Q1 2020 Earnings Call
Good morning, and welcome to the Herman Miller's first quarter earnings Conference call.
As a reminder, this call is being recorded.
I would now like to introduce your host for today's conference, Kevin Veltman, Vice President of Investor Relations and Treasurer.
Good morning, everyone. Joining me today on our first quarter earnings call, our Andy Cohen, our President and Chief Executive Officer, Jeff Theiler, Chief Financial Officer, and John Mcphee, President of our retail business.
We have posted yesterday's press release on our Investor Relations website at Herman Miller Dotcom.
Some of the figures that we'll cover today are presented on a non-GAAP basis, we've reconciled the GAAP and non-GAAP amounts in a supplemental filed that can also be accessed on the website.
Before we begin our prepared remarks, I will remind everyone that this call will include forward looking statements for information on factors that could cause actual results to differ materially from these forward looking statements. Please refer to the earnings press release, we issued last night as well as our annual and quarterly SEC filings at the conclusion of our prepared remarks, we will have a Q and a session. Today's call is scheduled for 60 minutes and we ask that callers limit their questions to no more than three to allow time for all to participate with that I'll now turn the call over to Andy.
Good morning, and thanks for joining us today I'll begin the call with highlights of our quarterly results followed by sharing progress that we've made on our strategic priorities.
In the first quarter, we built on our momentum from last quarter by starting this fiscal year with strong growth in sales and orders led by our North America and retail businesses consolidated sales grew 8% organically over last year, while orders were up 7%. We were especially pleased to continue generating positive results in the face of the ongoing global trade tensions impacting the broader geopolitical environment.
Looking ahead, we are also seeing healthy levels of project opportunities in the pipeline.
We've been encouraged to have more and more discussions with our customers and how we can assist in their efforts around attracting and retaining talent and help them design flexible high performing arts basis. These discussions often highlight the power of the entire Herman Miller group of brands to meet those needs.
Complementing the growth in sales and orders, we posted improved gross margins this quarter, which were up 70 basis points over the same quarter last year.
At the same time, our teams continue to manage operating expenses very well. The combination of these factors helped drive another quarter of operating margin expansion with reported operating margins 160 basis points above the same quarter last year and adjusted operating margins were higher by 90 basis points.
We reported earnings per share on a GAAP basis of 81 cents during the quarter.
On an adjusted basis earnings per share of 84 cents reflected an increase of 22% over the same quarter last year.
On the strategy front, we remain focused on the four strategic priorities that we shared at our May Investor event, Let me summarize and briefly for you.
First we're being very intentional about unlocking the power of one Herman Miller to help leverage our amazing portfolio of brands and global capabilities to their fullest.
Second we are building a customer oriented and digitally enabled business model aimed at reaching our aspirations and most the contract and retail spaces.
Third we have clear opportunities to accelerate profitable growth in each of our business segments and finally, we believe now is the right time to reinforce our commitment to our people our planet and to our communities in a more integrated and deliberate way than ever before.
I'd like to share a few highlights of our progress over the last quarter, our new digital platform to help our north American contract dealers visualize our product offerings across all of our brands remain an excellent adoption curve our dealer network users created over 50% more projects than last quarter with the new tool and that created over 3500 projects since it was launched to support their selling efforts.
As a next step in this rollout will expand this capability to the EMEA region by the end of the fiscal year.
This is just one of the ways that we are looking across our entire operation to ensure they are easy to do business with for our customers our dealers and our architect and design partners.
Our profitability improvement initiative continues to gain traction as one of the key drivers in our aim to accelerate profitable growth.
As we evaluate our progress to date, we're seeing greater potential for savings and are increasing our savings target.
Our original aim for 30 million to $40 million of gross savings has been revised to a target of 40 million to 45 million.
We expect to achieve this run rate by the end of fiscal 2020 and finished the first quarter with an annual run rate savings of $36 million.
As a reminder, in addition to supporting bottom line improvements. These savings are also aimed at helping fund growth initiatives and offsetting inflationary pressures such as Paris.
We have a long history of seeking to create a positive societal impact for our people planet and the communities that we serve while at the same time, creating value for our customers and our shareholders. As a result, we were encouraged by the recent business round table statement on the purpose of corporations to lead their companies for the benefit of all stakeholders.
We have a number of initiatives and working on around this priority. For example, we've been exploring the potential for a broader plan around reducing and ultimately eliminating our use of single use plastics across our entire organization as an initial step we've largely eliminated single use water bottles across our corporate offices.
As Kevin mentioned, John excuse joining us today to share more about our growth trajectory for the retail business.
So let me turn the call over to John to provide some additional background.
Thank you Andy.
With sales growth of over 10% last year and 12% this quarter. The retail business has been and continues to be a growth engine for Herman Miller.
Importantly, there are a number of initiatives that we believe will help continue that momentum.
First our new state of the Art distribution center in Batavia, Ohio was fully operational at the end of the first quarter.
While this transition has required short term investments the past couple of quarters, it better positions our business to provide enhanced service and reliability to our customers over the long term.
At the same time the license that we acquired last year for the rights to breaking the Hay design brand to North America is gaining traction after establishing a hey ecommerce site last year and opening the first two HAE studios in North America will be opening our third haste studio early this quarter, which will be located in Lincoln Park area of Chicago.
His product line has been an important contributor to our growing design within reach contract business as it's furniture designs are a great fit for the residential styles that more offices are including in their portfolio.
In addition to our early efforts, where the Hay brand. We opened three new design within reach studios in the fourth quarter of last year.
While still in the early days the studios represent promising locations for our brand and are off to a good start.
One area, where we've experienced pressure on our gross margin is related to net shipping costs. A major source of this pressure comes from growing consumer expectations that the products they purchase should come with free delivery.
Compounding. This issue is the fact that over the past several months, we've experienced increasing costs from freight providers.
To help address this we are currently piloting a range of shipping models, where we expect to gain important knowledge over the coming months about how to better position product and deliberate pricing for our space.
On the cost front, we are in the midst of evaluating strategic sourcing strategies and optimizing our outlet store footprint to minimize shipping costs related to return.
Finally, we have been building new capabilities across our team with recent additions to our sales and marketing leadership team, bringing fresh perspectives to pair with our existing knowledge of the market.
While we are partnering closely with our chief digital officer to build new digital capabilities, including initial work around optimizing our e-commerce platforms and mapping customer journeys with a goal of finding ways to make buying process as seamless as possible for our customers.
On the profitability side, our investments in the new distribution center ramping up pay and the initial drag on earnings from studios that have been opened less than a year and related pre opening costs or an estimated five and a half million dollars during the quarter.
Even after considering these short term investments our operating performance is not where we want it to be and we are laser focused on driving operating margin improvement in this business.
As we continue to lean into scaling the business, we see the opportunity over time for high single digit operating margins for our retail business at the same time I'm energized by the passion that our retail team brings each and every day to making authentic modern design accessible to our customers without retail overview I'll now turn the call over to Jeff for further discussion of our financial results in the quarter.
Thank you John good morning, everyone.
Consolidated net sales in the first quarter of $671 million were 7% above the same quarter last year on a GAAP basis and up 8% organically after adjusting for the impact of year over year changes in foreign currency rates.
New orders in the period of $677 million were 7% above last year.
Within our North America contract segment sales were $458 million in the first quarter, representing an increase of 9% from last year.
New orders were 468 million in the quarter up 10% over last year.
Order growth in North America was broad based across all project size categories and from a sector standpoint was led by business services information technology and the us federal government.
Partially offset by lower demand in health care and financial sectors.
Our international contract segment reported sales of $114 million in the quarter.
A decrease of 1% compared to last year on a reported basis and slightly above last year organically.
New orders of $117 million or 7% below the same quarter last year on a reported basis and 5% lower organically.
I think it's important to note that the international business faced challenging growth comparisons for the quarter.
To put this in perspective in the first quarter of last year, the international business posted organic sales and order growth of 22% and 14% respectively.
We believe this is important context for you to consider as you evaluate the performance of our international business. This quarter to be clear. This business has been a key contributor to our growth in recent years, both on the top and bottom line perspective, and tough comparisons aside it factors heavily into our strategy for driving continued growth in the future.
With that background lower year over year demand levels were experienced in the EMEA region as well as India, while we continue to see growth in the rest of Asia Pacific, Mexico and Brazil.
Our retail business segment reported sales in the quarter of $99 million, an increase of 12% from the same quarter last year.
New orders for the quarter of $92 million were 11% ahead of last year.
In sales growth for the quarter was primarily driven by growth from design within reach contract the Hay brand New studios and outlet stores.
As John mentioned earlier, the first quarter reflected investments in new studio growth, a new warehouse in launching the hey, Brad.
All of which are initiatives that we expect will support continued sales growth and improved operating margins as we move forward.
From a currency translation perspective, the general strengthening of the US dollar relative to year ago levels was a headwind to sales growth. This quarter, we estimate the translation impact from the year over year changes in currency rates had an unfavorable impact on consolidated net sales of approximately $2 million in the period.
Consolidated gross margins in the first quarter were 36.7%.
Which reflects an increase from 36% in the same quarter last year.
This gross margin expansion was driven by manufacturing leverage on higher production volumes.
Favorable price realization and lower steel costs, along with our ongoing profit improvement initiatives.
These benefit helped mitigate gross margin pressures at the consolidated level from tariffs and within our retail business from increased net freight expenses and transition costs related to the new distribution center.
Operating expenses in the first quarter of $184 million compared to $178 million in the same quarter last year.
The current quarter included $400000 of special charges related to the vesting of key employee incentive expenses associated directly with our CEO transition.
By comparison, we recorded special charges totaling $5 million in the first quarter last year.
Exclusive of these items the year over year increase in operating expenses of $11 million resulted mainly from higher variable selling expenses and costs in our retail business related to occupancy marketing and staffing for new retail studios and the launch of the Hay brand in North America.
Restructuring charges recorded in the first quarter of $1.8 million related to actions associated with our profit improvement initiatives, including an early retirement program initiated last quarter was in North America and facility consolidation projects in the UK in China.
On a GAAP basis, we reported operating earnings of $60 million in the quarter compared to operating earnings of $46 million in the year ago period.
Excluding restructuring and other special charges adjusted operating earnings this quarter were $62 million or 9.3% of sales.
And by comparison, we reported adjusted operating income of $52 million or 8.4% of sales in the first quarter last year.
And the effective tax rate for the quarter was 21%.
And then finally net earnings in the first quarter totaled $48 million or 81 cents per share on a diluted basis compared to $36 million or 60 cents per share in the same quarter a year ago.
Excluding the impact of restructuring and other special charges adjusted diluted earnings per share. This quarter totaled 84 cents compared to adjusted earnings of 69 cents per share in the first quarter of last year.
With that ill turn the call over to Kevin to give us an update on our cash flow and balance sheet.
Thanks, Jeff.
Before I review, our cash flow and balance sheet highlights, let me start with a brief overview of our recent refinancing transaction.
The effective on August 28, we refinanced our existing revolving credit facility as part of this transaction, we upsized, our revolver by $100 million from $400 million to $500 million and extended the maturity of the facility by five years to August of 2024.
After this transaction the available capacity in our facilities stood at $265 million at the end of the quarter.
With that background, let me move to commentary on the first quarter.
We ended the quarter with total cash and cash equivalents of $160 million, which was slightly higher than the cash on hand last corner.
Cash flows from operations in the first quarter were $53 million, reflecting an increase of 60% over the same quarter of last year.
The increased earnings were the primary driver of higher operating cash flows in the quarter.
Capital expenditures were $19 million in the quarter cash dividends paid in the quarter were $12 million as a reminder, last quarter, we announced an increase of 6% in our quarterly dividend rate that will be paid beginning in October .
This increase brings our expected annual payout level to approximately $49 million. We also continued our share repurchase program with repurchases of $8 million during the quarter.
We remain in compliance with all debt covenants and as of quarter end, our gross debt to EBITDA ratio was approximately 0.9 to one.
Given our current cash balance ongoing cash flow from operations and total borrowing capacity, we remain well positioned to meet the financing needs of our business moving forward.
With that I will turn the call back over to Jeff to cover our sales and earnings guidance for the second quarter of fiscal 2020.
Okay. Thank you Kevin.
We expect sales in the second quarter of fiscal 2020 to range between $685 million and $705 million.
The midpoint of this range implies an organic revenue increase of 7% compared to the same quarter last fiscal year.
We expect consolidated gross margin in the second quarter to range between 36.6 and 37.6%.
This midpoint gross margin forecast is 100 basis points higher than the second quarter of fiscal 2019.
Reflecting improved production leverage lower steel prices and net benefits from our ongoing profit improvement initiatives.
Operating expenses in the second quarter are expected to range between 189 and $193 million.
We anticipate earnings per share to be two to be between 85 cents and 89 cents per share.
In the period in our assumed effective tax rate is expected to be between 21% and 23%.
With that I'll turn the call over to the operator, and we'll take your questions.
Thank you, ladies and gentlemen to ask a question press. The Star then the one key on your Touchtone telephone to withdraw your question press the pound key.
Again to ask a question press star one.
Please stand by while we compile the culinary roster.
And our first question comes from Budd Bugatch with Raymond James Your line is open.
Good morning, Andy Good morning, Jeff Good morning, Kevin Congratulations on though.
Nice start to the fiscal year.
Couple of questions about.
Thank you.
Couple of questions if I could.
Let's talk a little bit about gross margin. It was most notable in terms of segments in the retail segment you addressed it.
Qualitatively and perhaps directionally, but so we get a little more clarity on that.
Some data on the impact of commodities tariffs.
What's the new distribution center transition cost you called out for what that looks like going forward.
For the next quarter or in the next couple of quarters.
Yes. This is Jeff I'll I'll I'll start John is here, so China chime in John with any color you have so.
And just to clarify by you want it you want just retail or do you want to get a sense for cost price pressures and and benefits for the consolidated group.
Both if I could have been we segment model that the company and we obviously like to carry their core liquids. So consolidated results yes.
Yes, So let me start with the consolidated numbers button. Then we can talk we can kind of dig into that a few comments on the on the retail segment. So for the quarter I'll talk year over year I'll, just give you a kind of a walk through of.
Some of the major drivers on gross margins all in all we were up about 70 basis points tariffs.
Tariff pressures on a gross basis of course this is before any of the actions that we've taken which are which will be I'll cover in some of the other categories here.
90 basis points of pressure year on year.
In the retail business, specifically the impact of the of the net freight pressures that were referenced on the prepared remarks about 50 basis points of pressure at the consolidated level.
The distribution center move by itself and John can can provide further color on this of course, that's probably another 40 basis points.
Year on year.
On the gross margin negative and then offsetting that we had this combination of profit improvement initiatives that we've talked a lot about.
Along with.
Some specific pricing actions that have been taken in the business accounted for about 210 basis points of benefit year on year.
And then steel and commodity prices also now a help to our gross margins about 40 basis points of benefit.
So I did my math right that should get you close.
So what are you guys seeing safety. This is I take your consolidated 250 of good guys and I heard 130 of bad news.
Once quantity.
What did I Miss.
Sarah royalty.
Absent bindi the other one of the negatives 40 of the.
Okay.
Right, Yes that Dave Let me just let me just walk you through a little more time here quick just so that we're all the same page tariffs of 90.
Pressure.
Freight related expenses in the retail business pressure year on year of about 50 basis points. The DC move within the retail business about 40 basis points.
Pricing and profit improvement initiatives collectively benefit year on year of about 210.
And steel and commodities account for another about 40 basis points of benefit.
Got you Okay. That's right I missed the 50 is as a separate item. Okay. That's that's very helpful and going forward, Jeff How do you think they play out.
What happens I think as you look forward.
Yes sure so.
Our guidance for the second quarter.
Implied kind of the following headline assumptions tariffs. We think are continue to be a pressure year on year about 60 basis points, we would estimate.
The freight pressures within the retail business. We think are on the same order of magnitude year on year, probably somewhere 50 to 60 basis points of pressure.
Pricing and profit initiatives.
Similar as well year on year, but I'd call. It may be 190 to 200 basis points of benefit our assumed.
Steel and commodities, we start to see a little bit more benefit from stealing commodity prices, mainly steel driven.
Just if you look at the directional.
Our the direction of the steel index, it's actually been drifting down and so we should see about 70 basis points of benefit next quarter and then other puts and takes we we are including mix by the way probably another 30 basis points of pressure. So all in I think our guide.
Implies about a 110 basis points of year over year improvement and then did you say that accordingly.
Correct. The DC move is largely largely done at this point in yen in Java, if you'd add anything to that at all any additional color to it was a huge undertaking them in one quarter, but we moved about 700 containers worth of merchandise. Besides the regular ongoing receive new goods coming in.
From the old facility into the new state of the art facility in Batavia, Ohio.
I was down there last week, it's up running and.
You know really will be a.
Positive going forward, where it was a drain during the quarter.
And so the delta for the transition costs were primarily the freight of moving of moving goods one from the other that's that don't repeat right. That's the that was the trip that's the nature of the cost.
That would be one of the elements. We also of course on a GAAP basis, we're paying double rent. So we are paying rent on the old facility and the new facility and just the cost of getting everything put away and into the new location sure, though all all the sub evolved with Utwo, but we are completely out of the old facility at this point and fully operational would love to have you seen at some point.
Out of the new facility.
And is there a delta in depreciation now this new facility is up and operational how does that work.
Yes, there's going to be some additional depreciation drag its been plus it's included in the guide I don't have that number off the top my head, it's going to be incremental.
A bit higher than the old as you would imagine.
Okay.
Just a couple of other questions I know of but I'll limit myself to say, yes.
Thanks.
The digital efforts of which is obviously of interest to many investors how is that working in the retail side could you give us some color of the mix of E. Commerce business. What are you are seeing.
Okay that makes sense DWR is both the retail business and ultimately may be some contracts can you give us some flavor as to how those so revenues and profitability will work because obviously the profitability is a major issue.
Yeah, Hey, Ben let me start off with a little bit on the digital transformation efforts and then I'll turn it over to John and we don't break out this business segment. So I'll say that weve ticked off a really large scale effort to upgrade our e-commerce experiences starting with documented customer journey improved functionality. Some of the best new visualization configuration capabilities and also expanding our e-commerce presence across brands and geographies and business pretty major undertaking and that is underway.
Were also on the contract side looking at continued adoption of MRL and will continue as I said in our prepared remarks.
And then internationally, we're also looking at launching.
She was suffering data analytics senior positions and data analytic capabilities, so along with the improved ecommerce.
Presentation, Enphase will also have a larger and much more capable data analytics.
Thank you back that out and then we are working any be testing right now for help with army how should we model when we evaluate at shipping freight and shipping revenue. We're testing a variety of things to determine what our next steps are going to be there and then also looking any pricing platform and product platforms, including all of our products into one database that we can easily access and across all of our brand and then looking at ways that we can price more quickly. So there's additional effort around E. Commerce. It is you know far reaching improving our customer experience, including our.
Be including our presence to the customer understanding our customer better and then there is also the IP backbone investment that were making around product and were making around how we interact with our dealers on the contract side of the business as far as the.
E Commerce business in retail versus the bricks and mortar side on the horse is growing evidence in every other retailer and a large rate and we continue to think that he will be a very very very important ecommerce presence. So we continue to expect to see growth in both of those areas and Jonathan when you add to that I would just say that we're looking.
For both quick wins and long term loans and so we're implementing at the end of this month a series of changes to the DWR Dot com.
Site first.
And then based upon success, there, we'll be rolling that out across our other platforms Herman Miller Dot Com, Hey, Dot com.
And then there's other projects that will take a little bit longer and as Andy mentioned.
Going to one Herman Miller, and being able to share of product information seamlessly across our businesses will be a huge advantage going forward.
Okay.
Sure others will get into more try to get more more specifics on the E. Com side just last from me Kevin you did talk about the new.
Revolver any changes to interest structure interest rate structure on any of that debt commitments see differential.
The rate differential.
Yes, the new deal so we upsized it by $100 million to provide more liquidity our interest grid approved improved a bit in a couple of spots.
We're at the spot were add on the grid it'll be roughly the same going forward.
From an interest expense perspective.
And anything on the commitment fees since you've upsized. It to you have the more interest expense from that.
The the amounts were somewhat similar to what we paid last time on a larger deal. So the basis points came down a bit so that'll that'll flow through at a pretty similar run rate.
Thank you very much good luck on the quarter and the rest of the year.
Thanks, Thanks, let me quickly.
Thank you and our next question comes from Steven Ramsey with Thompson Research. Your line is open.
Good morning.
Wanted to start with the.
Specialty.
You know the old specialty segment inclusion in North America, how that turned around in those units is going I mean, clearly good to see a strong result in the whole sector. When you include.
You know the old segment, and so just trying to get color on on the headwind of those segments and the benefit if there was improvement.
Hey, Stephen This is Jeff I'll start with a few comments and then and then certainly Andy join in.
So I want to be real careful hopefully you understand where we are reporting the business on the basis of the combined segment now so I'm not going to give a ton of detail on that on the individual businesses, what I will say is.
On the contract side.
You all of these business are largely contract focus.
And.
Those businesses are continuing to see collectively.
The kinds of growth rates that were generally speaking talking about in total so good good uplift in the majority of those businesses as you know when we prior to making the change we've talked a bit about this on past calls we have we have one of our subsidiaries as health care focused that.
It's actually seen pretty good topline growth.
In the last you know as we closed last fiscal year, but we were struggling a little bit with kind of getting that translate to bottom line profitability. Those that work is ongoing.
And and we are taking that.
That whole process very seriously and we've actually made some improvements there so I'm not going to give you a detailed color on each of those businesses, but I can tell you generally speaking.
The businesses reflect the kind of contract growth that we're reporting in total yes, I would say, we see nice growth across all the segments, but to add to that Stephen what we've also seen as we think about what Herman Miller and you bring all of these contract partners under one leader and one sales force is how we're showing it to the customer how wishing them today the community really simplified our credits we've made it easier for them to access many of these brands and in some cases I think builds awareness that we are all part of one group. So I think that piece of ease of operation efficiency is definitely showing up across the board.
Excellent and then I know this isnt the topic, maybe high level you can talk to.
Any any resistance to the pricing.
Getting pricing.
In recent months it seems from not necessarily peers, but various companies in different channels Some group.
The pricing.
As further tariffs are being implemented.
You know not none of these seem at this time.
Okay, Great and then.
In International just just thinking about on the top line was was it purely a comps issue or is there any fundamental slowing of demand there.
And then on the gross margin improvement with with the slight pullback in sales.
Is that just a function of mix or is that a function of pricing that you put through in the past.
Flowing through.
You know I became primarily comp if you look at the performance in international in Q1 of last year and our two year comps are still on the Twentyth, which we're pretty happy with we had some very large projects in our EMEA region last year. The one place, where we have seen slowdown which isn't a surprise in the UK and that's been happening a while with the Brexit uncertainty, we still see strong growth in Asia Pac and Tam and we have Oh I'm confident in our international businesses from a gross margin perspective, and Jeff Please add color to that.
We've had a lot of attention we've seen from our combination of our manufacturing facilities and online in Asia, and Thats really helped us to capture some and Chris profitability across the international region, as well and I would just say a shout out to the international team and our teams in general we've done an excellent job of managing operating expense and profitability. This quarter in the face of some really interesting challenge and so I think the team deserves credit for their ability to turn enough profit performance was declining sales.
Yes, Stephen this is great.
I think thats spot on the one little bit I'd add to that on the gross margin side is that the business now we're we're seeing for a long time that business just didnt have the volume running through the various operations to tell a similar leverage story as we would historically get in our North American manufacturing operations were seeing more volume run through the factory now Theyre ops teams and the amazing job and I think we are benefiting.
Leverage basis in a way that we haven't historically as well great.
Great. Thank you for the color.
Thanks, Kevin.
Thank you and our next question comes from Matt Mccall with Seaport Global Your line is open.
Okay.
Thank you good morning, everybody.
The main determinant.
I actually want to follow up on the Stevens questions. The Jeff you gave.
When you break down the bought about the different buckets of puts and takes.
Yes, 210 basis points from price and profit improvement what about just price did you have.
Right up to offset your cost.
If it wasn't inflation or the tariff impact where you price cost positive without the profit improvement efforts.
Yes, yes.
We were.
Okay, if I could follow that up with how much yet no.
That's why I am sorry, yes.
So what was the what was the price cost benefit and then.
When you think about the price cost outlook, just given what you said about steel was that turn into just the pricing side.
Yes, probably 100 basis points of the number I gave you net.
Net of the tariff impact.
And is that it so that the that was the the Q1 what about in the guide.
About the same order magnitude Matt.
Okay. Okay.
All right.
So maybe.
And you mentioned the comment the business round table I think that the national metric yesterday wasn't as encouraging and we've actually written from I think about some of the macro factors were watching that clearly you guys are seeing the impact of that can you talk of and it sounds like the pipeline is good so.
Can you talk about.
No why is the wide.
Why is that not more concerning doesn't sound like you're calling out any.
Any indications of concern from from your from your dealers or anything like that what wise. What do you think is driving the strength. Despite what appears to be a little bit of a moderation in the in the macro.
You know I think what we're still hearing anywhere I'm out with customers and Andy can you me all the time, we're still hearing as a war for talent is really contributing to people looking at their worst cases people understanding how they can provide pages that people want to work Oh, we aren't seeing a slowdown in our funnel looks good in pharma basis on a long term basis or Andy partners, even architectural billings have been down slightly if you look at the long term in the last six months at home and we are seeing indicators out there that are concerning class right. Now now obviously as everyone else is doing we're watching carefully but right now we really feel that work for talent, we really feel.
American companies and consumers are strong.
Jeff do you have now.
I think thats right exactly right.
Okay, Okay, and then I guess the.
Let's see.
The.
Okay, two more quick ones do you see in a.
Outlook it looks like there's a little de leveraging on a year over year basis implied if if if would there our math right is there anything you want to call out or explain there already but do our math wrong.
No I think you're right, Matt I think there's a couple of things.
Well number one we're off to a good start on the fiscal year. So expect in again this is year over year I assume your math is based on.
There's there's got to be some drag from incentive bonus.
Accruals, assuming we can keep the pace right.
That won't be earned if we don't if we don't it won't be paid we don't own it but but right now thats what the guide implies that's part of the answer I think in fairness to some of the some of this is Andy alluded to some of the investment we're making on various digital fronts. All actions that we think are mission critical to the strategic direction of the company some of that's going to require.
Some incremental investment and I think thats what.
Would represent the balance of what you're seeing largely yes for sure.
Okay, and then the last one.
The the take you took your targeted savings.
ER savings target up.
What drove that change what changed with your with your outlook.
Yeah, Matt This is Jeff again.
You kind of alluded to.
Pricing I think our pricing realization. His luck, it's been a bit better than we had earlier anticipated and as a result of that that really accounts for the majority of the difference.
Okay. So pricing is lumped them with the profit improvement efforts.
There are this is where a good that's why that's why I lump them together in my walk Matt because there are certain pricing actions that we've taken that I would I would classify kind of act outside of the of the specific profit.
Initiatives that we've been talking about but at the end of the day.
Some of our profit improvement initiatives have been very directly associated with price actions and so it's a little hard to draw the bright line in between the two weve somewhat considered them collectively and our internal.
And how we've operated the business internally, so thats why a lump them together, but yes. There is some in both in both buckets.
Okay got it all right. Thank you all.
Thanks.
Thank you and our next question comes from Greg Burns with Sidoti and company. Your line is open.
Good morning.
Just had a question about retail demand trends that we've seen that it looks like the comp the comparable brand sales of.
The growth there has slowed down a little bit.
So I just wanted to get your view on the outlook.
For growth in the.
The retail segment and if you think you can kind of maintain the current pace given that.
The comparable brand sales have been a bit lower than reported revenue growth. Thanks.
Hi, This is John Mcphee so.
One of the things with the deep Sea move was it slowed our deliveries during the quarter, which impacts future sales going forward right, we had to publish that.
Due to the transition our delivery times would be a little longer than than historically, they would have them and.
So we had some pressure.
There.
But overall I believe that the trend is positive.
And certainly having removed behind us will allow our team to.
Put a 100% of their focus back on selling.
So that should be positive going forward.
Okay, and then from a profitability perspective for that segment I know that the DC movies behind you. So maybe some of the duplicate costs are rolling off but what's your view on what's your profit outlook for that.
Segment of the business for the remainder of the year do you foresee that.
Getting back to positive operating earnings sometime this year. Thank you.
Hey, Greg Greg This is Jeff.
Yes, so so we outlined a number of things that we do that.
In our prepared remarks that that we feel are are.
Temporary prep cost pressures in the business among them, there's the kind of near term.
Items that are that are I think behind us related to the DC move there's some to some additional costs that I would characterize as they will be ongoing and we will ramp into.
Improved profitability as we begin to leverage them or we talked about investment in the launch of the Hay brand as an example, the effect of having six stores today that are that werent in place a year ago at this time and the.
Fairly well documented.
Data across our store portfolio would suggest that that takes a period of time for those stores to mature.
And so if you factor all of those out we think going forward. Our guide for Q2 first of all would imply something closer to breakeven operating margin for the for the quarter. So I'll just be clear on that but as we get into the back half of the year. We believe we start to see the ramp up of profitability against some of those investments were like closer to 3% to 5% in the back half will be as we kind of get toward Q4 op margins for that business.
And then you know our job is to to continue to ramp it beyond that and we do believe that that's possible going to take a little bit of time.
Okay, great. Thanks, that's helpful and then.
Are your are your dealers currently selling hey, do they have access to to sell those products yet.
Yeah, we are localized and several families of products throughout the first couple of quarters of the year and they have access to those products as well as a product that we came into restaurants restaurant, we're ramping it fails in here and our dealer network in North America, and then as we work towards expanding Hain will continue to have that same present in other countries in the world.
Okay, great and very strong.
Okay, great. Thanks, and then lastly.
You talked about the digital efforts on the retail side, but.
On the contract side what.
Percent of your dealers have adopted those new digital tools and maybe if you can just give us a little bit of color on.
The.
The effect. It has had on your orders like have you been have you seen an increase in your wallet share your dealers.
At the ones that have adopted the new digital tools. Thank you.
You know I can't speak to increasing wallet share at this point, but what I can say is that maybe you want to have adopted and the majority of our dealers have and will continue to its again its a gradual rollout dealer to dealer what we've heard from arguments over time is that were very complicated to work with and also that it takes a lot of time to visualize and specify our products. What we're hearing from them is that they're saving anywhere from 30% to 60% time, taking them that much less time to actually design and satisfy the products and that's helping them hairless designers uses the designers to have more effectively and spend more time with customers. So we anticipate we will see an increase in wallet share. We also anticipate.
We'll just see better interaction to their dealers and more time savings from that and Kevin would you address that.
No I think the point is we definitely hit in North America pretty good Cross section of the dealer base certified dealer network that type of thing I think that 3500 products projects that had been visualized using this new tool starts to show the adoption. It was up nicely sequentially from here from last quarter, but were still only a couple of quarters in sort of Andy's point. The key is freeing up time for our designers and salespeople to focus on the customer and spend time with them.
Okay. Thank you.
Thank you.
Thank you and I'm showing no further questions at this time I would like to turn the call back to.
Andy Owens for any closing remarks.
Great. Thanks, Catherine Thank you all for joining todays call. We will of course be back to you in December with another prime or something and I hope that you all have a great day, how do you feel.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now all disconnect.