MillerKnoll, Inc.

Good evening, and welcome to Miller-Knowles' 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, Senior Vice President Kevin Beltman.

Good evening. Thanks for joining us today. I'm joined by Andy Owen, Chief Executive Officer, and Jeff Stutz, Chief Financial Officer. Also available during the Q&A are John Michael, President of America's Contracts, and Debbie Probst, President of Global Retail. Before I turn the call over to Andy, please remember our safe harbor regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties, and other factors, which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release. The forward-looking statements are as of today and assume no obligation to update or supplement these statements. We may also refer to certain non-GAAP financial metrics, which are reconciled and described in our press release, posted on our investor relations website at millernull.com. With that, I'll turn the call over to Andy.

Thanks, Kevin. Good evening, everyone, and thanks again for joining the call. As Miller Knoll, we know that one of our strongest assets is our collective of design brands. offered across multiple channels to customer segments around the globe. Our second quarter results speak to the benefits of the strategic emphasis that we have placed on diversifying our business model over the past few years and the resilience of that model in shifting economic conditions. This strategic direction includes both the expansion of our global retail business to now over $1 billion in annual revenue and the combination of Herman Miller and Knoll, which creates even further opportunities to bring our collective of brands to new channels and geographies. We've led the way on industry consolidation with our acquisition of Null. This has created the opportunity to leverage our increased scale to capture synergies, further build capabilities, and refine processes and organizational structures to maximize efficiency and agility. Continued synergy opportunities ahead will help us further optimize our cost structures as we navigate softer order levels across our business segments. Across the globe, different regions are in varying phases of return to office, compounded by varying economic conditions and a general slowdown in the housing market. Our teams continue to focus on contract wins, retail success, and delivering on our commitment to our shareholders. In the America contract segment, we saw strong operating margin expansion over last year, while uncertain macroeconomic conditions pressured order levels for the quarter, and we saw customers take longer to make decisions and also take on smaller return to office projects. Our price increases and cost synergies have helped improve profitability. Our international contract and specialty segment delivered sales growth and meaningful operating margin expansion over last year. The international business complements the Americas with different market conditions, including a faster return to the office, an opportunity to capture new regional accounts. We've onboarded nearly 50 dealers to cross-sell the Millernal Collective of brands in Europe, and we'll emphasize Asia-Pacific, and Middle East dealer onboarding during the back half of this year. Similarly, our specialty businesses also contributed to sales growth for the quarter and offer further opportunities to expand in new markets and channels around the world. Turning to global retail, as I mentioned earlier, we're seeing a slowdown in the housing market, particularly in luxury. Despite this, our retail segment also contributed organic sales growth for the quarter. While orders were down overall, we finished the quarter by delivering our best cyber week on record, with an increase of 22% over last year. Investments in our digital capabilities, excellence in customer service and reliability, and strategic promotion management all helped to bolster this sales period. We'll continue to reach customers through our direct-to-consumer channels and have continued investment in technology, with more robust customer data and metrics coming online in the latter half of this year. These improvements will help us attract new customers and drive repeat business through our broader collective of brands and products. Turning to product, we continue to innovate, launching several collaborations across Hay, Meharam, and Null Textiles. Our collective of brands also pushed design boundaries with new launches, including Herman Miller's EEN shell chair with recycled materials, Geiger's wood chair, and Holly Hunt's new lighting fixtures. In addition, our newest performance gaming chair was launched, Phantom, in time for the holiday gift-giving season. We're attracting new customers with gaming, and we're working to further expand the gaming category globally. As Miller & Noll, we know we can do more with our brands and our associates. This quarter, we held our company-wide Day of Purpose, giving our employees a day out of the office to ensure they had time to vote in the U.S. elections and also give back in their communities around the world. Our associates held over 150 Day of Purpose events around the globe, bringing greater purpose and support to our commitment to better our local communities and our planet. We aim to serve as a model for the future of work, and this quarter our retail headquarters in Stamford, Connecticut received WELL certification at the platinum level, the highest level possible, alongside receiving the WELL Health Safety rating. This award is only given to facilities that go through rigorous performance testing in 10 different categories. I'm proud of our commitment to our associates and also to building spaces that promote wellness, inclusivity, and productivity. Despite uneasiness in the current macroeconomic environment, I remain confident in our ability to reach customers in a variety of channels and markets and to deliver further results through our innovative products, personal customer service, and dedicated associates and dealers. We continue to find synergy in our integration, leaning to meaningful cost savings and opportunities to maintain a strong balance sheet and cash flow. We'll remain flexible and nimble in this environment while continuing to focus on serving our customers' needs. With that, I pass the call over to Jeff.

Thanks, Andy, and good evening, everyone. Our results for the second quarter highlight the power of our diversified business model, which has helped to mitigate some of the pressures from the current macroeconomic environment. As we look forward, we will continue to focus on those things that we can control, providing solutions to our customers across multiple audiences, channels, and the regions that we serve. Now, turning to our results for the quarter, consolidated net sales in the second quarter were just under $1.1 billion, an increase of 4% on a reported basis and 8% organically compared to the same quarter last year. Consolidated orders of $1 billion were 12.5% below prior year levels on a reported basis and 9% lower organically. While partially due to the current economic uncertainty in our end markets, I think it's fair to say we also had a difficult prior year comparison due to pandemic-driven tent-up demand last year at this time. In the America's contract segment, sales in the second quarter were $530 million, an increase of 6% compared to the same period a year ago. Order levels in the second quarter decreased 17% to $474 million compared to the same quarter last year. The decline was due to the factors Andy mentioned earlier and included a particularly challenging prior year comparison. Positive price-cost dynamics and synergies contributed to a meaningful 560 basis point increase in adjusted operating margins compared to last year. Within our global retail segment, sales in the quarter were $272 million, a decrease of 3% compared to the same period last year on a reported basis and up 1% organically. New orders totaled $298 million in the second quarter. down 8% compared to the same quarter last year on a reported basis, and down 4% organically. As we expected coming into the quarter, we had some near-term inventory-related costs affect our operating margins as we worked through excess inventory from supply chain issues earlier this year. We expect retail profitability to steadily improve over the next two quarters and exiting the fiscal year with high single-digit operating margins. Turning to our international contract and specialty segment, Sales for the quarter totaled $265 million, reflecting an increase of 7% on a reported basis and up 15% organically. New orders in the second quarter of 242 million were down 7% year on year on a reported basis and essentially flat compared to last year organically. Strong order growth in India, South Korea, and the Middle East was balanced by softening in China, France, and Ireland. The international contract and specialty segment also delivered strong year-over-year profit improvement with an adjusted operating margin increase of 180 basis points. Consolidated gross margin in the quarter was 34.5%, which is 10 basis points higher than the same period last year on a reported basis. Adjusted gross margin declined 40 basis points compared to the comparable period last year. The decline in adjusted gross margin was primarily driven by inflationary pressures and the near-term elevated inventory-related costs for retail. and that was partially offset by further realization of price increases and synergy capture. Operating margin for the second quarter was 3.6%, and on an adjusted basis came in at about 6%, which was 20 basis points lower than the prior year. Higher sales and well-managed operating expenses helped partially mitigate the near-term pressures on gross margin. We reported diluted earnings per share of 21 cents in the quarter, and adjusted diluted earnings per share came in at 46 cents in the quarter. compared to 54 cents in the same period last year. Turning to the balance sheet, at the end of the second quarter, our liquidity position reflected cash on hand and availability on a revolving credit facility totaling $428 million. We generated $60 million of cash flow from operations during the quarter and ended the period with a net debt to EBITDA ratio of 2.8 times. Regarding our guidance for the third quarter, we expect sales to range between approximately $980 million and $1,020,000,000, and adjusted earnings per share to be between 40 and 46 cents. This forecast contemplates the relative seasonal slowdown in factory production that we normally experience around the holiday period and in the month of January. As announced last quarter, we're also proactively taking additional steps to improve our near-term profit and cash flow outlook as we navigate the current macroeconomic environment. As a result of these actions, we expect to realize annualized expense reductions between 30 and 35 million dollars. These savings begin gaining traction during the third quarter and will be more fully realized in the fourth quarter of this fiscal year. To close, we have a strong collective of brands and a unique and diversified business model that provides resilience for our business going forward as we navigate the current economic climate. And with those opening remarks, we'll turn the call over to the operator and take your questions.

Thank you. If you would like to ask a question today, press star followed by the number one on your telephone keypad. We ask today that you limit yourself to one question per person and we invite you to rejoin the queue with a second question. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Steven Ramsey with Thompson Research. Your line is now open.

Hi, good evening. Maybe a couple of questions to start with on the retail segment, these inventory issues being at peak challenging points right now. Maybe can you talk through kind of why that is and if it's resolved by the end of the fiscal year? You see it being an improving point, but maybe the improvement drags into FY24. Yeah.

Hi, Steven. Thanks for the question. Yeah, you know, as we said in our last call, as most retailers experienced, we had such high demand and such a difficult supply chain going into this quarter that we had built up our inventory to compensate for that. And demand dropped off pretty rapidly. So we were faced this quarter with moving through some of that inventory buildup that we had put in place, a sort of safety stock to get us through what we thought would be much higher demand. That inventory came with much higher storage costs, much higher freight costs. And so to the retail team's credit, We really did experience an amazing November, a great cyber week, as I outlined before. So we really leaned into a promotional strategy that was not aggressive, but really coupled with the desirability of our product helped us move through a lot more of that cost-weighted inventory this quarter than we had anticipated. Based on that, we expect the beginning of this quarter, we'll see a little bit of that still shaking through, but we will see in Q3, that dissipate down to nothing, and in Q4, that will be gone. So back to our original point, we should see single-digit operating margins and the high single digits by the time we exit the quarter. So no, it will not continue through the rest of the year.

Okay, helpful, helpful. And then maybe can you go through the order strength picking up in the retail segment? Maybe it was covered in what you said there, Andy, but if there's anything additional on retail order strength in the quarter.

Yeah, you know, I think orders have softened in the residential home furnishings market. I think a lot of that is tied to macroeconomic uncertainty, Stephen. I think also with home sales slowing down, I think we'll continue to see a softening in demand. But I think we captured more than our fair share of the market with how we positioned ourselves in the quarter, and I think we're outpacing our competition. Debbie, I don't know, Debbie from Retail is on, would you like to add anything to the order trend?

I think beyond the trend we experienced during cyber driven by our agile and personalized approach to promotions, coming out of that, given the strong acquisition we had during that time period, we have more momentum in our business now. And so the trends coming out of cyber are stronger than the order trends we had going into that period.

helpful.

And then last question for me, a peer of yours recently talking about a lower total addressable market in U.S. core office furnishings. I guess, how do you feel about that perspective? If you do think the market over the next few years maybe is lower than prior peaks, what do you need to do in various verticals or internal strategies to reach prior sales and profitability levels for yourself. Thanks.

Yeah, you know, I don't know if I can predict the future, but I would say, Stephen, as we looked several years ago at what was happening in the office kind of workplace, we saw a hybrid coming. It's been coming for the better part of a decade. This is the main reason why we acquired Knoll when We believed that the industry would consolidate and we believed that becoming one company would actually be a much better strategic position to be in. So we can capture the synergies. We can capture the strength of both of us as one. In addition to that, we really worked hard to diversify our business model. So we have a strong and growing billion dollar retail business. We have multiple channels and new products that we can explore in the residential side of our business, as well as our digital forays into not only contract, but retail. So when you look at our business model with the B2B and B2C side, as well as really pretty extensive international expansion that we can pursue, which has been a very profitable and strong business for us. We feel that we are kind of one of a kind in our industry and that we really have set ourselves up to win.

Excellent. Thank you.

Your next question comes from the line of Ruben Garner with Benchmark. Your line is now open.

Thanks. Good evening, everybody. Hey, Ruben.

Can we talk about the progression of order patterns in North America through the quarter and then what you're seeing of late? Has there been any noticeable change in either direction after the soft patch kind of hit earlier in the year?

Hey, Ruben. This is Jeff. Yeah, let me start and then I'll open it up for John to add any color if you have anything to add. Maybe start with a big, important caveat. One of the things you've got to bear in mind is that last year in January, we put in place a 10% list price increase in the contract business in North America. And as you probably know just from your history, at least for our business, that might be the single largest ever price increase, certainly in my time with the business. So that pulled forward some order activity into the month of December. So you've got a bit of a, right there, you've got a bit of a non-comparable activity period. But in intra-quarter, in the second quarter, we saw things kind of started off kind of flattish and then were somewhat consistently down in October and November to get us to that full quarter down, I think, 16% organically in the Americas segment. And then as we've moved into the early part of Q3, it really hasn't moved too far off of that, albeit a year ago we had particularly strong order entry levels. And I don't know, John, if you want to add any color. Feel free.

I think that's a good summary, Jeff. I would say if you look, you know, we're only two weeks, obviously, into the quarter, but even the last few days we've actually had some of the best days we've had since the start of the quarter. So I think the patterns are bouncing around a little bit, as expected this time of year, but we're seeing, continue to see a fair amount of activity.

Got it. That's very helpful. And then on the same kind of progression type question, on the price cost and margin side, can you talk about where price cost kind of stands today and what kind of expectation is embedded in the guidance for next quarter and when you think you'll kind of get back to whether it's neutral on a dollars basis or back to neutral on a margin basis, Jeff?

Sure, Ruben.

Yeah, so for the quarter, year on year, I would say if I gather all the buckets that I think would fit into your category of price cost, we had a net positive year on year to the tune of about 160 basis points. And I can break that out for you if you'd like. In terms of just net price increase flow through at the consolidated level, we had about 350 basis points of net benefit, which, you know, at long last, we're seeing some momentum pick up on the margin front, particularly on the contract side of the business, which we were very encouraged by. Now, obviously, we're still comping against elevated commodity costs from a year ago, so that drove about 100 basis points of year-on-year margin pressure still. It's still a little bit of a mixed picture, but I'd say in general we're feeling like the trend is in our favor from an input cost perspective as we move forward. Anything can happen, but based on kind of our experience throughout the quarter, that feels like it's actually perhaps a tailwind going forward. Labor and overhead costs were also a bit elevated against last year. You can just think of things like all the wage inflation that we've experienced over the last year. That was about a 60 basis point negative on margins. And then freight and transportation year on year was down about 30 basis points. When you net all those together, that's cost price of about 160 basis points positive. And then the balance to get to the kind of the full quarter gross margin, you had some adverse product and channel mix as well as those retail inventory costs that largely hit us in Q2, a little bit in Q3 going forward. So let me pause there. That's kind of a walk on the Q2 cost price picture.

Yeah, no, that's helpful, Jeff. And if you wouldn't mind, kind of like it doesn't have to be line or piece by piece, but what kind of high level are you expecting for the third quarter?

yeah yeah i won't go quite as granular but i will say the guide implies or our assumption is that sequentially going from q2 to q3 there's going to be some incremental uh positive benefit from net pricing uh somewhere on around 50 basis points it would be my general expectation and i think commodities should flip to a positive uh now the one the one negative that we have to acknowledge is that with order pacing being a bit depressed in Q2, that's going to have a negative effect on our production leverage in Q3, which, as you know, tends to be the case anyway sequentially from Q2 to Q3 in this business. So that'll be a bit of a headwind from a margin perspective. And then you're going to get the sequential benefit of those inventory-related costs rolling off out of the retail business. So that's kind of the big picture expectation.

Okay. And I'm going to sneak one more in if that's all right on the retail side. So just to be clear on the margin, so high single digit margin exiting your fiscal year, is that a normalized go forward run rate to use at this kind of volume level? I think in the past there was some higher targets thrown out there? Are those targets based on maybe what the previous volume assumptions were? Can you just kind of walk us through how you're thinking about that as we get into your next fiscal year and beyond?

Yeah, no, I don't think they're normalized, Ruben. I still think there's tons of opportunity for upside here. And as you know, as you can have been with us for all these years, the retail team has really been working and investing to build up the infrastructure of this business to support what is essentially a business that's doubled in size over the last 24 months. So when you think about fulfillment capability, digital capability, customer data capability, all those things are schooling up in the background, which will enable us to make faster decisions, move more quickly, get product to market more quickly. So we see expansion going forward. Debbie, what would you add to that?

I would agree. I think there's continued OPEX improvement as we bring some of those investments to fruition and start to leverage them and continued revenue upside opportunities that will help us leverage that OPEX in a better way.

And also, Ruben, as you think about the bringing together of the two companies, we have opportunity on the null side specifically in retail because it is one of our largest brands in our retail business. to really get more efficient with margin there. So there's several things pulling up the background around bringing these companies together that will improve the margin picture as well as operating income.

Thank you so much. Happy holidays and good luck in the new year. And you guys stay safe. I know you've got some snow headed your way, but stay safe and enjoy the holidays.

Thanks, Truman. You too. Your next question comes from the line of Greg Burns with Sidoti and Company. Your line is now open.

Greg Burns Yes. Can you just talk about the relative strength in the international segment? What's driving that relative to maybe North America? And then what are some of the growth opportunities that you have internationally? Thanks.

I think there's a few things, and I'll invite Jeff to add in here. But I think internationally across the board, we in some cases never saw a leaving of the office, and in most cases we've seen a much faster return to office. So that kind of normalcy of how people are working and have worked hasn't really changed internationally. On top of that, our business is a little bit more nascent, and it is very diversified. So there's so many different, as you know, we all know, regions and things that are happening across Europe, and whether you're talking about southern Europe or mainland Europe. So we really do... When we have a business trend that is strong in one part of international, we may have one that's weaker in another. So I think that diversity is really, really important, coupled with the fact that we still have growth opportunity. You know, we have a dealer network that is capable, but we could actually still grow. So there's quite a few things that are happening in international. What would you add, John?

I agree with all that. I think that geographic diversity helps us tremendously. You know, we talk about this. And sometimes it's easy to forget that you're talking about massive distances and varied geographies and fragmented markets that all behave and act a little bit differently. And so when one is down, we're at a scale now where we benefit where another one might be stronger. We've certainly seen that now for the past several years. Andy, your point on a white space, I think there's opportunity to grow into spaces and markets where we simply just don't have the presence or even the dealer presence to to really capitalize on projects. And we've had a big focus on that for a number of years. The other thing that I might mention, even pre-COVID, one of the biggest themes in the international business was this notion that companies were, it was a fierce battle for talent in a lot of these businesses. And that's been true in North America as well. But I think one of the key differences are that so many of the customers in some of these regions had always kind of opted for a lower cost facility type of a solution. And when that war for talent really began to heat up, I think there was a real recognition on the part of first global multinationals and then ultimately localized companies that investing in spaces was a strategic way of attracting talent. And I think that continues even through COVID. So that would be the other bit that I would add.

So diversity, market share, ability to grow. And I would also say with the acquisition of Knoll, we've missed in major markets in Europe and the Middle East the ability to really bring a much stronger ancillary collection. And now with Knoll, not only do we have manufacturing in Italy, but we have the ability to bring that to a wider selection of dealers.

Okay, great. Thank you.

Your next question comes from the line of Rex Henderson with Water Tower Research. Your line is now open. Rex Henderson Good afternoon and thanks for taking my questions.

I want to quickly return to the question about the retail freight costs and the impact on gross margins there. First of all, it sounds to me like any of the issues that you once had in terms of demurrage and storage costs at the ports has been now solved, that that's been resolved, and now it's just a matter of working that inventory through the system. Is that what I'm hearing? Yes, that's absolutely correct. Okay. And can you quantify for the quarter what that impact of those freight costs were this quarter? Can you help us kind of understand what might have been excluding the impact of that?

We sure can.

Sure, Rex.

So the cost that we're referring to, if you think about it, I mean, there's a number of factors there, but they all fit in that inventory handling and storage-related cost, including the demurrage fees that you referred to. That was meaningful. It was to the tune of about $15 million in the full quarter. Okay.

That's very helpful. The other question I wanted to address was, particularly in the America segment, revenues or sales have been running ahead of order levels, which means you're working down backlog. How much longer can you continue to do that before sales and order levels start to match up more closely?

Yeah, Rex, so this is Jeff and John. give your perspective if you'd like to add. I would tell you that you are absolutely right. We have had an elevated backlog really across all of our segments through really all of last year, but the majority of last fiscal year and in through the Q1 and really through Q2. So to your point, we've been eating into backlog. The America's backlog is down year on year about 21%, stands at about $456 million, I think, at the end of Q2. I think we're very close to nearing what I would call a normalized backlog level for this business. I expect that our revenue picture going forward is nearing a more historic relationship to the order trends that we're seeing in a quarter. John, feel free to add to that.

I totally agree, Jeff. I think I know that. The reduction in the backlog is to some degree related to order levels, but it's also production and efficiency in the plants and lead times coming down. So the throughput is that much better, which is obviously bringing more to an equilibrium from a production level. Okay.

So there's good news and bad news there. But thanks. I appreciate that. It sounds like you are now kind of at the inflection point where you get to more historic relationships between orders, backlog, and sales. Is that right?

Yeah, I think we're getting much closer to that, Rex. Okay.

You can look at the last elevated backlog and say that that was more bad news because we had more disappointed customers with production and supply chain issues. So I think getting to a more normalized level is actually better news.

Okay, very good. Thanks for your call.

There are no further questions. We turn the floor back to President and CEO, Andy Owen, for closing remarks.

Thanks, you guys. I'd really like to thank everyone again for joining us on today's call. In closing, we are so proud of the resilience demonstrated by our collective of brands and the progress we're making for our innovation and also product innovation. We really appreciate your continued interest in Miller Knoll, and we look forward to updating you again next quarter. On behalf of all of us here, I want to wish you and your families a wonderful and restful holiday season.

This concludes today's conference call. Thank you for attending. You may now disconnect. you Bye. Thank you. Good evening, and welcome to Miller Knowles' 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, Senior Vice President Kevin Beltman.

Good evening. Thanks for joining us today. I'm joined by Annie Owen, Chief Executive Officer, and Jeff Stutz, Chief Financial Officer. Also available during the Q&A are John Michael, President of America's Contracts, and Debbie Probst, President of Global Retail. Before I turn the call over to Andy, please remember regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties, and other factors, which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release. The forward-looking statements are as of today and assume no obligation to update or supplement these statements. We may also refer to certain non-GAAP financial metrics, which are reconciled and described in our press release, posted on our investor relations website at millernull.com. With that, I'll turn the call over to Andy.

Thanks, Kevin. Good evening, everyone, and thanks again for joining the call. As Miller Knoll, we know that one of our strongest assets is our collective of design brands. offered across multiple channels to customer segments around the globe. Our second quarter results speak to the benefits of the strategic emphasis that we have placed on diversifying our business model over the past few years and the resilience of that model in shifting economic conditions. This strategic direction includes both the expansion of our global retail business to now over $1 billion in annual revenue and the combination of Herman Miller and Knoll, which creates even further opportunities to bring our collective of brands to new channels and geographies. We've led the way on industry consolidation with our acquisition of Knoll. This has created the opportunity to leverage our increased scale to capture synergies, further build capabilities, and refine processes and organizational structures to maximize efficiency and agility. Continued synergy opportunities ahead will help us further optimize our cost structures as we navigate softer order levels across our business segments. Across the globe, different regions are in varying phases of return to office, compounded by varying economic conditions and a general slowdown in the housing market. Our teams continue to focus on contract wins, retail success, and delivering on our commitment to our shareholders. In the America contract segment, we saw strong operating margin expansion over last year, while uncertain macroeconomic conditions pressured order levels for the quarter, and we saw customers take longer to make decisions and also take on smaller return to office projects. Our price increases and cost synergies have helped improve profitability. Our international contract and specialty segment delivered sales growth and meaningful operating margin expansion over last year. The international business complements the Americas with different market conditions, including a faster return to the office, an opportunity to capture new regional accounts. We've onboarded nearly 50 dealers to cross-sell the Millernal Collective of brands in Europe, and we'll emphasize Asia Pacific, and Middle East dealer onboarding during the back half of this year. Similarly, our specialty businesses also contributed to sales growth for the quarter and offer further opportunities to expand in new markets and channels around the world. Turning to global retail, as I mentioned earlier, we're seeing a slowdown in the housing market, particularly in luxury. Despite this, our retail segment also contributed organic sales growth for the quarter. While orders were down overall, we finished the quarter by delivering our best cyber week on record, with an increase of 22% over last year. Investments in our digital capabilities, excellence in customer service and reliability, and strategic promotion management all helped to bolster this sales period. We'll continue to reach customers through our direct-to-consumer channels and have continued investment in technology, with more robust customer data and metrics coming online in the latter half of this year. These improvements will help us attract new customers and drive repeat business through our broader collective of brands and products. Turning to product, we continue to innovate, launching several collaborations across hay, maharam, and null textiles. Our collective of brands also pushed to line boundaries with new launches, including Herman Miller's EEN shell chair with recycled materials, Geiger's wood chair, and Holly Hunt's new lighting fixtures. In addition, our newest performance gaming chair was launched, Phantom, in time for the holiday gift-giving season. We're attracting new customers with gaming, and we're working to further expand the gaming category globally. As Miller & Noll, we know we can do more with our brands and our associates. This quarter, we held our company-wide Day of Purpose, giving our employees a day out of the office to ensure they had time to vote in the U.S. elections and also give back in their communities around the world. Our associates held over 150 Day of Purpose events around the globe, bringing greater purpose and support to our commitment to better our local communities and our planet. We aim to serve as a model for the future of work, and this quarter our retail headquarters in Stamford, Connecticut received WELL certification at the platinum level, the highest level possible, alongside receiving the WELL Health Safety rating. This award is only given to facilities that go through rigorous performance testing in 10 different categories. I'm proud of our commitment to our associates and also to building spaces that promote wellness, inclusivity, and productivity. Despite uneasiness in the current macroeconomic environment, I remain confident in our ability to reach customers in a variety of channels and markets and to deliver further results through our innovative products, personal customer service, and dedicated associates and dealers. We continue to find synergy in our integration, leaning to meaningful cost savings and opportunities to maintain a strong balance sheet and cash flow. We'll remain flexible and nimble in this environment while continuing to focus on serving our customers' needs. With that, I pass the call over to Jeff.

Thanks, Andy, and good evening, everyone. Our results for the second quarter highlight the power of our diversified business model, which has helped to mitigate some of the pressures from the current macroeconomic environment. As we look forward, we will continue to focus on those things that we can control, providing solutions to our customers across multiple audiences, channels, and the regions that we serve. Now, turning to our results for the quarter, consolidated net sales in the second quarter were just under $1.1 billion, an increase of 4% on a reported basis and 8% organically compared to the same quarter last year. Consolidated orders of $1 billion were 12.5% below prior year levels on a reported basis and 9% lower organically. While partially due to the current economic uncertainty in our end markets, I think it's fair to say we also had a difficult prior year comparison due to pandemic-driven tent-up demand last year at this time In the America's contract segment, sales in the second quarter were $530 million, an increase of 6% compared to the same period a year ago. Order levels in the second quarter decreased 17% to $474 million compared to the same quarter last year. The decline was due to the factors Andy mentioned earlier and included a particularly challenging prior year comparison. Positive price cost dynamics and synergies contributed to a meaningful 560 basis point increase in adjusted operating margins compared to last year. Within our global retail segment, sales in the quarter were $272 million, a decrease of 3% compared to the same period last year on a reported basis and up 1% organically. New orders totaled $298 million in the second quarter. down 8% compared to the same quarter last year on a reported basis, and down 4% organically. As we expected coming into the quarter, we had some near-term inventory-related costs affect our operating margins as we worked through excess inventory from supply chain issues earlier this year. We expect retail profitability to steadily improve over the next two quarters and exiting the fiscal year with high single-digit operating margins. Turning to our international contract and specialty segment, Sales for the quarter totaled $265 million, reflecting an increase of 7% on a reported basis and up 15% organically. New orders in the second quarter of 242 million were down 7% year on year on a reported basis and essentially flat compared to last year organically. Strong order growth in India, South Korea, and the Middle East was balanced by softening in China, France, and Ireland. The international contract and specialty segment also delivered strong year-over-year profit improvement with an adjusted operating margin increase of 180 basis points. Consolidated gross margin in the quarter was 34.5%, which is 10 basis points higher than the same period last year on a reported basis. Adjusted gross margin declined 40 basis points compared to the comparable period last year. The decline in adjusted gross margin was primarily driven by inflationary pressures and the near-term elevated inventory-related costs for retail. And that was partially offset by further realization of price increases and synergy capture. Operating margin for the second quarter was 3.6%, and on an adjusted basis came in at about 6%, which was 20 basis points lower than the prior year. Higher sales and well-managed operating expenses helped partially mitigate the near-term pressures on gross margin. We reported diluted earnings per share of 21 cents in the quarter, and adjusted diluted earnings per share came in at 46 cents in the quarter. compared to 54 cents in the same period last year. Turning to the balance sheet, at the end of the second quarter, our liquidity position reflected cash on hand and availability on a revolving credit facility totaling $428 million. We generated $60 million of cash flow from operations during the quarter and ended the period with a net debt to EBITDA ratio of 2.8 times. Regarding our guidance for the third quarter, we expect sales to range between approximately $980 million and $1,020,000,000, and adjusted earnings per share to be between 40 and 46 cents. This forecast contemplates the relative seasonal slowdown in factory production that we normally experience around the holiday period and in the month of January. As announced last quarter, we're also proactively taking additional steps to improve our near-term profit and cash flow outlook as we navigate the current macroeconomic environment. As a result of these actions, we expect to realize annualized expense reductions between 30 and 35 million dollars. These savings begin gaining traction during the third quarter and will be more fully realized in the fourth quarter of this fiscal year. To close, we have a strong collective of brands and a unique and diversified business model that provides resilience for our business going forward as we navigate the current economic climate. And with those opening remarks, we'll turn the call over to the operator and take your questions.

Thank you. If you would like to ask a question today, press star followed by the number one on your telephone keypad. We ask today that you limit yourself to one question per person, and we invite you to rejoin the queue with a second question. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Steven Ramsey with Thompson Research. Your line is now open.

Hi, good evening. Maybe a couple of questions to start with on the retail segment, these inventory issues being at peak challenging points right now. Maybe can you talk through kind of why that is and if it's resolved by the end of the fiscal year or you see it being an improving point but maybe the improvement drags into FY24? Yeah.

Hi, Steven. Thanks for the question. Yeah, you know, as we said in our last call, as most retailers experienced, we had such high demand and such a difficult supply chain going into this quarter that we had built up our inventory to compensate for that, and demand dropped off pretty rapidly. So we were faced this quarter with moving through some of that inventory buildup that we had put in place as sort of safety stock to get us through what we thought would be much higher demand. That inventory came with much higher storage costs, much higher freight costs. And so to the retail team's credit, We really did experience an amazing November, a great cyber week, as I outlined before. So we really leaned into a promotional strategy that was not aggressive, but really coupled with the desirability of our product helped us move through a lot more of that cost-weighted inventory this quarter than we had anticipated. Based on that, we expect the beginning of this quarter, we'll see a little bit of that still shaking through, but we will see in Q3, that dissipate down to nothing, and in Q4, that will be gone. So back to our original point, we should see single-digit operating margins and the high single digits by the time we exit the quarter. So no, it will not continue through the rest of the year.

Okay, helpful, helpful. And then maybe can you go through the order strength picking up in the retail segment? Maybe it was covered in what you said there, Andy, but if there's anything additional on retail order strength in the quarter.

Yeah, you know, I think orders have softened in the residential home furnishings market. I think a lot of that is tied to macroeconomic uncertainty, Stephen. I think also with home sales slowing down, I think we'll continue to see a softening in demand. But I think we captured more than our fair share of the market with how we positioned ourselves in the quarter, and I think we're outpacing our competition. Debbie, I don't know, Debbie from Retail is on, would you like to add anything to the order trend?

I think beyond the trend we experienced during cyber driven by our agile and personalized approach to promotions, coming out of that, given the strong acquisition we had during that time period, we have more momentum in our business now. And so the trends coming out of cyber are stronger than the order trends we had going into that period.

helpful.

And then last question for me, a peer of yours recently talking about a lower total addressable market in U.S. core office furnishings. I guess, how do you feel about that perspective? If you do think the market over the next few years maybe is lower than prior peaks, what do you need to do in various verticals or internal strategies to reach prior sales and profitability levels for yourself. Thanks.

Yeah, you know, I don't know if I can predict the future, but I would say, Stephen, as we looked several years ago at what was happening in the office kind of workplace, we saw a hybrid coming. It's been coming for the better part of a decade. This is the main reason why we acquired Knoll. When We believed that the industry would consolidate, and we believed that becoming one company would actually be a much better strategic position to be in so we can capture the synergies, we can capture the strength of both of us as one. In addition to that, we really worked hard to diversify our business model. So we have a strong and growing billion-dollar retail business. We have multiple channels and new products that we can explore in the residential side of our business, as well as our digital forays into not only contract but retail. So when you look at our business model with the B2B and B2C side, as well as really pretty extensive international expansion that we can pursue, which has been a very profitable and strong business for us. We feel that we are kind of one of a kind in our industry and that we really have set ourselves up to win.

Excellent. Thank you.

Your next question comes from the line of Ruben Garner with Benchmark. Your line is now open.

Thanks. Good evening, everybody.

Can we talk about the progression of order patterns in North America through the quarter and then what you're seeing of late? Has there been any noticeable change in either direction after the soft patch kind of hit earlier in the year?

Hey Ruben, this is Jeff. Yeah, let me start and then I'll open it up for John to add any color if you have anything to add. Maybe start with a big, important caveat. One of the things you've got to bear in mind is that last year in January, we put in place a 10% list price increase in the contract business in North America. And as you probably know, just from your history, at least for our business, that might be the single largest ever price increase, certainly in my time with the business. So that pulled forward some order activity into the month of December. So you've got a bit of a, right there, you've got a bit of a non-comparable activity period. But in intra-quarter, in the second quarter, we saw things kind of started off kind of flattish and then were somewhat consistently down in October and November to get us to that full quarter down, I think, 16% organically in the Americas segment. And then as we've moved into the early part of Q3, it really hasn't moved too far off of that, albeit a year ago we had particularly strong order entry levels. And I don't know, John, if you want to add any color. Feel free.

I think that's a good summary, Jeff. I would say if you look, you know, we're only two weeks, obviously, into the quarter, but even the last few days we've actually had some of the best days we've had since the start of the quarter. So I think the patterns are bouncing around a little bit as expected this time of year, but we're seeing, continue to see a fair amount of activity.

Got it. That's very helpful. And then on the same kind of progression type question and on the price cost and margin side, can you talk about where price cost kind of stands today and what kind of expectation is embedded in the guidance for next quarter and when you think you'll kind of get back to whether it's neutral on a dollars basis or back to neutral on a margin basis, Jeff?

Sure, Ruben.

Yeah, so for the quarter, year on year, I would say if I gather all the buckets that I think would fit into your category of price cost, we had a net positive year-on-year to the tune of about 160 basis points. And I can break that out for you if you'd like. In terms of just net price increase flow through at the consolidated level, we had about 350 basis points of net benefit, which, you know, at long last, we're seeing some momentum pick up on the margin front, particularly on the contract side of the business, which we were very encouraged by. Now, obviously, we're still comping against elevated commodity costs from a year ago. So that drove about 100 basis points of year-on-year margin pressure still. It's still a little bit of a mixed picture, but I'd say in general we're feeling like the trend is in our favor from an input cost perspective as we move forward. Anything can happen, but based on kind of our experience throughout the quarter, that feels like it's actually perhaps a tailwind going forward. Labor and overhead costs were also a bit elevated against last year. You can just think of things like all the wage inflation that we've experienced over the last year. That was about a 60 basis point negative on margins. And then freight and transportation year on year was down about 30 basis points. When you net all those together, that's cost price of about 160 basis points positive. And then the balance to get to the kind of the full quarter gross margin, you had some adverse product and channel mix as well as those retail inventory costs that largely hit us in Q2, a little bit in Q3 going forward. So let me pause there. That's kind of the walk on the Q2 cost-price picture.

Yeah, no, that's helpful, Jeff. And if you wouldn't mind, it doesn't have to be piece by piece, but what kind of high level are you expecting for the third quarter?

Yeah, I won't go quite as granular, but I will say the guide implies, or our assumption is, that sequentially going from Q2 to Q3, there's going to be some incremental benefit from net pricing. Somewhere on around 50 basis points would be my general expectation. And I think commodities should flip to a positive. Now, the one negative is, that we have to acknowledge is that with order pacing being a bit depressed in Q2, that's going to have a negative effect on our production leverage in Q3, which, as you know, tends to be the case anyway sequentially from Q2 to Q3 in this business. So that'll be a bit of a headwind from a margin perspective. And then you're going to get the sequential benefit of those inventory-related costs rolling off out of the retail business. So that's kind of the big picture expectation.

Okay. And I'm going to sneak one more in if that's all right on the retail side. So just to be clear on the margin, so high single digit margin exiting your fiscal year, is that a normalized go forward run rate to use at this kind of volume level? I think in the past there was some higher targets thrown out there? Are those targets based on maybe what the previous volume assumptions were? Can you just kind of walk us through how you're thinking about that as we get into your next fiscal year and beyond?

Yeah, no, I don't think they're normalized, Ruben. I still think there's tons of opportunity for upside here. And as you know, as you can have been with us for all these years, the retail team has really been working and investing to build up the infrastructure of this business to support what is essentially a business that's doubled in size over the last 24 months. So when you think about fulfillment capability, digital capability, customer data capability, all those things are schooling up in the background, which will enable us to make faster decisions, move more quickly, get product to market more quickly. So we see expansion going forward. Debbie, what would you add to that?

I would agree. I think there's continued OPEX improvement as we bring some of those investments to fruition and start to leverage them and continued revenue upside opportunities that will help us leverage that OPEX in a better way.

And also, Ruben, as you think about the bringing together of the two companies, we have opportunity on the null side specifically in retail because it is one of our largest brands in our retail business. to really get more efficient with margin there. So there's several things pulling up the background around bringing these companies together that will improve the margin picture as well as operating income.

Thank you so much. Happy holidays and good luck in the new year. And you guys stay safe. I know you've got some snow headed your way, but stay safe and enjoy the holidays.

Thanks, Truman. You too. Your next question comes from the line of Greg Burns with Sidoti and Company. Your line is now open.

Greg Burns Yes, Nguyen. Could you just talk about the relative strength in the international segment? What's driving that relative to maybe North America? And then what are some of the growth opportunities that you have internationally? Thanks.

Nguyen Thi Nguyen I think there's a few things, and I'll invite Jeff to add in here. But I think internationally across the board, we in some cases never saw a leaving of the office, and in most cases we've seen a much faster return to office. So that kind of normalcy of how people are working and have worked hasn't really changed internationally. On top of that, our business is a little bit more nascent, and it is very diversified. So there's so many different, as you know, we all know, regions and things that are happening across Europe, and whether you're talking about southern Europe or mainland Europe. So we really do... When we have a business trend that is strong in one part of international, we may have one that's weaker in another. So I think that diversity is really, really important, coupled with the fact that we still have growth opportunity. You know, we have a dealer network that is capable, but we could actually still grow. So there's quite a few things that are happening in international. What would you add, Jeff?

I agree with all that. I think that geographic diversity helps us tremendously. You know, we talk about this. And sometimes it's easy to forget that you're talking about massive distances and varied geographies and fragmented markets that all behave and act a little bit differently. And so when one is down, we're at a scale now where we benefit where another one might be stronger. We've certainly seen that now for the past several years. Andy, your point on a white space, I think there's opportunity to grow into spaces and markets where we simply just don't have the presence or even the dealer presence to to really capitalize on projects. And we've had a big focus on that for a number of years. The other thing that I might mention, even pre-COVID, one of the biggest themes in the international business was this notion that companies were, it was a fierce battle for talent in a lot of these businesses. And that's been true in North America as well. But I think one of the key differences are that so many of the customers in some of these regions had always kind of opted for a lower cost facility type of a solution. And when that war for talent really began to heat up, I think there was a real recognition on the part of first global multinationals and then ultimately localized companies that investing in spaces was a strategic way of attracting talent. And I think that continues even through COVID. So that would be the other bit that I would add.

So diversity, market share, ability to grow. And I would also say with the acquisition of Knoll, we've missed in major markets in Europe and the Middle East the ability to really bring a much stronger ancillary collection. And now with Knoll, not only do we have manufacturing in Italy, but we have the ability to bring that to a wider selection of dealers.

Okay, great. Thank you.

Your next question comes from the line of Rex Henderson with Water Tower Research. Your line is now open. Good afternoon and thanks for taking my questions.

I want to quickly return to the question about the retail freight costs and the impact on gross margins there. First of all, it sounds to me like any of the issues that you once had in terms of demurrage and storage costs at the ports have been now solved, that that's been resolved, and now it's just a matter of working that inventory through the system. Is that what I'm hearing? Yes, that's absolutely correct. Okay. And can you quantify for the quarter what that impact of those freight costs were this quarter? Can you help us kind of understand what might have been excluding the impact of that? We sure can.

Sure, Rex.

So the cost that we're referring to, if you think about it, I mean, there's a number of factors there, but they all fit in that inventory handling and storage-related costs, including the demurrage fees that you referred to. That was meaningful. It was to the tune of about $15 million in the full quarter. Okay.

That's very helpful. The other question I wanted to address was, particularly in the America segment, revenues or sales have been running ahead of order levels, which means you're working down backlog. How much longer can you continue to do that before sales and order levels start to match up more closely?

Yeah, Rex, so this is Jeff and John. give your perspective if you'd like to add. I would tell you that you are absolutely right. We have had an elevated backlog really across all of our segments through really all of last year, but the majority of last fiscal year and in through the Q1 and really through Q2. So to your point, we've been eating into backlog. The America's backlog is down year on year about 21%, stands at about $456 million, I think, at the end of Q2. I think we're very close to nearing what I would call a normalized backlog level for this business. I expect that our revenue picture going forward is nearing a more historic relationship to the order trends that we're seeing in a quarter. John, feel free to add to that.

I totally agree, Jeff. I think I know that. The reduction in the backlog is to some degree related to order levels, but it's also production and efficiency in the plants and lead times coming down. So the throughput is that much better, which is obviously bringing more to an equilibrium from a production level. Okay.

So there's good news and bad news there. But thanks. I appreciate that. It sounds like you are now kind of at the inflection point where you get to more historic relationships between orders, backlog, and sales. Is that right?

Yeah, I think we're getting much closer to that, Rex.

Okay. You can look at the last elevated backlog and say that that was more bad news because we had more disappointed customers with production and supply chain issues. So I think getting to a more normalized level is actually better news.

Okay, very good. Thanks for your call.

There are no further questions. We turn the floor back to President and CEO, Andy Owen, for closing remarks.

Thanks, you guys. I'd really like to thank everyone again for joining us on today's call. In closing, we are so proud of the resilience demonstrated by our collective of brands and the progress we're making for our integration and also product innovation. We really appreciate your continued interest in Miller & All, and we look forward to updating you again next quarter. On behalf of all of us here, I want to wish you and your families a wonderful and restful holiday season. Thank you.

This concludes today's conference call. Thank you for attending. You may now disconnect.