Q3 2022 MillerKnoll Inc Earnings Call

March 29, 2022

Good evening and welcome to the Marina.

Third quarter earnings Conference call as a reminder, this call is being recorded.

I'd like to introduce your host for today's conference Kevin Development Senior Vice President.

Integration lead for never know.

Yeah.

Good evening, joining me today on our third quarter earnings call are Andi Owen Chief Executive Officer, Jeff Stutz, Chief Financial Officer, and John Michael President of Americas contract.

We have posted the press release on our Investor Relations website at <unk> Dot com wherever any figures that are presented on a non-GAAP basis, we've reconciled the GAAP and the non-GAAP amounts within the press release before I turn it over to Andy for a brief overview of the quarter 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 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 event.

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 evening, everyone. Thanks for joining us Tonight for nearly a year now you've heard us say that <unk> competitive advantage is our unique combination of strong global contract business.

Well positioned retail business, we leveraged that to drive sales and growth in all segments. This quarter and our momentum is continuing to build as we move through our integration journey.

Every day it becomes more evident that we have created something special.

<unk> built for long term growth with the ability to have a tremendous impact on the world around us.

Jeff will take you through the details of our third quarter performance, but before I hand, it off to him.

To share a few remarks about our business and the progress youre, making relative to the integration.

During the quarter many parts of the world begin shifting our focus to emerging from the pandemic and contract clients began activating the return to office plan.

Players are not pulling back theyre investing in new assets experiences that their employees unless theres, a push for premium experiences and thanks to our extensive product portfolio across many brands mellissa ready to meet that demand.

<unk> from our ability to meet the needs of our global customer base.

<unk> premium product solution, our global footprint allows us to serve local clients and global accounts around the world.

We take great pride in our thought leadership in the future of work, we have the insights our customers need to create a workplace strategies.

Most of our customers are telling us that they're headed towards hybrid work arrangements and we know from our research that they will likely continue to evolve their approach over time.

This creates an amazing opportunity for a mill or not we can support the work the way it happens today and in the future.

As compelling reason for creating Miller mellissa power of our combined portfolio and our distribution network.

One of our top priority since the deal closed just been activating our millennial dealer network, and we're making great progress and nearing our North America market launch, which is planned for early June .

We brought our America sales team together in early March and it was an amazing and inspiring experience to be together for the very first time at Miller Hill, the week with Philips shared learning and more importantly, the growing recognition that more really as more and together, we're going to do incredible things.

That momentum has continued with our dealers in the past few weeks, we've held several dealer activation meetings to help prepare for our cross sell launch we're building a highly capable and cohesive Miller Knoll dealer network.

I said that with dealers and our sales teams I've seen the energy and enthusiasm they have for what's to come they are invested in our future and eager to bring the comprehensive melanoma portfolio to our customers are.

Our early pilots and dealer consolidations in North America provided the opportunity to build a strong foundation and we are feeling extremely optimistic as we approach our June go live date.

Our international team has also launched our first Miller Knoll dealer pilot in Europe , which consists mainly of legacy Herman Miller dealers, who are expanding to sell more products.

Opportunity to extend the reach of our collective brands around the world and we're pleased with the progress were making during the early expansion pace.

Moving on to retail this business has nearly doubled in size in just two years retail played a pivotal role in helping us navigate the early challenges of the pandemic and today, it's a meaningful contributor to millennials overall performance with year to date sales of $635 million.

Retail is a high performing resilient business with distinct competitive advantages, including significant upside benefits now as a combined millennial organization, we began expanding our assortment of knoll and <unk> products across our brick and mortar and e-commerce outlets driving incremental growth and margin we have the channels geographic reach.

Each and product portfolio to meet the needs of residential customers around the world.

<unk> got our retail business, we've been making investments to modernize our operations and enable us to compete as a best in class retailer.

Many of these critical initiatives that will launch in the first half of fiscal 2023, and we're looking forward to the opportunities that they'll create.

Alongside our global growth strategies, we have clear priorities relative to giving back and creating a better world.

We continue to receive recognition for our commitment to sustainability.

Diversity in design and inclusivity.

For the 15th year in a row, we achieved a perfect score on the human rights campaign Foundation's corporate equality Index. We were also awarded the platinum model and recognition of our commitment to sustainability and corporate social responsibility by equal Fotis. This places our company among the top 1% of all companies assess worldwide for the second year.

We're in a row.

Before I hand, it over to Jeff I would like to comment briefly on the tragedy that has unfolded in Ukraine over the last month.

Our foundation made an immediate donation supportive humanitarian relief efforts and is matching donations from employees dealers and our suppliers.

It's been inspiring to see our melanoma community come together in response and while this region makes up a small part of our international contract segment. It will remain a top priority in terms of both business risk mitigation.

And humanitarian support.

So with that I'll turn it over to Jeff who will cover a bit more about our results before we open it up for questions.

Thank you Andy and good evening, everyone, it's great to be with you.

Sure the tragedy in Ukraine is top of mind for all of US These days.

Any of the follow up to your comments FY 'twenty, one annualized revenue from the region was approximately $10 million.

We don't have manufacturing facilities or offices in the region.

And in terms of our independent dealer network, we have a relatively small presence with two dealers in Ukraine and Russia.

In Belarus.

We're not fulfilling existing orders or extending new orders in the region at this time.

Now turning to our third quarter results, we drove growth across every segment and every region of the business.

Even with continued macro economic challenges pressuring margins in the near term it was a strong quarter for demand generation.

We're confident about our future, including our ability to further mitigate inflationary pressures and deliver on the cost synergies associated with the noble acquisition.

Consolidated net sales of $1 billion were up 74% on a reported basis and 20% organically over the prior year.

Sales growth was again constrained by our ability to produce and ship orders due to global supply chain and labor supply challenges.

We estimate these disruptions adversely impacted net sales by approximately $34 million in the quarter.

Orders in the period of $1 1 billion were 94% higher than the prior year on a reported basis and increased 32% organically.

The international contract segment delivered strong performance again, this quarter with sales and orders up in all regions and across all brands.

Organic basis sales were up 30%.

Inorganic orders of $162 million were up an impressive 74% over last year, achieving an all time record for this business.

Strong demand from local customers, especially in China, and Europe helped accelerate growth globally.

Global account activity was also very strong, especially in Europe , and Asia and within the tech industry.

Customers around the world are prioritizing workplace investments as they seek to differentiate themselves and create a premium amenity rich employee experience to attract and retain critical talent.

We also saw strong performance from Nova and this quarter with sales up 28% and orders up 37% from last year on a pro forma basis.

Growth was broad based across all regions, both for contract clients and through retail channels.

Additionally, Holly Hunt saw record order levels in the quarter with growth in every product category.

Many backfill felt also set a record for orders in the quarter.

The performance of our Americas contract segment.

Also quite strong this quarter with sales up 26% and orders up 37% on an organic basis.

Overall demand continues to be solid in all regions.

The same time easing supply chain and labor pressures along with tremendous efforts from our teams around the world helped us improve reliability and lead times.

This resulted in the highest sales volume this fiscal year.

Our retail segment also delivered continued growth in the quarter.

On an organic basis orders were up 4% and sales were up 7% over Q3 last year.

Gross margin in the quarter was impacted by channel and category shifts as well as production costs and freight charges.

Now we've taken a number of steps to mitigate further impact from current inflationary pressures, including targeted price increases and new freight charge programs.

Reinforcing Andrew's earlier point sales in our retail business had nearly doubled in the past two years moving it from essentially breakeven operating margins to consistent double digits.

And we see tremendous opportunity ahead for further growth.

Adjusted gross margin was 32, 9% compared to $39, 1% in the prior year at the consolidated level largely due to the impact of rising commodity costs.

And other inflationary pressures like labor and transportation expenses.

Recent price increases have helped to offset some of these inflationary pressures and we expect to see the impact of these increases gained further traction in future quarters.

We continue to carefully manage operating expenses and focus on what we can control across the business as we work to mitigate the impact of these macroeconomic pressures.

And of course, we'll monitor cost trends and take further pricing actions as necessary going forward.

Adjusted operating margin was three 8% compared to nine 4% in the prior year and.

And we reported earnings per share of <unk> 16 for the quarter.

Adjusted earnings per share were <unk> 28 in the period compared to <unk> 65 last year.

Looking ahead to the fourth quarter, we expect sales to range between $1.

75 billion and $1 115 billion and adjusted earnings per share to be between <unk> 46, and <unk> 52.

This guidance continues to consider the near term inflationary and supply chain environment that we're navigating as well as the actions we're taking to help mitigate these pressures.

And so to sum up we're entering the final quarter of the fiscal year in a position of strength given the continued strong demand environment and expect to continue building momentum through our integration efforts and strategic initiatives.

So with those prepared comments I will now turn the call over to the operator, who will take your questions.

As a reminder.

So we need to press star one on your telephone and to withdraw your question Jess Preston.

Once again Thats star one for questions. Please standby will be competitive.

Our first question comes from the line of Steven Ramsey from Thompson Research you may begin.

Hey, good evening.

Wanted to start on the retail.

Maybe with sales kind of in a bigger context quarterly sales from Q3 'twenty. One Q3 dollars 22 were all between 200 to 222 million each per quarter.

Does the Q4 guide imply stepping up off of that level.

In Q4, and does that imply a step up in <unk>.

Sales per quarter going into FY 'twenty, three and then lastly, what factors go into.

Driving that step up in growth.

Hey, Steven This is Jeff let me, let me start.

Andy you can certainly pilot.

So, yes, I would say in general it does imply we had we had good order entry for the retail business good demand levels overall.

No.

Yes, we would expect to see it ramp up in revenue as we move into the fourth quarter I'm not going to comment on FY 'twenty three at this point.

Although I will tell you that.

Overall, we feel quite good across most product categories. We are seeing good traction bear in mind, we are up against.

Fairly tough prior year comparisons in the workplace category, just given the strong e-commerce demand, we saw in and workplace furnishings, but.

But we're feeling good that overall as we move forward, we'll be able to comp those.

Certainly in total over the next 12 months.

Add to that too Steven as you think about our retail business, it's still sort of Nathan we have a lot of opportunity and new product growth.

And Debbie and her team have been working diligently at that so we have categories to fill in.

We also have new channels that we're delivering we have a very strong wholesale business globally. So we continue to see growth in the retail.

Sector of the business.

Okay, Great. That's helpful. And then I wanted to get a little bit more color on delayed sales, which were down on a dollars basis and a percentage of quarterly sales.

What does that improvement reflect do you think this keeps improving.

Or is there some embedded delay of sales in the Q4 guide maybe some helpful color there to balance that you talked about North America contract lead times getting better or is that part of the driver there.

Yes, Stephen Jeff again, yes.

Yes, it's a good question I would say a couple of things. So the trend I would let me let me summarize by saying that the trend line is positive in.

In the business in terms of some of the constraints that we've been facing all year now I don't want to leave you with the impression that we're all the way out of the woods on this by any stretch, but we're moving in the right direction. So it gives you some specifics.

Areas that we've made real good improvement on credit our operations teams in partnership with our with our recruitment efforts through HR.

We've improved overall production staffing levels quite significantly from this time last quarter, where not all the way to the levels. We would like to be certainly you can see the backlog. We've got we've got good demand levels, but were much improved from where we were that's helping.

So that contributed to the to the improving trend line, albeit we're still feeling some of those constraints.

Paul.

And as a result of that overall lead times are improving.

Question. There is some pockets of challenge that remain I'll give you a couple of categories as an example.

Our contract business case goods and upholstered products continue to be an area, where we're seeing a bit more extended lead times.

An improvement.

And then in the retail business, we're seeing.

On average longer lead times compared to prior years on the on the order of about four weeks longer in total for the business compared to where we were last year at this time.

The contract business, a little better than that moving in the direction of normal not quite there yet so I think expectations would be.

<unk> and our guidance is we don't think we're out of out of the woods, yet as I mentioned, we will likely see some continued constraint on shipments, but feeling pretty good where we stand at this moment.

I'd just add to that Steven what we've done to attract and hire.

Labor right now has paid off we are starting to see a lot less open roles. However.

Youll notice in the margin, we're paying more for it so.

Had to do to attract labor in this market has been tougher, but as we've got more people in the world with we're starting to see reliability and production increase across the board.

Very good and last quick one for me on the.

Range on gross margin maybe go into is that segment dependent or is there a certain component of cost of goods, that's driving that or is it.

Sales dependent and operating leverage.

Well, Stephen Jeff again, certainly in this business.

We can push more out in the form of shipments we will get leverage on that volume plays a role here without a doubt I think.

Overall channel mix matters as well as you know the retail business has structurally higher gross margins than our contract business does so if we can.

If we over perform.

Current internal forecast in retail or vice versa. If we underperformed that will be a factor just from a mix perspective, and then lastly, it's a dynamic environment.

We feel quite good about our performance this quarter and we feel like we've got good momentum.

We're also well aware that there's a lot of change in the air with energy prices with interest rates and so all of those things can flow through and as a factor, but as a general rule I would say mix and overall volume levels are probably the biggest factors.

Great. Thank you.

Our next question will come from the line, Greg Burns from Sidoti <unk> Company you may begin.

So I just wanted to follow up on that last line of questioning around the gross margin. So.

Can you just quantify how big the price cost gap.

This quarter or maybe year to date like how much of a headwind that has been.

And what point do we start to see the.

The pricing increases that you've been passing.

Close that out and maybe it turns either close the gap or it turns to a tailwind for margins is that do you see that happening over the next couple of quarters.

Yeah, Hey, Greg It's Andy we do and as you guys know you are super familiar with this business price lag, it's a big deal for the contract side of our business. So we've been very aggressive with price increases and we will continue to.

Try to capture as much of the inflationary issues as we can in pricing, but given the backlog given the amount of orders that were working through it will take us several quarters to get there as we look into the next quarter, we will see improvement there we will see it over the next two or three.

So we believe very strongly that we've done the right pricing movement so far.

But it is slower to come than we would like but getting better but once you add Josh, yes, quantifying and Greg just to kind of get to the numbers I'll give you a bit of a sense for year over year Q3.

Kind of the walk between the last year to this year from a price cost perspective first of all on the on the negative side commodities.

We are a drag on gross margins to the tune of about 220 basis points when.

And then you add to that about 210 related to freight and transportation costs. So another 210 basis points.

A bit of impact from labor as Andy mentioned, we've had to raise wage rates a bit.

And you've got some drag on productivity.

40 basis points. So those are the kind of the negatives.

The price increases that we've announced have been quite substantial as you know and we're in.

Slower than we would like to see later in the early impact on this quarter was about 110 positive.

110 basis points positive impact from price from pricing and as Andy said, we expect that to ramp up as we move forward.

I'll add to Greg the casino the contract business is known for their price side, but I would say retail normally we would expect to see a much faster turnaround in pricing because it's much more dynamic and agile. However, if you look at the lead times in some of our third party suppliers and some new categories that we still have on boats waiting to come in we havent captured.

The full kind of 10% increase that we've actually put on the books for retail so there's a little bit of a lag in the retail business as well due to the same constraints that we're seeing in the contract is not as much but it's still there.

Okay.

Okay great.

And then when we look at.

Some of the retail initiatives you mentioned.

Some of the growth investments, you're making how should we think about that business over the next.

A couple of quarters.

Spending can arise and margins take a step back and then we kind of hopefully realize some growth off of those investments how should we think about the.

The model for that business over the next couple of quarters.

I'm, sorry, Greg you broke up a little bit in the middle of your question can you repeat it.

Yes, just.

In terms of the growth investments you plan on making a retail how is that going to impact the business from a margin perspective over the next few quarters.

Yes, we expect in this quarter, we will still continue to see a little bit of pressure.

<unk> got the big Bad Guy in retail is really about product mix. So if you'll recall in the beginning of the pandemic. We were selling a lot of task chairs, which are incredibly high margin product for us and we've entered into new categories, but we've actually seen a decline in our tax share business with which we were expecting when we expect that that will continue to push down our margins a little bit along with inbound.

Outbound freight, but some of the investments we've made specifically the customer data platform. Some of the planning and allocation systems that we have and are really focused on improving the customer experience as well as our efficiency driving up the long term with the lifetime value of our customers and also driving our customer acquisition. So over time, we also expect to see.

Gradual step up in our retail margins throughout 2023, and Q4 would you add yes, yes, and the only thing I would add Greg is in the very near term bear in mind. We are because they are working we are leaning into opening new.

New retail stores these seating store.

Very very pleased with the performance of those it's one of the chief levers that the team has pulled as they've pivoted to respond to the shift in product mix.

As that high volume of E. Commerce task Chair orders has begun to normalize and its working for us and so we're going to lean into that we're going to open more stores and of course in the near term.

Take a little time, just to get up to speed and so you have to take out a lease you have to staff.

That is likely in the next quarter or so.

Take a bit of a step backwards in terms of overall margin flow through we're very very confident though.

But thats accretive for the business is the right move going forward. The other thing I would mention is I think the credit the team they've been they've been really focused on looking at transportation costs, which are up that's another in addition to the mix that Andy mentioned.

Inbound freight expenses have really spiked up with them over the course of the last three months or so so the team is looking at and has actually already announced and implemented changes around things like increasing threshold delivery charges modifying the proximity thresholds.

Around around delivery charges as well so they're they're doing everything they can to control it.

And I think in the longer term, we're going to see these investments in stores and a lot of the digital technology.

That is going to help improve data.

Analytics in that business, we're very very comfortable with the right stuff to do and as Andy said in the medium to longer term those margins are expected to rise in the near term you might see them take a bit of a step backwards.

Okay, great. Thank you.

Okay.

Our next question will come from Atlanta Rubin Garner benchmark you may begin.

Thank you and good evening everybody.

Hey, Rob.

<unk>.

So.

Orders growth in the Americas, and with Knoll, even very.

Strong up I think 36% across the board can you talk about what youre seeing in those orders what kind of product mix any any signs that this is more than just catch up from offices being closed down for a period of time and maybe folks looking at companies looking at how theyre going to.

Set up their offices for the future with we work.

Hey, Reuben this is Andy and I want to turn it over to Jon Michael.

I think theres certainly across the globe, the pent up demand, but I think the bigger news for US is that there really is a complete rethink about how people are working and how they're thinking about their office space shared remote and hybrid and I think thats whats really contributing to kind of the frenzy that we're seeing in the A&D community in the design community about office space.

So I think it's more than just we were out of the office for the pandemic I think most people are taking a look at their space and trying to figure out how to work more productively and that's really fueling the demand John what would you add to that.

Thanks Sandy.

Ruben I'd say, we're seeing a few different things. The first is I think C level executives understand that their space has to work harder now than ever before in terms of attracting people back into the office and being a destination.

Where people want to come to work for culture and connectivity and collaboration.

In terms of product mix, a lot more amenity spaces, which lends itself more to sort of lifestyle or ancillary product as opposed to maybe the core workstation type products.

Popular sort of pre pandemic.

But I do think.

Companies aren't hesitating any longer as they were previously I think once we got through the omicron surge in late January customers became much more definitive about when they were going to be back to work whether that was April 1st June 1st or September one.

And as opposed to sort of.

Easing into that work it began in earnest and at a lot faster pace. So we think the continued change to more of a hybrid environment will continue and that space is they're going to have to do different things now than they have in the past and I think that bodes well given the portfolio that we have.

As the collective of melanoma.

Perfect very helpful.

While I have you.

Integration.

36% order numbers I think thats.

I'm not sure I'm fully up to date on different data, but that's at the very least growing with the market if not outpacing best in that region.

Yes.

That's what it looks like to me what how sustainable.

Is that I mean is there I'd imagine that's parts of your business maybe have easy comparisons.

Especially with no but.

Other parts are.

Other parts don't so what what is it that is allowing you to do that are you already are you seeing any kind of negative impacts of the Rev.

Revenue dis synergies from the merger with Noel is there still more to come or is this kind of outperforming your expectations internally.

I don't know that it's outperforming our expectations I think I think there's a couple of factors that are favorable. The first is demand is strong.

With with people returning to the office and the increased focus on that I would tell you in terms of the.

The unified Miller Knowles sales organization as well as the work we're doing to unify the Miller node Miller Knoll dealer network that work is really just taking off and just getting started I think we're just just beginning to feel the impact of of those powerful combinations.

Andy made reference to our sales conference that we had about a month ago and the energy level and the positivity there was was incredible.

We are the second week in two to three weeks of dealer or dealer activation experience, where we've got more than 500 dealer sellers and designers with us in Chicago getting oriented to the brands. The products that's going to be followed up by eight weeks of virtual training to reinforce the product specifics ordering processes.

Malaysia, etcetera, so momentum is building.

From a Miller Knoll perspective, and we expect to see that continue for the next several months.

Okay and last one for me Jeff.

Appreciate the price cost color that you gave in the third quarter. So.

Just trying to think about how that plays out over the next.

Plus I mean youre still.

Behind by my math, roughly 350 basis points on the price cost front does that.

Soon that you want to not only make that up but makeup for some of the last few quarters like how quickly does that progression happened or are we looking at.

100 basis points, a quarter improvement over the next five quarters to get back to kind of where margins were before or will we see a step change how do we how do we model out 23, and I know, it's early but just conceptually how do you think about it.

Yes.

Fair question and to confirm yes, we want it to accelerate but Theres no question.

I would say this rubin.

First of all we think that we want.

I mentioned, it's a dynamic environment, there's a lot changing we feel very good about the aggressive price actions. We've taken through it would be February mid February on the Knoll brand would be the most recent.

<unk> and <unk>.

Absent some of the recent moves in oil prices in there.

That are filtering through the economy in transportation costs.

We felt we felt like we had we had moved enough to.

To cover these costs given enough time and that we would exit FY 'twenty three.

A pre COVID-19 margin levels on a combined basis.

This is happening real time, but we're evaluating that closely as we said in our prepared comments and we will take additional actions. If we if we deem that's necessary.

I think I, maybe would just suffice it to say our expectation would be that.

We see a continually ramping margin performance I don't know that I want to commit to a 100 basis points a quarter, but I mean that doesn't that doesn't sound absolutely crazy to me.

And the point being that we would exit FY 'twenty three at levels ahead of pre Covid.

Overall performance I don't know if that helps you or not but thats kind of the best color I can give you.

Jeff just to clarify that last part exit.

Exists.

The last part again exit what quarter at pre Covid levels.

While our belief is that because this is expected to ramp quarter after quarter over the over the next.

Year.

Our expectation would be that we would exit next next fiscal year at a combined gross margin level that exceed the pro forma combined margin for the two companies combined.

Prior to Covid got it okay, yes.

Alright, Thank you guys, Congrats again and good luck.

Thank you.

Our next question comes from the line of Alex Fuhrman from Craig Hallum Capital you may begin.

Hey, guys. Thanks, very much for taking my question I wanted to ask more about your retail channel.

Obviously growth there has slowed relative to the real dark days.

Working from home in 2020, but continues to be showing positive year over year growth can you unpack that a little bit where that's coming from I think you mentioned earlier the Herman Miller seating stores are driving.

Some of that growth is it the same kind of product assortment that we see in your corporate business thats been driving retail like seeding or is it more home decor options just kind of wondering big picture not thinking about any specific quarter here, but is that business seems like its on track pretty.

To become a $1 billion segment for you and then so I'm just wondering.

How should we think about this kind of three five years out I mean could this be 30% of your business is this something that could potentially be a 100 or more Herman Miller branded stores. Just wondering if you've even kind of kind of started to see signs of where at the end of the line could be or if it's just open ended growth for you.

Alex. Thank you so much for you seem to be where the $1 billion. We love that these are great questions the answer to Where's the growth coming from.

So all of our categories are outperforming last year I would say the one exception to that is task seating, but that's not surprising to us we're seeing solid growth in VW are we're seeing solid growth in hey, our <unk> stores have been incredibly productive comping in double digits. The ones that have been open over a year and very small spaces, we're seeing growth in <unk>.

Three bedroom dining room, and he's Aman, it's happening across the board.

I would say any.

Slowing in growth that we're seeing is really related to kind of OMA crime that happened in December and January a little bit of a slowdown in what we were able to ship and not time based on labor shortages all of the things that everyone else is saying it all happened to us too.

But I think the opportunities that we have in this business are vast if you look at our competitors.

We have a lot of ground to gain in the amount of assortment that we can still add and then new categories that we're pushing and I know forget gaming gaming is a big category for us and from nothing and next year, we could be looking at a 90 to 100 million dollar business in gaming alone, which is a huge sweet spot for us. So when you add all that together we're incredibly opt.

Thomistic about what Herman Miller as a brand can do about what all of our collective brands can do.

In the retail space.

Great that's really helpful.

Thank you and then just as you think about building out the retail channel.

More with more stores I mean are there any other brands that you think could be a really big source of investment for additional stores over the next few years.

Yes.

I can't elaborate but of course, we have we have a great collective of brands and of course, we look at all of them with that lens.

That's terrific. Thank you very much.

Yes.

Once again Thats star one for questions. Our next question comes from the line now.

<unk> Yang from Baird you may begin.

Hey, guys. Thanks, so much for taking my questions.

Obviously going forward.

Expecting pricing actions to further benefit margins, but just curious how much of your backlog is now comprised of orders under new pricing versus oil pricing and then it sounds like supply chain constraints are getting better. So I guess, just what tangible aspects can you talk to that just to give you confidence it will be able to see improvements and moved.

In your backlog.

Better going forward.

Yes really good question. This is Jeff so.

Maybe what maybe I'll step back and say.

As you can software report, we've got a backlog that exceed the $1 billion, we were chatting a little bit before the call started that for.

For those of US who've been in the business for a while that's a kind of a shocking number but.

That's candidly that backlog is.

David a little longer than it typically as you might imagine with supply chain constraints.

That's a little bit longer data. This has been the same story of the past few quarters.

So we certainly expect a smaller percentage of that backlog to ship in the fourth quarter than we than we historically would have been pre COVID-19 , Dave maybe just to kind of ground you on that.

Remember, we have been implementing price increases going back to may of last fiscal year.

The Herman Miller, the Knoll brands did price increases initially in May and June and then again in October November and then again in January February . So there is a good portion of that backlog that has some semblance of it's a mix of course, but some semblance of pricing and because orders had been quite strong.

<unk>.

Throughout the third quarter EBIT, our most recent price increases which for the contract business was up 10% list price increase.

Good chunk of that backlog that has that in it as well so.

I don't know I don't have the blended number to give you, but it is certainly a mix and that's why as order.

We hope that this continues that the order pacing continues at a good got a good rate that will absolutely.

Continue to ramp up as we move forward.

Yes really.

The color Thats Super helpful.

And then I know, we've talked a lot on retail already but.

Orders were pretty strong year over year, especially given the tough comps, but I think retail orders declined sequentially from last quarter. So just curious on any thoughts you have on terms that may be permanently changing there. If that's just the reduction in task seating or anything else that may have drove that.

Yes, Rudy so.

It's a good question. So I think a couple of things come to mind first of all we did have some weather related.

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Earlier in the quarter that impacted our distribution center. So I think there is a factor there I don't I certainly don't want to.

To point to that alone obviously were getting at.

We are we are.

Continuing to run up against the tougher comps to last year from a from a task seating perspective.

Jonathan one thing to add Jeff is if you look sequentially in our retail business also there is a pretty consistent decline from Q2 to Q3 in general if you strip out last year and the pandemic related kind of boost we had so I would say that sequential quarter to quarter would be expected for us.

Operating in this business so we're not alarmed by it.

Okay, Great and then just last one from me I know, it's early but are there any results that can share so far from your new mill or no dealer group in Europe . Thank you.

You were also doing some testing with pilot, Chris in Texas, and Arizona. So.

Just curious if any results were different between each of them and if there are any major differences to note when it comes to the integration of your domestic versus international dealers.

It's really early days with international but I would say really is that the pilots are going well, we're learning a lot from them all over the world and really for international dealers, it's almost an easier laps. Because this is really just one of our product category.

It's upside for them. So I think the place where we have more complexity will begin the Americas and all of our pilots there have really helped us to formulate our dealer activation strategy that we're undergoing now and launching in June .

Comes up across the board internationally.

Great. Thanks, so much guys.

Thank you.

Thank you and I'm not showing any further questions in the queue I will turn the call over to Andy for any closing remarks.

Well, great well. Thank you guys for joining us and millennial really has the momentum and the unique competitive advantages that are fueling growth and creating exciting new opportunities for all of our stakeholders. So we appreciate your time with US today. We appreciate your continued interest and we look forward to updating you again next quarter take care everyone.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

[music].

Good evening and welcome to the Marinos third quarter earnings Conference call.

A reminder, this call is being recorded I would now like to.

To introduce your host for today's conference, Kevin Veltman, Our senior Vice President and integration lead for melanoma.

Good evening, joining me today on our third quarter earnings call are Andy <unk>, Chief Executive Officer, Jeff Stutz, Chief Financial Officer, and John Michael President of Americas contract we.

We have posted the press release on our Investor Relations website at <unk> Dot com wherever any figures are presented on a non-GAAP basis, we've reconciled the GAAP and the non-GAAP amounts within the press release before I turn it over to Andy for a brief overview of the quarter I would like to remind everyone that this call will include forward looking statements for information on.

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 evening, everyone. Thanks for joining us Tonight for nearly a year now you've heard us say that no no no. Its competitive advantage is our unique combination of its strong global contract business.

Well positioned retail business, we leverage that to drive sales and growth in all segments. This quarter and our momentum is continuing to build as we move through our integration journey.

Every day it becomes more evident that we have created something special.

<unk> built for long term growth with the ability to have a tremendous impact on the world around us.

Jeff will take you through the details of our third quarter performance, but before I hand, it off to him I'd like to share a few remarks about our business and the progress, we're making relative to the integration.

During the quarter many parts of the world began shifting their focus to emerging from the pandemic and contract clients began activating the return to office plan and.

Players are not pulling back they are investing in new office experiences that their employees a lot theres a push for premium experiences and thanks to our extensive product portfolio across many brands.

Arnaud is ready to meet that demand, we benefit from our ability to meet the needs of our global customer base through our portfolio of premium product solution.

Our global footprint allows us to serve local clients and global accounts around the world.

We take great pride in our thought leadership in the future of work, we have the insights our customers need to create their workplace strategies.

Most of our customers are telling us that they're headed towards hybrid work arrangements and we know from our research, but they will likely continue to evolve their approach over time. This.

This creates an amazing opportunity for a mill or not we can support the work the way it happens today and in the future.

It's compelling reason for creating Miller knows the power of our combined portfolio and our distribution network.

One of our top priority since the deal closed it's been activating our millennial dealer network, and we're making great progress and nearing our north American market launch, which is planned for early June .

We brought our America sales team together in early March and it was an amazing and inspiring experience to be together for the very first time at Miller Hill. The week was full of shared learning and more importantly, the growing recognition that more really as more and together, we're going to do incredible things.

That momentum has continued with our dealers in the past few weeks, we felt several dealer activation meetings to help prepare for a cross sell lunch, we're building a highly capable and cohesive melanoma dealer network.

As I've met with dealers and our sales teams I've seen the energy and enthusiasm they have for what's to come they are invested in our future and eager to bring a comprehensive melanoma portfolio to our customers.

Our early pilots and dealer consolidations in North America provided the opportunity to build a strong foundation and we are feeling extremely optimistic as we approach our June go live date.

Our international team has also launched our first Miller Knoll dealer pilot in Europe , which consists mainly of legacy Herman Miller dealers, who are expanding to sell more products.

Great opportunity to extend the reach of our collective brands around the world and we're pleased with the progress were making during the early expansion pace.

Retail is a high performing resilient business with distinct competitive advantages, including significant upside benefits now as a combined millennial organization, we began expanding our assortment of knoll and meter products across our brick and mortar and e-commerce outlets driving incremental growth and margin we have the channels geographic reach.

And product portfolios to meet the needs of residential customers around the world.

As we've got our retail business, we've been making investments to modernize our operations and enable us to compete as a best in class retailer.

Many of these critical initiatives will launch in the first half of fiscal 2023, and we're looking forward to the opportunities that they will create.

Alongside our global growth strategies, we have clear priorities relative to giving back and creating a better world. We continue to receive recognition for our commitment to sustainability diversity and design and inclusivity.

For the 15th year in a row, we achieved a perfect score on the human rights campaign Foundation's corporate equality Index. We were also awarded the platinum metal and recognition of our commitment to sustainability and corporate social responsibility by equal virus. This places our company among the top 1% of all companies assessed worldwide for the second year in.

The Roe.

Before I hand, it over to Jeff I'd like to comment briefly on the tragedy that has unfolded in Ukraine over the last month, our foundation made an immediate donation and supportive humanitarian relief efforts and is matching donations from employees dealers and our suppliers.

It's been inspiring to see our millennial community come together in response and while this region makes up a small part of our international contract segment. It will remain a top priority in terms of both business risk mitigation.

And humanitarian support.

So with that I'll turn it over to Jeff who will cover a bit more about our results before we open it up for questions.

Thank you Andy and good evening, everyone, it's great to be with you.

Sure the tragedy in Ukraine is top of mind for all of US These days.

Andy is a follow up to your comments FY 'twenty, one annualized revenue from the region was approximately $10 million.

We don't have manufacturing facilities or offices in the region.

And in terms of our independent dealer network, we have a relatively small presence with two dealers in Ukraine, and Russia and Belarus.

We're not fulfilling existing orders or accepting new orders in the region at this time.