MillerKnoll, Inc.

Good evening and welcome to Miller Knowles' third quarter earnings conference call. As a reminder, this call is being recorded. After the speaker's remarks, there will be a question and answer session. And if you would like to ask a question during this time, simply press star one on your telephone keypad. If you would like to withdraw your question, you may press star one again. I would now like to introduce your host for today's conference, Vice President of Investor Relations, Carola Mingolini.

Thank you, Lisa. Good evening and welcome to Miller Knowles' third this quarter fiscal 2023 conference call. I am joined by Andy Owen, Chief Executive Officer, and Jeff Stutz, Chief Financial Officer. Also available during the Q&A session are John Michael, President of Americas Contract, 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 millernol.com. With that, I will turn the call over to Andy. Andy?

Thanks, Carola.

Good evening, everyone, and thank you so much for joining our call. Throughout this quarter, our team delivered strong earnings and margin improvement despite challenging economic conditions. We have many competitive advantages. We have a collection of strong design brands, which are sold across multiple business channels and that cater to a different customer segments around the globe. And we're nimble. We're capturing synergies, reducing our cost structure, and optimizing our capabilities so that we're positioned to capture opportunities as and when the macroeconomic picture improves. To be sure, this is a disruptive period. Traditional office usage and layouts are not as relevant as they once were, and new opportunities exist to help our customers design more hybrid, collaborative work environments. Our contract clients continue to engage us in conversations around reimagining their workspaces, both to enhance their employee experience and to create multi-use spaces. Because of this, the volume of customer discussion remains very high, and the funnel of potential project opportunities is robust. albeit somewhat uncertain in terms of timing. These customer interactions continue to emphasize the importance of non-traditional product categories to home and office settings. We believe that this pivot to premium ancillary product solutions give Miller Knoll and our distribution partners a distinct competitive advantage given our best-in-class collective of brands. To this end, I will highlight the great performance of some of our smaller luxury brands, such as Holly Hunt, Mudo, and Spinnebeck Filtsville. which support our strategy towards a diversified global business model that includes luxury, ancillary products that cater to both a residential and commercial client base. As we continue to build our presence as one collective of Miller Mill brands, we're also seeing a new pattern emerge with our dealers and the way we're winning businesses. Now, with more offerings across our portfolio, we are better suited to win whole floor plan solutions than ever before. We're also using this transitional period across our industry as a strategic opportunity on many fronts, introducing innovative products, pursuing new sector expansion, and investing in our digital capabilities, all of which permits us to further our reach and remove friction points for our dealers and our customers. As it pertains to our retail segment, we believe that higher interest rates have temporarily slowed new and second home buying, and in some cases also delayed decisions to upgrade and renovate current spaces. Additionally, we're seeing customers temporarily shift more of their discretionary spend towards travel, and leisure. And although we believe this is a short-term trend due to pent-up demand after an extended period of pandemic-related isolation, all of this, we are preparing for a nearing-term slowdown in our demand environment. And although this won't jeopardize our long-term growth strategies, we know that it's happening. To the end, we're analyzing and reviewing our retail footprint. We will continue to expand our reach through targeted channel development and digital experiences. During the quarter, We finished converting Hay stores in the U.S. into DWR spaces in several key marketplaces. On the other hand, and based on the success of Hay's wholesale business in Europe, we opened our first Hay shop and shop with Nordstrom here in the U.S. Moreover, through a wholesale partner, we also opened our first Herman Miller and Knoll stores in Shanghai. In addition, we're strategically expanding our international business. Around the world, different regions are in varying phases of return to office. Due to our global footprint, we continue to capture business in areas with more favorable economic conditions, such as the Middle East, Asia, and India, to name a few. Our global reach, our unmatched product portfolio, and our expertise in varied areas such as healthcare, education, and hospitality are a meaningful advantage. We're also making strategic choices to prioritize projects and opportunities that drive sales and margin expansion across all channels. I'll share a few examples. Through our integration work, we continue to compare capture cost synergies with $123 million of implemented savings to date as we work our way towards our goal of $149 million. We're creating centers of excellence to deliver improved quality, reliability, and production lead time. Our Geiger facility in Hildebrand, North Carolina does incredible work, and we're shifting more millenial production there, creating a center of excellence for premium upholstery and craft wood products. We're also looking across our global operations network and identifying where we have available capacity and unharnessed capabilities. We will move production to the places that are best suited to manufacture items versus having solely brand-dedicated facilities. For example, during the quarter, we shared our decision to shift some metal fabrication work from Toronto to East Greenville, Pennsylvania. And we're fine-tuning our brand portfolio. With multiple brands and channels, we can select where and how we sell items. This quarter, we began the work to wind down Fully as a standalone brand and sales channel. Going forward, select Fully products will be sold through our existing Design Within Reach and Herman Miller channels. So before I hand the call over to Jeff, I want to highlight that we continue to lead through innovative design. During the third quarter, we launched a variety of exciting new products across our collective of brands. In addition, we continue to deliver against our sustainability goals, reducing our carbon footprint and using sustainable materials. For example, Herman Miller was recently recognized by the Chemical Footprint Project for our commitment to minimizing chemical footprints and integrating criteria for better alternatives into our design practices. In the months ahead, we'll continue to manage our business, taking into consideration the macroeconomic pressures we are all experiencing, vigorously controlling the factors that we can, leaning into our strategy and adapting our business priorities to anchor on our best assets, and to continue to develop areas where we see future success. As we navigate a variety of market conditions around the world, we're prioritizing our work around innovation and what drives our business, where there is margin to gain, where there are opportunities to build for future success, and ensuring that our customers turn to us first. So with that, I'll turn the call over to Jeff for his prepared remarks.

Thanks, Andy, and good evening, everyone. We appreciate you joining us. During this quarter, we delivered adjusted earnings of $0.54 per share. beating our guidance and significantly outperforming the same period last year. While net sales came in lower than the same time last year, we experienced another quarter of strong margin expansion that contributed to our improved performance. At the consolidated level, net sales in the third quarter of $984.7 million decreased 4.4% on a reported basis and 2.7% organically compared with the same quarter last year. Consolidated orders for the quarter were $885.4 million, reflecting an organic decline of 17.6% from the same quarter last year. Softer demand tied to global macroeconomic uncertainty and elevated comparables in the third quarter of last year resulted in the year-over-year pressure for orders in each of our business segments. Within our America's contract segment, net sales for the quarter totaled $484.6 million, This represents a year-over-year decrease of 4.9 percent on a reported basis and an organic decrease of 4.5 percent. New orders for this segment came to 461.6 million, reflecting a decrease of 12.6 percent from the same quarter last year on a reported basis and down 11.8 percent organically. During the past few months, general economic uncertainty and the impact of rising interest rates have weighed on business and consumer sentiment levels. The result has been slowing demand patterns and further delays in customer return to office timelines. With all that said, gross and operating margins in the America segment have continued to improve as expected, driven by net pricing benefit and the impact of integration cost synergies. For the quarter, operating margins for this segment improved 980 basis points on an adjusted basis versus the same period last fiscal year. Within our global retail segment, net sales in the quarter were $257.6 million, a decrease of 7.7% compared to the same period last year on a reported basis and down 5.5% organically. New orders totaled $213.7 million in the third quarter, down 23.5% compared to the same quarter last year on a reported basis and down 21% organically. Here again, macroeconomic pressures and increased stock market volatility have eroded consumer sentiment and buying activity. Overall margin performance in this segment did improve sequentially from the second quarter, but remained lower on a year-over-year comparison due to elevated freight expenses and higher inventory costs that we outlined for you last quarter. As Andy mentioned, this quarter we made the decision to cease operating fully as a standalone brand. By integrating fully into our global retail organization, we will reduce operating costs and further optimize our retail structure. As part of our commitment and focus to drive profitable growth and streamline our organization, we're constantly reviewing our channels to market, products, and processes to identify ways to leverage our strengths. And this decision is an example of that. Turning to our international contract and specialty segment, net sales for the quarter, were 242.5 million, reflecting an increase of 0.6% on a reported basis and an increase of 4.3% organically. New orders in this segment were 210.1 million, which is down 27.2% year-on-year on a reported basis and down 24.5% organically. From an adjusted operating margin perspective, this segment delivered strong year-over-year improvement with an increase of 270 basis points, mostly driven by pricing actions taken earlier in the year and favorable product mix. Shifting back to the enterprise-level results, we were pleased this quarter to report a meaningful improvement in margin performance. Our consolidated adjusted gross margin in the period was 35.7%, and the adjusted operating margin was 7.5%. And these results are 260 and 340 basis points higher than the same period last year, respectively. Higher pricing, benefits from cost synergies, and reduction in variable compensation more than offset higher commodity costs and other inflationary pressures to drive these positive increases. Turning to cash flows in the balance sheet, this quarter we generated $75.7 million of cash flow from operations and paid down $18.1 million of debt. And moreover, As part of our focus on maintaining a strong balance sheet, this quarter we executed an interest rate hedge, which provides an immediate reduction in current interest expense and, together with our previous three hedge instruments, has provided a fixed interest on 65% of our total bank debt. We ended the period with a net debt-to-EBITDA ratio as defined in our credit agreement of 2.6 turns. Now I'll talk about our guidance for next quarter. The outlook reflects a revenue guide that is informed by the recent order trends. To this end, we expect net sales to range between $930 million and $970 million, and adjusted earnings to be between 37 cents and 43 cents per share. So before we open the call for your questions, I just want to highlight that our focus and actions toward diversifying our business, driving profitable growth, and capturing cost synergies are helping us navigate short-term macroeconomic challenges. But most importantly, they're strategically positioning us to capture further top-line and margin expansion when the macroeconomic trends improve.

With those prepared remarks, I'll turn the call back over to the operator, and we'll take your questions.

Thank you. As a reminder, that is star one on your telephone keypad to ask a question. We'll take our first question from Greg Burns with Sidoti & Company.

Good afternoon. Can you just talk about the order trends in the early part of this quarter? Have you seen any improvement or has it stayed about the same?

Yeah. Hi, Greg. This is Jeff. I'll take that. So the good news is we did see improved trends as we made our way through the quarter, really across each of our three business segments. So while we ended the quarter – in the organic numbers that I gave you in my prepared remarks, order entry levels in the month of February, for example, were actually better than the full quarter trend in each of the three segments. So we did see some improvement. And in the first couple of weeks of Q4, I would say generally that's continued.

Okay, and then just specifically the decline you saw internationally, the international segment has kind of been an outperformer relative to North America, but it seems like it's catching down. Is there anything in particular going on there?

I think there's a couple things, Greg, and then I'll turn it back to Jeff. I think the international business is a little lumpier as far as timing and placing orders. I think that if you think about last year, They had an amazing quarter with the price increase that we instituted, and so they're up against really significant comps. So I think there's a little bit of timing in quarter over quarter, and there's a little bit of a comparison to last year in international. We are seeing more weakness in the European business than we are across the globe, and we're seeing China come back a little more slowly than we had thought. But I think on the whole, long term, we feel very optimistic.

Yeah, and the only thing I would add, Greg, and I think this is an important reminder, really, for all of the comps across our consolidated group, that a year ago, Q3, we had an amazingly strong quarter in order entry in particular. And just to kind of remind everybody, we had 74% order growth in the third quarter of last year in our international segment. We've never seen anything even that touches those types of percentages. So remarkable growth. So these were tough comps. And even in the America segment, we had growth that was up 37% in the year-ago period. So I'm always cautious about pointing to comps, but this is one of those moments where it matters because I do think that those were remarkably strong numbers a year ago.

Okay. And then in terms of your synergy targets, I know Foley – Fully was a null brand, so is this part of that 140, the savings there, or is this incremental to that? And are there any other brands that are up for maybe being absorbed into your broader network?

Yes, this is part of the synergy savings, Greg. It's a great question. And as part of the integration process, we will continue for the next however many months to go through and evaluate what is profitable, what are the right decisions, and certainly we'll let you guys know when we make those decisions and when they're public. But right now, Philly is the only place that we've made that decision, and it is the right thing to do.

Always hard to do, but the right thing to do.

Okay, thank you.

We'll take our next question from Ruben Garner with Benchmark Company.

Thank you. Good evening, everybody.

Ruben. Jeff, maybe to start operating expenses in the third quarter came in, I think lower than you guys were looking for. And it looks like there's a step up in dollars in the next revenue. Can you kind of walk through maybe what was different for you in the third quarter? And is there any reality of spending or anything else that would lead to the step up in the next quarter?

Yeah, happy to, Ruben. You're spot on. And I would tell you that given order trends, just in general terms, we are really taking every measure to manage costs in line with lower demand levels. So that's just a general overview comment. I would tell you that one of the big factors in the third quarter, and this speaks to our guide for Q4 as well, is the impact of declining volumes around instead of compensation as an example. So we did see some of those accruals come down in the third quarter. So you won't get a repeat of that in Q4, if that makes sense. So that's one of the factors that's causing some lumpiness there. But I would also tell you that we historically, and I think you know this from past, we tend to see some seasonal uptick between Q3 and Q4 in spend rates just as we ready ourselves for the for new product releases and so forth that tend to be seasonal as we move into the early part of summer. So I think all of those factors combined cause that. But look, I would tell you that those programs work as designed. They're variable in nature, and when you see volume levels drop, you see those come down. And so I think it's no surprise, but it is a factor that influenced the comparison to the guidance.

Okay.

And then same kind of line of questioning on the gross margin side. It looks like with your guidance for the next quarter, you're still kind of on the path that you laid out at the end of last year. And that's what I think is despite less volume than you probably would have otherwise thought. And then maybe less mix of the higher margin retail. Is that right? And I And if so, can you kind of walk through what's kind of improved sequentially? Is it simply price flowing through and finally some deflation or inflationary release?

Yeah, I think you're hitting on a couple of the key points, Ruben. And by the way, I appreciate the observation because this is an area that we wanted to make sure we emphasize and that we feel really good about. I mean, the margin expansion across the business is every bit as strong as we had expected it to be. And I think it's encouraging to see it even as demand levels have fallen. And that's been a message that we've consistently been sending that we think we can achieve that. So we feel really good about that. I think our guide, if you look just sequentially from Q3, a couple of things that inform that, pricing is one of them. And you mentioned that that's somewhere on the order of 30 basis points. We're going to get a little bit of lift from commodities. So we are seeing a couple areas where we're starting to see market prices move around significantly. even some reinflation. Look at market price of steel, for example. That's been ticking up of late, but we still believe that as a basket, commodities will be favorable to us sequentially. The other thing that I'd point out is there's a mixed factor in there that's going to help, but I want to give a shout out to the retail side of the business. We've had a couple of quarters here where we've had some one-offs that we've talked to about, things like inventory storage costs and so forth that have pressured margins. We expect those to meaningfully improve as we move into Q4. So that's another driver of that expected increase in gross margin.

My last thing I would add, Jeff, is just, you know, you start to see synergy capture coming through that line as well. And as we continue to capture more and more synergies, we will also see that at the margin on that wide line. So, yes, we're very pleased about that.

All right, I'm going to sneak one more in. A follow-up on Foley. So can you help... Is that something that you are not able to do because of developments with HermanMiller.com and, you know, internal kind of initiatives versus some kind of structural change? I just thought that Foley was offering something that maybe you guys didn't have before, or maybe it was just Noel didn't. Can you kind of, I guess, dig into that a little bit more?

Yeah, it's a great question, Ruben. So I think when Noel acquired Foley, and I certainly can't speak for that company back then, but it offered them a digital avenue to market that they didn't have. We have that, and we have a very well-established one as well as a retail business. And so as we look across the organization and find redundancies, it's important that we address those. We have a great retail channel to market. We have great fully products. We don't need the duplication that we've had. And although Foley is a small portion of our business, it has been break-even to money losing at best. And so for us, this was the right decision, and we can still maintain the great products. We can still bring them to market in a very meaningful way. We don't need to lose that, but we can lose some of the extra costs that was making it not a profitable equation for us.

Got it. Thanks, guys, and good luck going forward.

Thank you.

We'll take our next question from Bud Bugach with Water Tower Research.

Good afternoon, Jeff. Good afternoon, Andy and the team. Congratulations. Can you hear me? Am I coming through?

Yeah, we can hear you. Yeah, you're coming through.

Thank you. Thank you. Congratulations on managing the margins in this. I think that's impressive, and congratulations The differences, at least to my model, mostly center in the Americas, which I don't suspect is a big surprise in terms of particularly the revenue. And I know, John, you said that the order patterns have started to improve. Can you at least put some quantification on that? Are we looking at positive orders year over year in terms of what you're seeing in the last couple of weeks of the quarter or maybe the first couple of weeks of the next quarter?

Yeah, but this is Jeff. So, so what, what, what I would tell you is that we started the quarter lagging pretty, you know, we were, we were down double digit percentage. Uh, we improved in January and February to single digit percentage still declines, but an improving trend line. And that has, uh, it's moved a little bit in the first couple of weeks at Q4. but nowhere near as low as it was to start back in December. So, you know, it's still pressure. Wouldn't want to leave you with the wrong impression there. But that coupled with the fact, and, John, maybe you can speak to this a little bit. I think we're getting some feedback, by the way.

Operator, we're hearing some feedback on the line. Are you hearing that?

Yes, ma'am, I am hearing that.

Thank you.

Can you hear us?

I can hear you. I can hear you fine. I'm not getting the feedback, so I don't think it's coming.

Okay, great. We'll just keep going then.

Yeah, sorry. We were getting a little feedback in the room. Yeah, so I would say that trend, which is at least moving in the right direction, albeit still you're on your pressure, combined with some of the funnel metrics that we're seeing, and I don't know, John, if you want to speak to that, that gives us some encouragement here. Yeah, thank you, Jeff. Hi, Bud.

From a funnel perspective, we've seen significant growth in the over-million-dollar-sized projects, something we really haven't seen a lot of since sort of pre-pandemic days, if you will. So seeing a lot of activity there. And the overall funnel is up quarter to quarter as well. I think from Q3 to Q4, our net funnel additions were up 38%. So the activity seems to be percolating a bit, and that gives us obviously some encouragement to see some change in order trend over time as well.

And when you're talking about funnel, you're talking about visits and projects you're bidding on, or is there something more concrete to what you define as a funnel?

It's identified project and account opportunities that our sellers have identified and are pursuing in the market. So they're live projects that we're tracking in pursuit of.

And the Biffman numbers, at least as we see them on a monthly basis, look like we're getting into a situation where orders are just about flat year over year. Not quite, but getting there. And so the fact that you're still down single digits, does that mean that you're performing a little bit behind BIFMO or the rest of the industry?

I think you have to look at BIFMO with a grain of salt, Bud. I mean, depending on how all of the players are reporting their numbers and what's included in contract and if there's other business, I wouldn't say that you can make that leap necessarily.

Okay. I always take those numbers with a little bit of a grain of salt indeed.

Okay, good. We appreciate that.

Jeff, can you give us maybe kind of an MD&A read of going from a walk from gross margin, either segment level or overall level, as to what drove the difference? Because where's the contribution margin right now with all the changes that you're experiencing or with all the difficulties in the environment?

Yeah, happy to talk. I'm going to keep it at the enterprise level, Bud, just because we don't guide at the segment level, but happy to talk kind of at the ink level for the business. And I'll just walk you year on year for the third quarter. You know, pricing was the big story for us this quarter, and it really has been, but that was a favorable 400-plus basis point move in in gross margins. And again, that's particularly encouraging because we have been expecting it and we're getting it, which is great. The other positive is that we had a little bit of positive around 60 basis points best we can estimate from overall product mix shifts that have been in our favor. And that's across all of our channels, by the way. So that can be channel mix and it can also be product mix. Commodities are actually, after many, many quarters of significant pressure from commodities, we're starting to see those flatten out. They were slightly negative. We had about a 20 basis point year-on-year drag from net commodity impacts on the business, but much improved from where they've been. We did lose some overhead from lower production levels. Again, as you know, when order levels drop in the business and you get less production, you see that on the labor and overhead lines. So we lost about 70 basis points year on year from overhead leverage. And then freight and transportation costs continued to be a pressure in total. We were 90 basis points down year on year from freight and transportation. And the thing I'd say about that is We're seeing it's stubbornly slow, but we're seeing improvements. I think particularly in the retail side of our business, we're seeing still elevated inbound freight costs, mainly coming out of Europe, where container rates and shipping costs just haven't come down as fast as what we've seen out of Asia. So that's one kind of nuance to the business. But in total, for the enterprise, 90 basis points of freight are And then the last thing I'd point out is I mentioned this wasn't a surprise because we knew this was going to be a factor. 50 basis points of that storage fee impact that we had in the retail side of the business, that inventory demurrage and storage fees that I talked about on the call last quarter was 50 basis points of pressure year on year. The good news is that's behind us now. I'm sorry, that was a negative 140 then with a 90 and a 50?

Is that correct?

Yeah, between freight and the retail storage. That's 140 negative. That's correct.

Right. And so the merge is done. I hate that word. I hate the fact of paying out money. So do we. Turns out so do we. Unfortunately, it took a lot of my personal wealth about 30 years ago. Can you also give us maybe on a – Gap basis, what the gap guidance would be for EPS? I know the adjusted is 37 to 43. What would the gap be? What's the adjustment number?

But the only known adjustment would be the impact of amortization cost on purchased intangibles from the NOLA acquisition. And that's, I think, on the order of $6 million a quarter Beyond that, we may well have other adjustments, but they're certainly not known at this point.

And they're not in the guidance. So the guidance says you do that. And your guiding on tax rate is the same as has been, or where is that going to be?

Yeah, we figure 22% to 24%, same as where we've been. Okay.

And just a couple more for me, and these are more nits. That $4.6 million, I think, of restructuring, is that all fully?

So the fully restructuring, well, no, we had total special charge items in the quarter of just over $52 million, I think, but 37 of which relates to the fully decision, and those were impairment of things like leases, Some inventory valuation reserves. Yep, yep. So the majority of it was related to fully, but not the total amount.

But the $4.6 million in restructuring, what was the restructuring? What did you do there?

That would have related, Bud, to actions that were announced in Q2 associated with early retirement and some workforce reductions that have a tail as we move through the balance of the fiscal year, just based on the timing of exits.

Okay, and that split, it's probably mostly in America, is that right? I think that's where it's sitting, mostly. Okay, I see it. And last for me is the incentive comp. Can you quantify what that was in the quarter, how much that helped in the quarter?

I'm not going to quantify it, but it was a primary driver in the operating expense reduction year on year.

And the reason that doesn't repeat is you've already made that reduction for, you had a similar reduction last year. I mean, you all always have that variable issue when revenues don't quite make expectations.

Yeah, that is correct. Yep, it just depends on kind of business conditions at a given point in time and kind of the outlook for the balance of the year.

So it's already, you see, we shouldn't expect that to recur? Correct. You should not expect that to occur. I hope I said that right. I'm still a little confused, but we'll get that squared away at a later time. Thank you. Thank you very much. Good luck to you on the fourth quarter and going into next year. Hopefully we find some sort of normalcy as society.

Agreed. Thank you, bud.

We'll take our next question from Stephen Ramsey with Thompson.

Hi, good evening.

Hi, Stephen.

Hi. Maybe to start with, just bringing the America's orders and demand into the context of more companies laying off workers, but the tug of war against companies wanting workers. workers in the office and recognizing the value, realize that the near term maybe is a headwind, but how is that shaping conversations for the longer term, maybe as you look into the second half of calendar 2023 and beyond?

It's a great question, Steven. John alluded earlier to the amount of activity that we're seeing, and I think it's directly related to returning to work, to leaders of companies wanting to find ways to get people back in the office, and also, frankly, people coming back into the office and enjoying being together and collaborating again. So we are seeing an uptick in activity, looking to find creative ways to change spaces, to adapt to the new workforce, to adapt to hybrid. So more activity than we have in the past, and I think that's shaping how we can help people make these decisions and how they can think about their workspaces. But, John, what specifics would you add for the Americas?

Thanks, Sandy. I would add that Literally every C-level conversation we're having, probably for the last 90 days, those executives are looking for help to get their employees back in the office. I think they understand the importance of return to office for all the reasons we've all talked about in the past, culture, connections, collaboration, et cetera. And I think they're becoming bolder in terms of, their desire to have people back because they're understanding the business impact of not having their employees back in the workplace. So I think, to your point, ultimately that will change from a headwind to at least neutral, if not a bit of a tailwind, as companies come to grips with that.

Okay, great. And then shifting to international, you talked about new markets. and geographies through local accounts. Can you share if this is a new initiative or a stronger push than the past? And is this going to be a major sales benefit in the next couple of quarters, or will this have to build up over time?

You know, we have been investing in and developing our international sales team, expanding our dealer network internationally for the last several years. So I would say we stand more ready now than we did a couple of years ago to capture the opportunities in different markets than we did before. We've had great leadership there. We continue to have great leadership there. And because we have such a varied presence, we can capitalize on the markets where we see opportunities. So I would say it's been a conscious effort, not a new one, but one where I think we'll start to reap benefit as we find these opportunities. Jeff, what would you add?

Yeah, and Stephen, the only thing that I would add to that is This is one of those areas where I think the combination of Herman Miller and Knoll plays to our advantage here because we now have new tools and new solutions that we can offer existing dealer partners in markets like India or markets like Korea or even in Europe where the Knoll product lines give us solutions that we couldn't previously offer our customers, and it opens doors. So we're very encouraged and have high expectations for that.

Gotcha. Okay. And then last quick one for me on the fully shift. I may have missed this, but how quickly does that help profitability in the retail channel? Is that pretty immediate, or will that take time to build up?

We'll be unwinding this in the next quarter, and then we'll see it in Q1. But remember, this is a small portion of the piece of the retail business. Jeff, you want to add something specific?

No, I think that's fair.

Okay, great. Thank you.

Thank you. We'll take our next question from Alex Furman with Craig Hellam Capital Group.

Hey guys, thanks for taking my question. First and foremost, if I could just ask maybe to square a little bit the differences in what we're hearing about for orders versus your revenue trend. I mean, it sounds like orders were down close to 20% in the third quarter and have gotten a little bit better, but obviously the revenue guidance that you're giving for Q4 is a good amount better than than that order trend. So just hoping if you could square the two numbers a little bit is part of that, you know, the improvement you've seen in orders quarter to date or maybe just, you know, the benefit of working through your existing backlog. Just anything you can kind of give us as we sort of size up what the base case would be heading into next year would be very helpful.

Yeah, Alex, this is Jeff. Good question.

So I think you kind of hit on a couple of the main points, but just to maybe emphasize them. A, we have seen, as I mentioned earlier, you know, kind of as we move through the quarter, order patterns did get a little better. And so that's part of our calculus. You also have, in particular in the international business, we've just got, you know, some of this is, Andy used the term lumpy earlier, and it is very true in that segment of our business. And so there are, we have line of sight to orders that we have confidence in early enough in the quarter to influence revenue in Q4. And then the other point that I would make is even though in total the Q4 revenue guide is a little atypical because it's actually, at our midpoint, it's down from the Q3 number, that's just reflective of economic conditions. However, even within that, within some of the segments, you do have some seasonality that is normally expected in Q4. And I would point to the retail business as part of that as well. So I think those are the major factors that give us kind of the parts and pieces that inform the fourth quarter guidance.

Okay, that's really helpful, Jeff. And then if I could ask also just about the backlog before COVID and before the acquisition of Knoll, It seemed like your backlog was more or less consistent at around the $400 million level. And then, of course, with Noel and the pandemic, we saw it balloon up to a billion dollars. Now it's been working its way steadily down for a few quarters and is around $700 million. Can you give us a sense of where we should expect to see that level out with Noel and in 2020? the post-COVID world? Are you expecting that number to continue to work lower throughout next year?

You know, Alex, the world has been so disrupted, we're still kind of waiting to see ourselves what kind of the new normal looks like. But I would tell you that I think based on the patterns that we see and based on how orders are scheduling, we are nearing a point where we think the backlog is largely stabilized. You might argue it's still a bit elevated in total, but I think as we move through Q4 and get into certainly Q1 of this next year, our expectations would be that we are, if you will, kind of at that new normal level. So I'm not going to give you an absolute dollar amount because as soon as I do, business conditions will change, but I think we're getting close.

Great, that's helpful. Thanks, Jeff.

Thank you. We do have a follow-up question from Bud Bugach with Water Tower Research.

Yeah, sorry to prolong it, but I just wanted to make sure I understood something. Jeff, you said that the only adjustment you would expect in Q4 is really the amortization of purchase intangibles. Are there still acquisition and integration charges continuing? I think you told me they would continue for a long time.

Well, this is why we're not guiding. We don't have absolute clarity on what those will be. That's a live program that will unfold, so that's why we've tried to keep it out of the numbers because it can move around based on actions and levers that get pulled in the corridor. So, yes, there's potential for other things. The only absolute known would be that amortization number that I gave you.

Got you. Okay. Well, thank you very much.

And again, good luck on the future periods.

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

Thanks again, everyone, for joining us on the call. We appreciate your continued support of Miller & All, and we look forward to updating you on our progress again next quarter. Thanks again, and have a great night.

And that does conclude today's presentation. Thank you for your participation and you may now disconnect. Thank you. Thank you. Thank you. Thank you. Let's pray. Thank you. you Thank you. Thank you.

Good evening and welcome to Miller Knowles' third quarter earnings conference call. As a reminder, this call is being recorded. After the speaker's remarks, there will be a question and answer session. And if you would like to ask a question during this time, simply press star one on your telephone keypad. If you would like to withdraw your question, you may press star one again. I would now like to introduce your host for today's conference, Vice President of Investor Relations, Carola Mingolini.

Thank you, Lisa. Good evening and welcome to Miller Knowles' third this quarter fiscal 2023 conference call. I am joined by Andy Owen, Chief Executive Officer, and Jeff Stutz, Chief Financial Officer. Also available during the Q&A session are John Michael, President of Americas Contract, 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 millernol.com. With that, I will turn the call over to Andy. Andy?

Thanks, Carola.

Good evening, everyone, and thank you so much for joining our call. Throughout this quarter, our team delivered strong earnings and margin improvement despite challenging economic conditions. We have many competitive advantages. We have a collection of strong design brands, which are sold across multiple business channels and that cater to a different customer segments around the globe. And we're nimble. We're capturing synergies, reducing our cost structure, and optimizing our capabilities so that we're positioned to capture opportunities as and when the macroeconomic picture improves. To be sure, this is a disruptive period. Traditional office usage and layouts are not as relevant as they once were, and new opportunities exist to help our customers design more hybrid, collaborative work environments. Our contract clients continue to engage us in conversations around reimagining their workspaces, both to enhance their employee experience and to create multi-use spaces. Because of this, the volume of customer discussion remains very high, and the funnel of potential project opportunities is robust. albeit somewhat uncertain in terms of timing. These customer interactions continue to emphasize the importance of non-traditional product categories to home and office settings. We believe that this pivot to premium ancillary product solutions give Miller Knoll and our distribution partners a distinct competitive advantage given our best-in-class collective of brands. To this end, I will highlight the great performance of some of our smaller luxury brands, such as Holly Hunt, Mudo, and Spinnebeck Filtsville. which support our strategy towards a diversified global business model that includes luxury ancillary products that cater to both a residential and commercial client base. As we continue to build our presence as one collective of Miller Mill brands, we're also seeing a new pattern emerge with our dealers and the way we're winning businesses. Now, with more offerings across our portfolio, we are better suited to win whole floor plan solutions than ever before. We're also using this transitional period across our industry as a strategic opportunity on many fronts, introducing innovative products, pursuing new sector expansion, and investing in our digital capabilities, all of which permits us to further our reach and remove friction points for our dealers and our customers. As it pertains to our retail segment, we believe that higher interest rates have temporarily slowed new and second home buying, and in some cases also delayed decisions to upgrade and renovate current spaces. Additionally, we're seeing customers temporarily shift more of their discretionary spend towards travel and leisure. And although we believe this is a short-term trend due to pent-up demand after an extended period of pandemic-related isolation, all of this we are preparing for a nearing-term slowdown in our demand environment. And although this won't jeopardize our long-term growth strategies, we know that it's happening. To the end, we're analyzing and reviewing our retail footprint. We will continue to expand our reach through targeted channel development and digital experiences. During the quarter, We finished converting Hay stores in the U.S. into DWR spaces in several key marketplaces. On the other hand, and based on the success of Hay's wholesale business in Europe, we opened our first Hay shop and shop with Nordstrom here in the U.S. Moreover, for a wholesale partner, we also opened our first Herman Miller and Knoll stores in Shanghai. In addition, we're strategically expanding our international business. Around the world, different regions are in varying phases of return to office. Due to our global footprint, we continue to capture business in areas with more favorable economic conditions, such as the Middle East, Asia, and India, to name a few. Our global reach, our unmatched product portfolio, and our expertise in varied areas such as healthcare, education, and hospitality are a meaningful advantage. We're also making strategic choices to prioritize projects and opportunities that drive sales and margin expansion across all channels. I'll share a few examples. Through our integration work, we continue to compare capture cost synergies with $123 million of implemented savings to date as we work our way towards our goal of $149 million. We're creating centers of excellence to deliver improved quality, reliability, and production lead time. Our Geiger facility in Hildebrand, North Carolina does incredible work, and we're shifting more millenial production there, creating a center of excellence for premium upholstery and craft wood products. We're also looking across our global operations network and identifying where we have available capacity and unharnessed capabilities. We will move production to the places that are best suited to manufacture items versus having solely brand-dedicated facilities. For example, during the quarter, we shared our decision to shift some metal fabrication work from Toronto to East Greenville, Pennsylvania. And we're fine-tuning our brand portfolio. With multiple brands and channels, we can select where and how we sell items. This quarter, we began the work to wind down Fully as a standalone brand and sales channel. Going forward, select Fully products will be sold through our existing Design Within Reach and Herman Miller channels. So before I hand the call over to Jeff, I want to highlight that we continue to lead through innovative design. During the third quarter, we launched a variety of exciting new products across our collective of brands. In addition, we continue to deliver against our sustainability goals, reducing our carbon footprint and using sustainable materials. For example, Herman Miller was recently recognized by the Chemical Footprint Project for our commitment to minimizing chemical footprints and integrating criteria for better alternatives into our design practices. In the months ahead, we'll continue to manage our business, taking into consideration the macroeconomic pressures we are all experiencing, vigorously controlling the factors that we can, leaning into our strategy and adapting our business priorities to anchor on our best assets, and to continue to develop areas where we see future success. As we navigate a variety of market conditions around the world, we're prioritizing our work around innovation and what drives our business, where there is margin to gain, where there are opportunities to build for future success, and ensuring that our customers turn to us first. So with that, I'll turn the call over to Jeff for his prepared remarks.

Thanks, Andy, and good evening, everyone. We appreciate you joining us. During this quarter, we delivered adjusted earnings of 54 cents per share. beating our guidance and significantly outperforming the same period last year. While net sales came in lower than the same time last year, we experienced another quarter of strong margin expansion that contributed to our improved performance. At the consolidated level, net sales in the third quarter of $984.7 million decreased 4.4% on a reported basis and 2.7% organically compared with the same quarter last year. Consolidated orders for the quarter were $885.4 million, reflecting an organic decline of 17.6% from the same quarter last year. Softer demand tied to global macroeconomic uncertainty and elevated comparables in the third quarter of last year resulted in the year-over-year pressure for orders in each of our business segments. Within our America's contract segment, net sales for the quarter totaled $484.6 million, This represents a year-over-year decrease of 4.9 percent on a reported basis and an organic decrease of 4.5 percent. New orders for this segment came to 461.6 million, reflecting a decrease of 12.6 percent from the same quarter last year on a reported basis and down 11.8 percent organically. During the past few months, general economic uncertainty and the impact of rising interest rates have weighed on business and consumer sentiment levels. The result has been slowing demand patterns and further delays in customer return to office timelines. But with all that said, gross and operating margins in the America segment have continued to improve as expected, driven by net pricing benefit and the impact of integration cost synergies. For the quarter, operating margins for this segment improved 980 basis points on an adjusted basis versus the same period last fiscal year. Within our global retail segment, net sales in the quarter were $257.6 million, a decrease of 7.7% compared to the same period last year on a reported basis and down 5.5% organically. New orders totaled $213.7 million in the third quarter, down 23.5% compared to the same quarter last year on a reported basis and down 21% organically. Here again, macroeconomic pressures and increased stock market volatility have eroded consumer sentiment and buying activity. Overall margin performance in this segment did improve sequentially from the second quarter, but remained lower on a year-over-year comparison due to elevated freight expenses and higher inventory costs that we outlined for you last quarter. As Andy mentioned, this quarter we made the decision to cease operating fully as a standalone brand. By integrating fully into our global retail organization, we will reduce operating costs and further optimize our retail structure. As part of our commitment and focus to drive profitable growth and streamline our organization, we're constantly reviewing our channels to market, products, and processes to identify ways to leverage our strengths. And this decision is an example of that. Turning to our international contract and specialty segment, net sales for the quarter, were 242.5 million, reflecting an increase of 0.6% on a reported basis and an increase of 4.3% organically. New orders in this segment were 210.1 million, which is down 27.2% year-on-year on a reported basis and down 24.5% organically. From an adjusted operating margin perspective, this segment delivered strong year-over-year improvement with an increase of 270 basis points, mostly driven by pricing actions taken earlier in the year and favorable product mix. Shifting back to the enterprise-level results, we were pleased this quarter to report a meaningful improvement in margin performance. Our consolidated adjusted gross margin in the period was 35.7%, and the adjusted operating margin was 7.5%. And these results are 260 and 340 basis points higher than the same period last year, respectively. Higher pricing, benefits from cost synergies, and reduction in variable compensation more than offset higher commodity costs and other inflationary pressures to drive these positive increases. Turning to cash flows in the balance sheet, this quarter we generated $75.7 million of cash flow from operations and paid down $18.1 million of debt. And moreover, As part of our focus on maintaining a strong balance sheet, this quarter we executed an interest rate hedge, which provides an immediate reduction in current interest expense and, together with our previous three hedge instruments, has provided a fixed interest on 65% of our total bank debt. We ended the period with a net debt-to-EBITDA ratio as defined in our credit agreement of 2.6 turns. Now I'll talk about our guidance for next quarter. The outlook reflects a revenue guide that is informed by the recent order trends. To this end, we expect net sales to range between $930 million and $970 million, and adjusted earnings to be between 37 cents and 43 cents per share. So before we open the call for your questions, I just want to highlight that our focus and actions toward diversifying our business, driving profitable growth, and capturing cost synergies are helping us navigate short-term macroeconomic challenges. But most importantly, they're strategically positioning us to capture further top-line and margin expansion when the macroeconomic trends improve. With those prepared remarks, I'll turn the call back over to the operator, and we'll take your questions.

Thank you. As a reminder, that is star one on your telephone keypad to ask a question. We'll take our first question from Greg Burns with Sidoti and Company.

Good afternoon. Can you just talk about the order trends in the early part of this quarter? Have you seen any improvement or has it stayed about the same?

Hi, Greg. Hi, Greg. This is Jeff. I'll take that. So the good news is we did see improved trends as we made our way through the quarter, really across each of our three business segments. So while we ended the quarter – in the organic numbers that I gave you in my prepared remarks, order entry levels in the month of February, for example, were actually better than the full quarter trend in each of the three segments. So we did see some improvement. And in the first couple of weeks of Q4, I would say generally that's continued.

Okay, and then just specifically the decline you saw internationally. The international segment has kind of been an outperformer relative to North America, but it seems like it's catching down. Is there anything in particular going on there?

I think there's a couple things. Greg, and then I'll turn it back to Jeff. I think the international business is a little lumpier as far as timing and placing orders. I think that if you think about last year, They had an amazing quarter with the price increase that we instituted, and so they're up against really significant comps. So I think there's a little bit of timing in quarter over quarter, and there's a little bit of a comparison to last year in international. We are seeing more weakness in the European business than we are across the globe, and we're seeing China come back a little more slowly than we had thought, but I think on the whole, long term, we feel very optimistic.

Yeah, and the only thing I would add, Greg, and I think this is an important reminder, really, for all of the comps across our consolidated group, that a year ago, Q3, we had an amazingly strong quarter in order entry in particular. And just to kind of remind everybody, we had 74% order growth in the third quarter of last year in our international segment. We've never seen anything even that touches those types of percentages. So remarkable growth. So these were tough comps. And even in the America segment, we had growth that was up 37% in the year-ago period. So I'm always cautious about pointing to comps, but this is one of those moments where it matters because I do think that those were remarkably strong numbers a year ago.

Okay. And then in terms of your synergy targets, I know Foley – Fully was a null brand, so is this part of that 140, the savings there, or is this incremental to that? And are there any other brands that are up for maybe being absorbed into your broader network?

Yes, this is part of the synergy savings, Greg. It's a great question. And as part of the integration process, we will continue for the next however many months to go through and evaluate what is profitable, what are the right decisions, and certainly we'll let you guys know when we make those decisions and when they're public. But right now, Philly is the only place that we've made that decision, and it is the right thing to do.

Always hard to do, but the right thing to do.

Okay, thank you.

We'll take our next question from Ruben Garner with Benchmark Company.

Thank you. Good evening, everybody.

Ruben. Jeff, maybe to start operating expenses in the third quarter came in, I think lower than you guys were looking for. And it looks like there's a step up in dollars in the next revenue. Can you kind of walk through maybe what was different for you in the third quarter? And is there any reality of spending or anything else that would lead to the step up in the next quarter?

Yeah, happy to, Ruben. You're spot on. And I would tell you that given order trends, just in general terms, we are really taking every measure to manage costs in line with lower demand levels. So that's just a general overview comment. I would tell you that one of the big factors in the third quarter, and this speaks to our guide for Q4 as well, is the impact of declining volumes around incentive compensation as an example. So we did see some of those accruals come down in the third quarter. So you won't get a repeat of that in Q4, if that makes sense. So that's one of the factors that's causing some lumpiness there. But I would also tell you that we historically, and I think you know this from past, we tend to see some seasonal uptick between Q3 and Q4 in spend rates just as we ready ourselves for the for new product releases and so forth that tend to be seasonal as we move into the early part of summer. So I think all of those factors combined cause that. But look, I would tell you that those programs work as designed. They're variable in nature, and when you see volume levels drop, you see those come down. And so I think it's no surprise, but it is a factor that influenced the comparison to the guidance.

Okay.

And then same kind of line of questioning on the gross margin side. It looks like with your guidance for the next quarter, you're still kind of on the path that you laid out at the end of last year. And that's what I think is despite less volume than you probably would have otherwise thought. And then maybe less mix of the higher margin retail. Is that right? And I And if so, can you kind of walk through what's kind of improved sequentially? Is it simply price flowing through and finally some deflation or inflationary relief?

Yeah, I think you're hitting on a couple of the key points, Ruben. And by the way, I appreciate the observation because this is an area that we wanted to make sure we emphasize and that we feel really good about. I mean, the margin expansion across the business is every bit as strong as we had expected it to be. And I think it's encouraging to see it even as demand levels have fallen. And that's been a message that we've consistently been sending that we think we can achieve that. So we feel really good about that. I think our guide, if you look just sequentially from Q3, a couple of things that inform that. Pricing is one of them. And you mentioned that that's somewhere on the order of 30 basis points. We're going to get a little bit of lift from commodities. So we are seeing a couple areas where we're starting to see market prices move around. even some reinflation. Look at market prices of steel, for example. That's been ticking up of late, but we still believe that as a basket, commodities will be favorable to us sequentially. The other thing that I'd point out is there's a mixed factor in there that's going to help, but I want to give a shout out to the retail side of the business. We've had a couple of quarters here where we've had some one-offs that we've talked to about, things like inventory storage costs and so forth that have pressured margins. We expect those to meaningfully improve as we move into Q4. So that's another driver of that expected increase in gross margin.

My last thing I would add, Jeff, is just, you know, you start to see synergy capture coming through that line as well. And as we continue to capture more and more synergies, we will also see that at the margin on that wide line. So, yes, we're very pleased about that.

All right, I'm going to take one more in. A follow-up on Foley. So can you help... Is that something that you are not able to do because of developments with HermanMiller.com and, you know, internal kind of initiatives versus some kind of structural change? I just thought that Foley was offering something that maybe you guys didn't have before, or maybe it was just Noel didn't. Can you kind of, I guess, dig into that a little bit more?

Yeah, it's a great question, Ruben. So I think when Noel acquired Foley, and I certainly can't speak for that company back then, but it offered them a digital avenue to market that they didn't have. We have that, and we have a very well-established one as well as a retail business. And so as we look across the organization and find redundancies, it's important that we address those. We have a great retail channel to market. We have great fully products. We don't need the duplication that we've had. And although Foley is a small portion of our business, it has been breakeven to money losing at best. And so for us, this was the right decision. And we can still maintain the great products. We can still bring them to market in a very meaningful way. We don't need to lose that. But we can lose some of the extra costs that was making it not a profitable equation for us.

Got it. Thanks, guys. And good luck going forward.

Thank you.

We'll take our next question from Bud Bugach with Water Tower Research.

Good afternoon, Jeff. Good afternoon, Andy and the team. Congratulations. Can you hear me? Am I coming through?

Yeah, we can hear you. Yeah, you're coming through.

Thank you. Thank you. Congratulations on managing the margins in this. I think that's impressive and great. The differences, at least to my model, mostly center in the Americas, which I don't suspect is a big surprise in terms of particularly the revenue. And I know, John, you said that the order patterns have started to improve. Can you at least put some quantification on that? Are we looking at positive orders year over year in terms of what you're seeing in the last couple of weeks of the quarter or maybe the first couple of weeks of the next quarter?

Yeah, but this is Jeff. So, so what, what, what I would tell you is that we started the quarter lagging pretty, you know, we were, we were down double digit percentage. We improved in January and February to single digit percentage still declines, but an improving trend line. And that has, it's moved a little bit in the first couple of weeks of Q4 and but nowhere near as low as it was to start back in December. So, you know, it's still pressure. Wouldn't want to leave you with the wrong impression there. But that coupled with the fact, and, John, maybe you can speak to this a little bit. I think we're getting some feedback, by the way.

Operator, we're hearing some feedback on the line. Are you hearing that?

Yes, ma'am, I am hearing that. Bud, can you hear us?

Okay.

Thank you.

Bud, can you hear us?

I can hear you. I can hear you fine. I'm not getting the feedback, so I don't think it's coming.

Okay, great. We'll keep going then. Yeah.

Sorry, we were getting a little feedback in the room. Yeah, so I would say that trend, which is at least moving in the right direction, albeit still you're on your pressure, combined with some of the funnel metrics that we're seeing, and I don't know, John, if you want to speak to that, that gives us some encouragement here. Yeah, thank you, Jeff.

Hi, Bud. From a funnel perspective, we've seen significant growth in the over-million-dollar-sized projects, something we really haven't seen a lot of since sort of pre-pandemic days, if you will. So seeing a lot of activity there. And the overall funnel is up quarter to quarter as well. I think from Q3 to Q4, our net funnel additions were up 38%. So the activity seems to be percolating a bit, and that gives us obviously some encouragement to see some change in order trend over time as well.

And when you're talking about funnel, you're talking about visits and projects you're bidding on, or is there something more concrete to what you define as a funnel?

It's identified project and account opportunities that our sellers have identified and are pursuing in the market. So they're live projects that we're tracking in pursuit of.

And the Biffman numbers, at least as we see them on a monthly basis, look like we're getting into a situation where orders are just about flat year over year. Not quite, but getting there. So the fact that you're still down single digits, does that mean that you're performing a little bit behind BIFMO or the rest of the industry?

I think you have to look at BIFMO with a grain of salt, Bud. I mean, depending on how all of the players are reporting their numbers and what's included in contract and if there's other business, I wouldn't say that you can make that leap necessarily.

Okay. I always take those numbers with a little bit of a grain of salt indeed.

Okay, good. We appreciate that.

Jeff, can you give us maybe kind of an MD&A read of going from a walk from gross margin, either segment level or overall level, as to what drove the difference? Because where's the contribution margin right now with all the changes that you're experiencing or with all the difficulties in the environment?

Yeah, happy to talk. I'm going to keep it at the enterprise level, Bud, just because we don't guide at the segment level, but happy to talk kind of at the ink level for the business. And I'll just walk you year on year for the third quarter. You know, pricing was the big story for us this quarter, and it really has been, but that was a favorable 400-plus basis point move in in gross margins. And again, that's particularly encouraging because we have been expecting it and we're getting it, which is great. The other positive is that we had a little bit of positive around 60 basis points best we can estimate from overall product mix shifts that have been in our favor. And that's across all of our channels, by the way. So that can be channel mix and it can also be product mix. Commodities are actually, after many, many quarters of significant pressure from commodities, we're starting to see those flatten out. They were slightly negative. We had about a 20 basis point year-on-year drag from net commodity impacts on the business, but much improved from where they've been. We did lose some overhead from lower production levels. Again, as you know, when order levels drop in the business and you get less production, you see that on the labor and overhead lines. So we lost about 70 basis points year on year from overhead leverage. And then freight and transportation costs continued to be a pressure in total. We were 90 basis points down year on year from freight and transportation. And the thing I'd say about that is We're seeing it's stubbornly slow, but we're seeing improvements. I think particularly in the retail side of our business, we're seeing still elevated inbound freight costs, mainly coming out of Europe, where container rates and shipping costs just haven't come down as fast as what we've seen out of Asia. So that's one kind of nuance to the business. But in total, for the enterprise, 90 basis points of freight are And then the last thing I'd point out is I mentioned this wasn't a surprise because we knew this was going to be a factor. 50 basis points of that storage fee impact that we had in the retail side of the business, that inventory demurrage and storage fees that I talked about on the call last quarter was 50 basis points of pressure year on year. The good news is that's behind us now. I'm sorry, that was a negative 140 then with a 90 and a 50?

Is that correct?

Yeah, between freight and the retail storage. That's 140 negative. That's correct.

Right. So the merge is done. I hate that word. I hate the fact of paying out money. Turns out so do we. Unfortunately, it took a lot of my personal wealth about 30 years ago. Can you also give us maybe on a – Gap basis, what the gap guidance would be for EPS? I know the adjusted is 37 to 43. What would the gap be? What's the adjustment number?

But the only known adjustment would be the impact of amortization costs on purchased intangibles from the NOLA acquisition. And that's, I think, on the order of $6 million a quarter Beyond that, we may well have other adjustments, but they're certainly not known at this point.

And they're not in the guidance. So the guidance says you do that. And your guiding on tax rate is the same as has been, or where is that going to be?

Yeah, we figure 22% to 24%, same as where we've been. Okay.

And just a couple more for me, and these are more nits. That 4.6 million, I think, of restructuring, is that all fully?

So the fully restructuring, well, no, we had total special charge items in the quarter of just over 52 million, I think, but 37 of which relates to the fully decision, and those were impairment of things like leases, Some inventory valuation reserves. Yep, yep. So the majority of it was related to fully, but not the total amount.

But the $4.6 million in restructuring, what was the restructuring? What did you do there?

That would have related, Bud, to actions that were announced in Q2 associated with early retirement and some workforce reductions that have a tail as we move through the balance of the fiscal year, just based on the timing of exits.

Okay, and that split, it's probably mostly in America, is that right? I think that's where it's sitting, mostly. Okay, I see it. And last for me is the incentive comp. Can you quantify what that was in the quarter, how much that helped in the quarter?

I'm not going to quantify it, but it was a primary driver in the operating expense reduction year on year.

And the reason that doesn't repeat is you've already made that reduction for, you had a similar reduction last year. I mean, you all always have that variable issue when revenues don't quite make expectations.

Yeah, that is correct. Yep, it just depends on kind of business conditions at a given point in time and kind of the outlook for the balance of the year.

So it's already, you see, we shouldn't expect that to recur? Correct. You should not expect that to occur. I hope I said that right. I'm still a little confused, but we'll get that squared away at a later time. Thank you. Thank you very much. Good luck to you on the fourth quarter and going into next year. Hopefully we find some sort of normalcy as society.

Agreed. Thank you, bud.

We'll take our next question from Stephen Ramsey with Thompson.

Hi, good evening.

Hi, Stephen.

Hi. Maybe to start with just bringing the America's orders and demand into the context of, you know, companies, more companies laying off workers, but, you know, the tug of war against companies wanting workers. workers in the office and recognizing the value, realize that the near term maybe is a headwind, but how is that shaping conversations for the longer term, maybe as you look into the second half of calendar 2023 and beyond?

It's a great question. Steven, John alluded earlier to the amount of activity that we're seeing, and I think it's directly related to returning to work, to leaders of companies wanting to find ways to get people back in the office, and also, frankly, people coming back into the office and enjoying being together and collaborating again. So we are seeing an uptick in activity, looking to find creative ways to change spaces, to adapt to the new workforce, to adapt to hybrid. So more activity than we have in the past, and I think that's shaping how we can help people make these decisions and how they can think about their workspaces. But John, what specifics would you add for the Americas?

Thanks, Sandy. I would add that Literally every C-level conversation we're having, probably for the last 90 days, those executives are looking for help to get their employees back in the office. I think they understand the importance of return to office for all the reasons we've all talked about in the past, culture, connections, collaboration, et cetera. And I think they're becoming bolder in terms of, their desire to have people back because they're understanding the business impact of not having their employees back in the workplace. So I think, to your point, ultimately that will change from a headwind to at least neutral, if not a bit of a tailwind, as companies come to grips with that.

Okay, great. And then shifting to international, you talked about new markets. and geographies through local accounts. Can you share if this is a new initiative or a stronger push than the past? And is this going to be a major sales benefit in the next couple of quarters, or will this have to build up over time?

You know, we have been investing in and developing our international sales team, expanding our dealer network internationally for the last several years. So I would say we stand more ready now than we did a couple of years ago to capture the opportunities in different markets than we did before. We've had great leadership there. We continue to have great leadership there. And because we have such a varied presence, we can capitalize on the markets where we see opportunities. So I would say it's been a conscious effort, not a new one, but one where I think we'll start to reap benefit as we find these opportunities. Jeff, what would you add?

Yeah, and Stephen, the only thing that I would add to that is This is one of those areas where I think the combination of Herman Miller and Knoll plays to our advantage here because we now have new tools and new solutions that we can offer existing dealer partners in markets like India or markets like Korea or even in Europe where the Knoll product lines give us solutions that we couldn't previously offer our customers, and it opens doors. So we're very encouraged and have high expectations for that.

Gotcha. Okay. And then last quick one for me on the fully shift. I may have missed this, but how quickly does that help profitability in the retail channel? Is that pretty immediate, or will that take time to build up?

We'll be unwinding this in the next quarter, and then we'll see it in Q1. But remember, this is a small portion of the piece of the retail business. Jeff, you want to add something specific?

No, I think that's fair.

Okay, great. Thank you.

Thank you. We'll take our next question from Alex Furman with Craig Hellam Capital Group.

Hey guys, thanks for taking my question. First and foremost, if I could just ask maybe to square a little bit the differences in what we're hearing about for orders versus your revenue trend. I mean, it sounds like orders were down close to 20% in the third quarter and have gotten a little bit better, but obviously the revenue guidance that you're giving for Q4 is a good amount better. than that order trend. So just hoping if you could square the two numbers a little bit is part of that. You know, the improvement you've seen in orders quarter to date or maybe just, you know, the benefit of working through your existing backlog. Just anything you can kind of give us as we sort of size up what the base case would be heading into next year would be very helpful.

Yeah, Alex, this is Jeff. Good question.

So I think you kind of hit on a couple of the main points, but just to maybe emphasize them. A, we have seen, as I mentioned earlier, you know, kind of as we move through the quarter, order patterns did get a little better. And so that's part of our calculus. You also have, in particular in the international business, we've just got, you know, some of this is, Andy used the term lumpy earlier, and it is very true in that segment of our business. And so there are, we have line of sight to orders that we have confidence in early enough in the quarter to influence revenue in Q4. And then the other point that I would make is even though in total the Q4 revenue guide is a little atypical because it's actually, at our midpoint, it's down from the Q3 number, that's just reflective of economic conditions. However, even within that, within some of the segments, you do have some seasonality that is normally expected in Q4. And I would point to the retail business as part of that as well. So I think those are the major factors that give us kind of the parts and pieces that inform the fourth quarter guidance.

Okay, that's really helpful, Jeff. And then if I could ask also just about the backlog before COVID and before the acquisition of Knoll, It seemed like your backlog was more or less consistent at around the $400 million level. And then, of course, with Noel and the pandemic, we saw it balloon up to a billion dollars. Now it's been working its way steadily down for a few quarters and is around $700 million. Can you give us a sense of where we should expect to see that level out with Noel and in 2020? the post-COVID world? Are you expecting that number to continue to work lower throughout next year?

You know, Alex, the world has been so disrupted, we're still kind of waiting to see ourselves what kind of the new normal looks like. But I would tell you that I think based on the patterns that we see and based on how orders are scheduling, we are nearing a point where we think the backlog is largely stabilized. You might argue it's still a bit elevated in total, but I think as we move through Q4 and get into certainly the Q1 of this next year, our expectations would be that we are, if you will, kind of at that new normal level. So I'm not going to give you an absolute dollar amount because as soon as I do, business conditions will change, but I think we're getting close.

Great, that's helpful. Thanks, Jeff.

Thank you. We do have a follow-up question from Bud Bugach with Water Tower Research.

Yeah, sorry to prolong it, but I just wanted to make sure I understood something. Jeff, you said that the only adjustment you would expect in Q4 is really the amortization of purchase intangibles. Are there still acquisition and integration charges continuing? I think you told me they would continue for a long time.

Well, this is why we're not guiding. We don't have absolute clarity on what those will be. That's a live program that will unfold, so that's why we've tried to keep it out of the numbers because it can move around based on actions and levers that get pulled in the corridor. So, yes, there's potential for other things. The only absolute known would be that amortization number that I gave you.

Got you. Okay. Well, thank you very much.

And, again, good luck on the future periods.

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

Thanks again, everyone, for joining us on the call. We appreciate your continued support of Miller & All, and we look forward to updating you on our progress again next quarter. Thanks again, and have a great night.

And that does conclude today's presentation. Thank you for your participation, and you may now disconnect.