, while also strengthening the unique position of each of our individual brands.

The most compelling reasons for creating them at all with our combined portfolio and distribution network.

Could even know when they'll do them at work is our top priority and we are well on our way we have no one else dealer pilots in process in both Texas and Arizona.

We use what were learning these pilots to inform the plan operationally I think the phone network, which is on track to occur by mid calendar year 2022.

While the world continues to wait and see the full impact of the omicron variance shaking your variance feels like the new normal tour, our research and customer feedback tells us that executives across a variety of industries that still have a strong desire to bring their teams back together this year and what's more most employees want the flexibility and the option to return to the office as well just have to see.

Office they left in 2020.

The players recognize their workplaces need to be re imagined and redesigned to meet the changed expectations as opposed to pandemic workforce.

No is the leader in providing adaptable solutions to create innovative productive environments for their workplaces and the homes about client we have the insights the products to surfaces and the tools to help our customers create high performing spaces that solved today indicate.

Hybrid workplaces, and a global insight partnerships to inform the future of work.

Our business is strong.

Howard by the preeminent portfolio of brands in the industry and we are built for growth.

Confidence, but there is tremendous opportunity ahead for little or no.

All of our stakeholders, so with that I'll turn it over to Jeff who will cover a bit more about other thoughts before we open cut out through your questions.

Thank you Andy good evening everyone.

During the second quarter, we drove growth across every segment and every region of the business.

We were able to leverage the breadth and depth of the organization to combat some of the macroeconomic pressures we faced in the quarter.

Even with those challenges, we had a strong quarter and we're confident about the future, including our ability to deliver on our cost synergies associated with the noble acquisition.

Consolidated net sales of just under 1.03 billion were up 64% on a reported basis and 11% organically over last year.

Our ability to ship orders this quarter was impacted by the supply chain disruptions that our industry faces.

Which we estimate adversely impacted net sales by approximately $50 million in the quarter.

Orders in the quarter of $1 $6 billion were 84% higher than last year and on an organic basis.

It is a $796 million, reflecting sequential improvement of 6% compared to the first quarter and were up 26% over the prior year.

As mentioned earlier, the strong demand, we're seeing across all reporting segments.

Global retail had another strong quarter with orders of almost 21% over the prior year and sales growth of approximately 18%.

The Americas contract segment saw strong demand in all regions and sectors with notable momentum in the middle and southern regions of the U S.

Net sales in this segment increased 4%, while new orders improved 29% on a year over year basis.

The segment reported a similar growth rate with your on your sales and orders increased 5% and 30% respectively.

Both the normal workplace and residential categories contributed to this growth in the quarter.

The International contract segment also saw strong orders and sales across all regions and brands with orders up 30% in sales up 23% over the same quarter last year.

Demand in Europe, including the UK was especially strong with orders in Europe up 42% over last year.

Adjusted gross margin was 34, 8% compared to 39% last year.

What we reported to you last quarter the year over year margin decline was driven by the impact of rising commodity costs, particularly steel and.

In other inflationary pressures in the categories of labor and transportation.

In response to these margin pressures, we've been aggressive in the area of pricing, having implemented or announced multiple contract list prices since may.

While we have realized some of this benefit to date the impact has thus far been limited and will take time to layer into our results.

This has been contemplated in our outlook for the third quarter.

Now with that said you should know that these increases are ultimately geared to offset the cost pressures that we're seeing across the business.

In the meantime, we're carefully managing what we can control across the business.

As we work to mitigate the impact of the macroeconomic pressures.

Adjusted operating margin in the second quarter for the consolidated business was five 9% compared to 11, 7% in the prior year and it's worth highlighting that our global retail business has continued to deliver solid profitability. Despite the underlying cost challenges and tough year over year comparisons that segment is facing in addition to order growth of 20.

The retail segment reported adjusted operating margins of 11, 3% this quarter.

We reported a consolidated net loss per share of <unk> and on an adjusted basis, excluding special charges associated with the integration of no earnings per share in the second quarter were 51 cents.

So with those brief opening comments, we'll now turn the call over to the operator and we'll take your questions.

Thank you to ask a question you will need to press star one on your telephone we ask that you. Please limit yourself to one question and one follow up question. You May then return to the queue to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question will come from Steven Ramsey with Thompson Research Group. Please go ahead.

Yeah.

Hi, Good evening, maybe just to start with on organic orders how much of this.

Is pricing driven and how much of it is volume and how you expect that to play out in the next several quarters I guess, what I'm getting at it.

If just you could share a little bit more on the pricing commentary and how that flows through our reported results.

Well good evening, Stephen good to hear from you and happy new year.

Yes, let me let me I'll start with maybe just the order trends in the quarter because I think the crux of your question is.

Have we seen meaningful pull ahead in order activity in advance of some of these increases and what was really encouraging for US is as you looked across each of the three months of the quarter order pacing was actually remarkably consistent and so from my perspective.

For the for the increase that we had in the October November timeframe, there was not a meaningful pull ahead impact from that increase.

As for our quarter orders for example in the Americas, where it was that we started off of 22%. We were we were kind of mid to high 30% growth in October and in high <unk> close to 30% in November for a total increase in the quarter of 29%.

Noel business was even more consistent than that close to 30% almost on the nose in each of the months of the quarter International similar retail had some movement in the quarter Debbie can speak to this.

If you'd like to go further but it had more to do with the timing of some of the promote promotional event. This year versus last year. If you adjust for that tier two retail order activity was quite consistent so what I would tell you Steve It is that the price increases in in early get into the summer months and then again in October November timeframe didn't seem to have much impact now what I will also.

<unk> mentioned is that the increase that we have planned for January February timeframe. We did start to see some of that pull ahead in in the last couple of weeks.

But it's not out of line with historical levels.

Let me pause there that helpful on the on the order trends.

Yes, yes that is and then was trying to get a sense for in that orders dollar number.

How much of that is is pricing driven and and kind of try to get a sense for in the next couple of quarters. If the price increases you have successfully implemented start to impair.

Impact results.

Yes. This is the this is the the challenge and again, we've got to talk about this in two pieces we have the the.

The positive side of this is the retail business, we fully expect that we'll benefit from price actions much sooner than the contract business and as we've talked with you in the past right. It's just a different animal in the retail business on the contract side. The challenge that we have and this is I think pretty consistent from what we're hearing across the industry.

We're somewhat a victim of the good news in terms of the solid demand demand has outpaced our ability to produce and ship by such a margin debt.

Such a wide gap that the backlog, we have it's going to take us a little time to work through it and that backlog currently as it exists today as I would say a mix of the last two price increases in it obviously, none of the increase that will go into effect. This month and in February So the punch line to this Steven is this going.

Take us we think a good part of the second half of this fiscal year to work our way through that and there and frankly, there's just not a tremendous amount of pricing benefit in that backlog, there's some and it will ramp up as we move through Q3 and into Q4, particularly the later part of Q4, but really it will be kind of early early next.

Italy increase as we move through the back half of the fiscal year I think in rough numbers gross margins for that business, where maybe just under 44% this quarter.

Expectations as we can move that as.

As much as a couple of hundred basis points over the or the spread over the next six months and then improve it from there into FY 'twenty three.

Okay, Yes, that's very helpful.

And then on that orders and shipments gap.

Is the growth rate of borders.

You know even beyond the quarter is it still exceeding shipments and to add onto that is the rate of shipments.

Going to increase at a faster pace than orders.

In the next in Q3 or is it a little bit beyond that the pace of shipments can accelerate and reduce that backlog.

Well I'll give you I'll give you my thoughts on this and then Chris and John Please feel free to chime in if you have views on this Debbie I assume again their retail visit a little bit different I think Steven from my perspective.

First of all we've not seen a meaningful change in demand since the end of the quarter. So that's a positive right December in fact, we saw some as I mentioned.

What we believe to be some pull ahead of order activity in December that would be ahead of that January price increase so the momentum continues in its Ben.

This is your question about will will orders will revenue and orders converge I mean.

We don't know that of course, I think our expectation just based on conversations with customers. What we're hearing from design firm.

They're busy and they're you know a lot of companies are still kind of formulating their plan for return to office as we move into even mid calendar 'twenty. Two so I think our expectations right. Now are for continued momentum on the order front the challenge for us is throughput.

Much of its labor driven and we're doing a whole raft of things as you would hope to try to improve our ability to ship more it's going to take us a little time to do that but that's a that's really among our chief focus as a business. The leadership team right now John and Chris That'd be feel free to add.

Thanks, Jeff.

Hi, This is John I think I think you said it well, Jeff I think our expectation in terms of order pacing based on some of the leading indicators that we see is we expect the order pacing to continue on a pretty robust pace and I think to your point from a production perspective.

I think we would expect production and then revenue and orders to be more closely matched.

Yes, the only thing this is Chris the only thing to add.

Steven is that our production output and recover the international business.

Is increasing and so we are we are shipping out more than we did sequentially.

And.

The good news and also the challenge is that the orders are continuing to increase even faster rate. So we'll keep the production.

Output growing and it may be that in the future will be at the same.

Right.

As the orders, but in the near term while the supply chain challenges are here, it's clear that will be slightly constrained.

And then on the Okay, I will say that the business.

Our backlog is historically high largely due to longer lead times than expected all third party inbound product.

And so sales as a percent of demand in Q2 was 84% we expect that to improve in Q3 and have seen some improvement there in that ratio in December already.

The factors that may cause any gap between the two.

Yeah.

Yes.

This is Chris I'll take that one so the trends are just as good and in fact, the transfer Knowles residential business are quite strong.

You could expect with <unk>.

Power of now Miller Knoll, and GW R. N e-commerce, so clearly the <unk>.

Former Herman Miller residential business is larger than the.

Former knoll business, but.

The <unk> business on the residential side is increasing dramatically.

Okay.

Great. Thank you.

Thank you. Our next question will come from Reuben Garner with the benchmark company. Please go ahead.

Thanks, Good evening everybody.

Hey, Reuben.

Some won't show margin pressures there mix in there or is the price cost situation getting worse before it gets better. It can you just kind of go through the puts and takes.

Yeah, Great question Ruben, let me start I'll start with Theres. Some commentary I think both in gross margin and operating expenses that standout here that I think are worth highlighting.

And by the way all of this all of this.

Commentary on our outlook and this is true while we're not guiding for the full back half of the year one of the I might mentioned one of the potential benefits of having this strong backlog.

It kind of a strange benefit of some of the production throughput issues. We're having is that it does by perhaps a little bit of time.

If we can see some.

Put cost come back in line or in favor now we don't expect that in a meaningful way around the steel front, but there are all kinds of other cost pressures that we're facing we may actually be able to benefit from that particularly as we move into Q4, but set that aside for a minute our guidance for the third quarter from a gross margin standpoint, we got we guided to a range of 33%.

To 34, two at the at the midpoint of that you're at really.

$33 seven so that's a deal that's a sequential.

Decrease obviously from what we just reported.

Couple of large factors that are impacting us there really commodities and freight.

And Labour the same the same major drivers that we saw in Q2, we are expecting continued pressure, particularly on the commodities front.

Into the into the market price of steel so that would be a benefit for us as we move forward beyond Q3, so commodities are 60 basis points.

Freight and transportation and labor account for we estimate about another 30 basis points of pressure.

And then that really tells the story there are some other moving parts, we think mix might be a bit adverse just pure product mix across the business, but we think that pricing benefit from our recent price increases will help offset that so that would kind of neutralize one another but that's those are the major moving parts in our assumption around gross margin at the midpoint.

The range that we're guiding.

And then operating expenses Youll see that we are guiding an uptick here again at the midpoint of that range just for narrative purposes.

That puts us at about $310 million.

There's really kind of four main categories.

Moving parts there. The first one is really a bit of a phenomenon related to Q3 and often the early part of Q4, it's really more of a timing issue with some of our calendar year benefit programs. The accounting for those programs tends to front end load. Some of those are calendar year base and it tends to front end load some of the costs associated with.

With those benefit programs things like vacation accruals and health savings account programs to be more specific so that accounts for maybe upwards to $5 million of the sequential increase the benefit there is.

That tends to even out as we move through the course of the calendar year. So we should see the opposite effect of that as we move towards back half of calendar 'twenty two.

Instead of incentive bonus plans, we expect might be a tick higher in the third in the third quarter as we move towards measuring ourselves against the back half targets that we've established investments in retail digital.

Program marketing.

Dollars, we expect to increase a bit to help continue to drive momentum in order activity and then this last one I'll mentioned using our guide we're going to do everything we can to manage this one but there is some incremental selling related expenses, including <unk> that are a factor in that as well and offsetting all of those those items, which if you will.

Say all of what I, just said call that $20 million as an estimate we expect to layer in incremental synergies related to the integration work that we're doing so the net change there at the midpoint is about $16 million.

Okay, perfect and just a quick clarification there.

The synergies are those showing up.

All in the no.

Quote unquote segment or are they spread out over the different businesses, how is that being recognized.

Laid out as you recognize them.

Hey, Reuben this is Kevin the synergies are coming really across the paths across all of the businesses as we've looked at how do we bring Miller and all together and so you see some of the benefits from synergies hitting each of the segments.

Okay.

Next question for me is on.

You know.

<unk> R I S.

Assume steel is as an example elevated in Europe as well.

How you are able to maintain the margins over there.

What are the differences in the business model is anything else that you can add.

Yes, Chris.

And then you chime in if you don't mind, Yeah Ruben the one thing I always this is actually something we're super proud of the international business has been.

Shining star in our in our business for <unk>.

Several years now and it's really showing up in a big way in the last couple of quarters. There are some differences and I think Chris will probably unpack some of these.

A little further but in terms of the cost pressures and inflationary pressures and supply chain pressures that we're feeling in North America vis vis outside of North America. One of the we in fact really aren't feeling the same magnitude of commodity pressures internationally as we're seeing in North America, and then you add to that the fact that the labor constraints.

That we're feeling in our production.

<unk>.

<unk> facilities in North America are not nearly as significant in our international operations and then Chris.

Last thing I'll say is we tend to have a fairly favorable overall product mix with our international contract business. It tends to tell those a bit more towards seating, which is a good thing in our business.

Our operations teams have done brilliant work there they are much more efficient now and that's.

Translating to better profitability.

Chris go ahead and add whatever you'd like.

It's hard to add much to that Jeff that was pretty comprehensive the only thing that I might add.

Note that the.

Sales in the quarter.

Perfect. So because we were able to get.

A better labor position.

Nationally, we were able to get increased throughput through the maturity. So we also.

Protests.

Does that are there I mean there.

Steel is there steel increase costs and things like that but we're going to be able to grow.

Withheld.

Okay, I'm going to sneak one more in if I can.

Sure.

The.

Back to the Americas the pricing back.

Clog situation I think you mentioned profitability in the backlog being up.

Somewhat constrained is there a point, where maybe you don't take as many orders.

Because you are not able to keep up and the profitability isn't as attractive as it is normal or do you view it as a longer term positive to just take anything that you can at this point, how do you guys.

Weigh that.

Yes, I'll, let John.

Add any any insights.

Closer to the customer side of things and I am but what I will tell you is that with this with our most recent price increase as I mentioned in my prepared remarks, I think it's super important that that you all.

At least are on the same page with us that we've geared these price increases.

With the idea that commodity.

Input costs labor costs, while while they likely are going to remain elevated that they stabilized, but not it does not assume that they come back down now that could happen in some cases and in that case, we think we benefit from that but we hear these price increases such that they are set to ultimately.

<unk> offset what is currently a very elevated cost environment.

The environment, so orders that we take from here forward will largely be reflective of the series of price increases that we've put in place and we actually feel quite good about about taking that business.

John Please.

Hi, Reuben, it's Jon Michael I would just add to what Jeff said I think in the short run as we're waiting for the price increase impact to begin to layer into new orders.

The other way we address those challenges is through our discounting methodology.

And just making sure that from a from a day to day discounting perspective, looking at accounts and project et cetera that were being.

We're being smart about our discounting methodology and making sure that the discounting methodology will obviously over time begin to regulate demand in such a way that it matches our ability to produce.

I think it's just one more lever that.

We pull to try and to try and balance out those two.

Yes.

Great. Thanks, guys.

Thank you. Our next question will come from Budd buckets with water Tower Research. Please go ahead.

Good afternoon, and happy new year to everybody.

Hey, Budd.

Hi, Jeff I look forward to.

A year, where the pandemic receipts into the background and I hope we will get there.

Forgive me for.

Were going on.

The cost issue.

I was trying to make sure I was trying to understand how to work from the.

The margin profile, we had let's just say in Americas, which I think was down.

700 basis points I think we show in the ER.

And gross margin.

What's the walk to get you to from 35 six.

28%, how much of that is cost.

How much of it or other things.

Yeah.

Well Budd this is Jeff.

The.

Let me, let me first talk at the consolidated level and my caveat here would be.

<unk>.

The categories of commodities freight and labor are most acute in our north American manufacturing operations.

And so at the consolidated level in Q2 from a year ago tell the Q2, we were just reporting we had 240 basis points of commodity pressure year on year, we had 90 basis points of freight and transportation pressure, we had a roughly 90 basis points of labor and overhead pressure.

Mix accounted for another close to 50 basis points and on that point in particular, I would remind you that we benefited last year with tremendous.

Task seating mix, particularly on the retail side of the business. So that one is a little less tied to the Americas segment.

And then we've got some but not not a terribly meaningful amount of price benefit that helped to offset that to the tune of about 30 basis points. So budd.

The best way I can answer the question in quantity and quantified terms just to talk about a consolidated but what I would just emphasize as commodities. If it's 240 basis points at the consolidated level, it's more than that.

The Americas segment level, and the same would be true for freight and labor.

I totally understand that I was just trying to trying to reconcile that to the 60 basis points and I think it was 30 30 30 for freight labor and transportation that I heard a few minutes ago.

Yes.

By the way, but just so that we.

We're not talking past each other I was just giving you the walk for Q2 year over year.

My earlier comments, where we are.

With respect to our guidance going forward.

Into Q3 and that was that.

That makes sense right. So in other words, we think we're going to get another 60 basis points of pressure from commodities as we move from Q2 into Q3 and that's at the consolidated level, but my comment we feel still 40 or incremental to the $2 40.

It would be it's incremental yes, another 60 basis points over and above what we felt in Q2.

So then that that would be I guess, your 300 basis points in the third quarter, that's where I'm trying that's what I was trying to work through.

Yes, okay.

You bet.

Great. That's very helpful and I do want helpful and I do understand that the Americas is significantly which is meaningfully more than the pressure elsewhere.

That is true.

Back to that.

For my follow up it looks like make sure I'm going to talk about the backlog and it looks to me like orders outstripped.

Revenues of sales by 130, or so million dollars. So that's just added to the backlog right.

Goodbye.

That's correct yeah, our backlog ended the quarter at $9 67, and Youre absolutely right. The change from beginning of quarter was about that $130 million.

Okay. So at the beginning backlog was $1 67.

Ending but ending backlog was 967.

And that's $130 million higher than where it began okay, alright, and thats, great and I appreciate that and obviously best of luck and best wishes to everybody going forward.

Thank you you as well bye thanks.

Thanks, Pat Thanks.

Thank you. Our next question will come from Greg Burns with Sidoti and company. Please go ahead.

Yes.

Good afternoon.

Just wanted to follow up I guess again on the price cost gap, you're seeing is there any way you could quantify like what it was this quarter or what do you expect it to be next quarter and.

Over what timeframe given the price increases that youre layering in when do you expect that to be completely offset.

Yes, Greg good evening.

I'm going to.

Let me take a take a stab at your question I think this is what you are asking and I'm just going to kind of recap a couple of the numbers that I just mentioned in terms of basis point impact on gross margin.

From year ago levels, we had about 30 basis points of improvement due to net price benefit.

Yet we saw a pretty meaningful decline in overall gross margin performance and so that 30 basis points was not enough to offset all of those other pressures that I mentioned commodities freight labor and so forth does that is that helpful.

Yes, I guess I'm, just kind of wondering what's the path.

Do you expect the gross margins in the third quarter to be the low and then given the price increases if everything else stays constant should we see kind of a steady sequential increase in gross margins.

Over the next two.

Two quarters like how when do we get back to neutral.

Yes, no I think.

The second part of your question and it's a great one and I would say if you. If you allow us to just assume for a minute that we don't see further degradation in the cost environment, which are already pretty at a fairly elevated level. Then I think it would be fair to expect improving margin profile moving out of Q3 into Q4 and beyond.

Certainly we expect that in retail and there's no reason to believe that as we as we improve our ability to ship more product work through this backlog, we should we should feel even more pricing benefit.

Flow through now it's not going to be a rapid improvement we don't expect but what you should see improvement I think if you want to think of it in terms of pre pandemic margin.

Levels versus where we are today, you would probably argue on a on a pro forma basis for the consolidated business a more a more.

Accurate pre pandemic gross margin level would be somewhere around 37%.

That's kind of going back to FY 19.

We fully expect that with the pricing that we've done we can we can work our way back there and in fact, it won't be into the early part of FY 'twenty three likely but we think late Q1 into Q2 of next year, we should be able to get there and arguably better than that given the performance of retail.

And frankly, the underlying cost performance in the synergy work that we're doing.

Okay.

And can you just talk about how you.

Hedge steel or.

How are you.

Purchases, just because steel come off pretty meaningfully from the peak.

<unk>.

At least from what I'm tracking so can you just talk about how that potential benefit might flow through like do you buy it.

Six months out like how does that work.

Yes.

Generally speaking, Greg we don't really formally hedge with like derivative type hedging steel steel prices, but what we do is we buy on a lag to the market and because we buy a decent amount of feel we get a bit of a discount off of the published.

Price of steel.

So youre right. Its still has come down off of the highs I think the latest don't exactly quote me on this but it is something just north of $2000 a ton.

For steel it was as high as Kevin you might have the number of 'twenty, one or 'twenty 100, plus so it has come down a little bit, but what we do is we buy on a lag so it tends to be about.

Three months about 90% 90 days and as a result, <unk> kind of in a period of inflation.

We lag into that over the course of many months and then as prices start to come back down the opposite happens if it takes us a little while longer to work to stabilize and then start to realize the benefits of a declining steel market. So that's why I mentioned earlier I think if you assume for a minute that steel stays roughly where it's at today we should.

Good.

We should kind of level out or if you will peak in Q3, and then from there we should start to see some relief from steel prices.

Okay and just.

Lastly in terms of the <unk>.

Dealer network integration.

Can you just talk about what.

It's involved in the.

The pilot programs, you have going on in Texas, and Arizona that just allowing them to sell before.

<unk> products across all the brands like what is involved in those and are you seeing any early benefits from from those.

Sure I'll take that one this is Jon Michael I think we've seen a number of benefits before I get to that though in terms of what's involved.

It's really working through the readiness and training.

To speed as well so I think it's really informed.

A lot of the work that we're doing to our broader readiness and rollout over the next several months and we're looking forward to it and I know the dealers are ready for it.

Okay, great. Thank you.

Thank you. Our next question will come from Alex Fuhrman with Craig Hallum Capital. Please go ahead.

Beyond.

Hi, Alex this is debbie thanks for asking.

We're really pleased with the continued growth we're seeing in our retail segment.

Dominant.

Drive our <unk> growth has continued assortment expansion and we're seeing growth across both the brick and mortar and e-commerce channels and across all of our brands and with assortment expansion being the predominant growth lever. They feel like that will continue to be a scalable opportunity for us coupled with optimize.

Some of the other investments that we're making in our business.

I like that.

France Pls some of the marketing investments, we're making on CRM.

We're using customer data.

Drive our marketing performance.

And ongoing investments in the overall infrastructure to improve customer service. So we continue to look with retail growing at double digit comps and we're excited and confident about that.

Yes.

Hey, there.

Thank you. Thank you very much for that.

A quick follow up if I, if I could just how much of that double digit growth as you look or do you expect to come from e-commerce versus continued brick and mortar growth and presumably opening more stores over the next few years.

We'll continue to open stores at about the pacing that we have been opening stores.

We opened an additional two historic in Q2 will open three more in Q3.

And the confidence that we have from the store performance as we opened them remains very strong and.

These stores predominantly through the Herman Miller brand are really proving to be a strong sign of customer acquisition borrow, allowing us to engage with new audience. As a result of some of the Adjacencies, we have with the store and so we're engaging with customers who care about their physical wellbeing and their overall physical performance and those are customers that we believe we can can.

To engage.

The pandemic trends.

So we will continue to invest in your stores.

And our base business remains very strong we had double digit comp growth as well as double digit total growth.

The improvements that we're making in our site experience and our marketing optimization in our assortment driving the base business as well.

Great. That's really helpful. Thank you very much.

Thank you. Our next question will come from Rudy Yang with Baird. Please go ahead.

Hey, guys.

And new year and thanks for taking my question.

Alrighty.

I guess just on run rate synergies.

Now expecting $120 million after year three.

Is that more because of greater success than you initially expected and recognizing those synergies this quarter or where theyre separate opportunities.

Uncovered and I guess, if that's the case could you provide some more color on what is now expected to help drive that additional $20 million.

Yes, Rudy this is Kevin so as the teams have been working through the integration planning our original targets were for the $100 million by the end of two years after close and as we've talked in the past a lot of those savings were coming from org structure and procurement types of savings as the teams.

Again, they started to look deeper into other categories like manufacturing or logistics.

Some other procurement.

<unk> that maybe have a little longer lead time and so.

It was a grounds up review by the teams looking at not just what could they do within two years, but where there are opportunities if given a little more time that we could get after as well.

Got it.

Great.

And then secondly, just to kind of get a little bit more color on retail order patterns I guess I'm just curious as to how the patterns in terms of product mix have changed as hybrid working has emerged over the last year are you seeing customers now accepting reality of work from home more and as a result.

Kind of pulling the trigger on a more central products, such as heating, which obviously is a higher margin product for you guys or our ancillary and other alternative home office products, starting to I guess now become more popular.

So the retail business, we have seen a decline in our overall performance eating as a percent to our total business year over year. However that is more than offset by our gaming business, which is with NFC. Thank asset great. Obviously, just targeting a different audience.

However, we're really pleased with the growth that we're seeing in some of our other core categories predominantly.

Australia seating and dining in outdoor where we have very high penetrations.

Private label products within those categories and therefore, some great opportunities in terms of margin enhancement within those categories as we continue to localize our sourcing capabilities.

So despite the fact that we have.

The claim and true performance fee thing and we are very confident in the growth that we're seeing in the rest of our categories, which are double digit growth in off price across all those categories with the exception of rocks and 9% growth.

Great. That's super helpful. Appreciate it thank you guys.

Thank you I'm showing no further questions in the queue. At this time I would now like to turn the call back over to management for any closing remarks.

Thank you and thanks, everybody for joining US today, we really appreciate your continued interest in Melbourne at all and we look forward to updating you again next quarter how come here.

One.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Q2 2022 MillerKnoll Inc Earnings Call

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