MillerKnoll, Inc.

I would now like to introduce your host for today's conference, Vice President of Investor Relations, Carola Mangolini.

Good evening and welcome to Miller & Norrell's second quarter fiscal 2024 conference call. I am joined by Andy Owen, Chief Executive Officer, and Jeff Stutz, Chief Financial Officer. Also available during the Q&A session is John Michael, President of America's 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 we 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 for joining our call. Miller Noll has delivered another quarter of strong financial performance, marked by a 28.3% year-over-year increase in adjusted earnings per share. Our second quarter results speak to the benefits of strategic emphasis we have placed on diversifying our business model, the benefits of our synergy capture, and the resilience of our company as we continue to navigate various global challenges. By leveraging the synergies across our collective and focusing on what is within our control, The team drove year-over-year margin improvement in all three areas of our business, again. And while we face relative high interest rates and geopolitical concerns, positive signs are emerging throughout our industry. Metrics such as project funnel activity, order intake, and recent measures of dealer optimism reflect that CEO confidence is improving. As it pertains to each of our segments, revenues for America's contract declined quarter-over-quarter, but we delivered another quarter of margin expansion mainly due to positive price dynamics and synergy capture. Since our integration with Miller Knoll, we have invested resources into our dealer network, and we continue to see the fruits of this labor. Our immersive dealer training session this fall was one of our best attended sessions to date. Cross-selling is up from the same period last year, along with digital tool adoption. The faster and easier we can make our processes, the more we see a direct correlation to a larger share of the wallet and higher sales. We're also delighted to see how our dealers are investing in their showrooms to tell the story of all our brands and products. Similarly, we opened our first Miller & Noll showroom this past quarter in Dallas. The first of its kind, this showroom showcases Herman Miller & Noll, as well as an immersive Miller & Noll area designed with settings from a variety of our collective brands. Spaces like this, which integrate our wide portfolio of solutions under one roof, will continue to enhance our leading position within the contract furniture industry. Consistently, our corporate customers express their desire to discover innovative ways to foster team connections and enhance the overall quality of the work experience. This includes the creation of more purposeful, inclusive spaces, even in situations where downsizing may be a factor. Corporate leaders seek guidance and information about available options, and our team is actively responding to these requests by offering carefully curated and thoroughly researched solutions. As an observation, we perceive a stabilization in return to office trends. In the fall, we conducted a survey involving 5,000 people across nine countries relevant to our business. The results indicated that 49% are employed by organizations with full in-office policies, while 37% work for organizations with hybrid policies. Notably, only about 13.6% of organizations have adopted a remote-first approach. Shifting our attention to the international contract and specialty segments, We continue to see strength in healthcare, tech, and the financial services vertical. We continue to focus on these market-resilient sectors where our products compete strongly due to our scale, agile manufacturing capabilities, and distribution network. We are continuing to help our existing dealers transition to selling our full Miller Knoll portfolio while also attracting strong new dealers to our international network. This quarter, we also saw demand increase in our specialty businesses, including a double-digit increase within our luxury trade-focused business, Holly Hunt. Turning to global retail, the team delivered its strongest day in the company's history with a record-breaking number of orders, followed by a record number of shipments in a single day. We were thrilled to see customers turn to us as a destination for key furniture pieces, with November being the largest sales month ever for our retail business. Investments in our digital capabilities excellent customer service, and enhanced marketing capabilities, along with the focus of driving traffic to our largest banners and improved reliability, all played crucial roles in bolstering sales this period. Our team also adopted an agile, strategic approach to this critical period that resonated with our customers in its highly promotional environment and significantly contributed to driving demand toward our highest margin brands and collections. Design within reach remains a key avenue for reaching retail customers. In 2024, we have plans to enhance our DWR spaces through incremental assortment displays and enhanced store design services. We will leverage revenue opportunities and also increase our brand awareness, enabling new customers to sit in their very first Eames lounge chair and personally experience some of our most iconic designs, while also getting to know newer designers and third-party brands. Furthermore, as we continue to expand our e-commerce business and enhance AI and visualization tools in order to enhance conversions. Throughout this quarter, we continued to innovate and reimagine our product portfolio. We reintroduced Knoll's classic model 31 and 33 designs for purchase, launched a high-profile limited edition gaming chair with G2 Esports, and at Herman Miller, we debuted a new nesting chair and further expanded our essential OE1 workspace collection for our contract clients. Not One introduced a playful new lounge chair, which received many notable accolades, and Maharam celebrated 20 years of continued collaboration with iconic British designer Paul Smith. Shifting gears, this past quarter we issued our first Better World Report as Miller Knoll. This report is a broad view of our efforts across the environmental, social, and governance areas. Also during this quarter, and for the 15th consecutive year, we received a top score from the Human Rights Campaign's Corporate Equality Index. Inclusion and a sense of belonging are integral elements within our organizational culture and of the experiences we design, and it's an honor to have our commitment to equality recognized in this way. In November, we organized our annual company-wide day of purpose, providing our employees across the globe a day away from the office to contribute to their communities and ensuring our U.S. team members are able to participate in regional elections. Our associates organized over 150 day of purpose events around the world. This initiative brought greater support to our commitment to improve our local communities and our planet. We reaffirmed once more that when we come together as one Millernold family, we can achieve more. In summary, while remaining agile and nimble in this environment, we will continue to focus on meeting our customers' needs, increasing our employee engagement, and adding value to our shareholders. This is an exciting time for us, strengthening our business and accelerating as the market rebounds. As always, we appreciate your support. Now I'll ask Jeff to walk us through the financials. Jeff?

Thank you, Andy. Good evening, everyone. As Andy just said, we're happy to deliver another quarter of strong earnings and a further increase to our full-year EPS guide to a midpoint of $2.08, despite what remains a rather challenging macroeconomic backdrop for our industry. Our consolidated adjusted operating margin for the second quarter was 7.9%, an all-time high since we became Miller & Ohl, and our adjusted EPS was 59 cents, up 28.3% year-over-year. Moreover, we continued to improve our gross margins. This quarter, we delivered a consolidated gross margin of 39.2%, up year-over-year in all three of our business segments. As we mentioned in the press release, this marks the fourth consecutive quarter of consolidated year-over-year adjusted gross margin expansion. Notably, these results were achieved in an environment largely affected by high interest rates and geopolitical concerns. both of which influence the housing market as well as sentiment measures. Our second quarter results reinforce themes that we've communicated over the past several quarters, namely the impact of strategic pricing initiatives, ongoing benefits of acquisition-related synergies, our focus on improved working capital management, and product and regional mix optimization. Our strong profitability in the quarter, despite softness on the top line, demonstrates the resilience that we are building around our operating margin. With respect to cash flows in the balance sheet, we generated $82.4 million of cash flow from operations this quarter. This enabled us to pay down $19 million of outstanding debt and provided an opportunity to repurchase approximately 1.4 million shares, amounting to a total cash expenditure of $28 million. As the quarter concluded, our net debt to EBITDA ratio stood at just under 2.5 turns. New orders at the consolidated level totaled $944 million in the second quarter. reflecting an organic decrease of 6% from the same quarter last year. While new orders in total were lower than last year's level, we were heartened to see the sequential trend improve steadily as we progressed through the quarter. Within our America's Contract Segment net sales for the quarter were $476 million, representing an organic decrease of 10.3% from the same quarter a year ago. New orders in the period totaled $437 million, down 8.1% from last year on an organic basis. Within the quarter, order comparisons to last year were somewhat volatile between September and October. This is largely due to the timing of a price increase that became effective in October of last year. Setting this aside, order growth in the month of November stabilized, with segment orders coming in 8% higher than last year. Additionally, for this segment, orders in the first two weeks of Q3 were up 15% year over year. Our confidence is further bolstered by other forward-looking demand indicators. including project funnel activity and a notable increase in requests for project pricing and mock-up builds. Customer showroom visits were also higher this quarter, with West Michigan visits up 28% year-over-year. We remain committed to providing our dealers with compelling content and dynamic tools to aid them in their projects, and our investment in technology is playing a key role in accelerating these efforts. In November, we launched a significant upgrade to our proprietary B2B e-commerce platform. This platform will substantially improve our ability to onboard new clients at a much faster pace. The onboarding process is already underway, and the backlog of new opportunities is growing. I'd also like to highlight the fact that our Americas contract team delivered another strong quarter of earnings, with its adjusted operating margin totaling 9.4%. This was the sixth straight quarter of year-over-year margin improvement for this segment, despite lower revenue. This year-over-year expansion reflects the positive price-cost dynamics and benefits from synergy capture, which are contributing to the overall resilience and operational success of the segment. Turning to our international contract and specialty segment, net sales for the quarter totaled $241.2 million, down 10.4% organically year-over-year, while new orders came to $234 million, reflecting a year-over-year organic decrease of 5%. Similar to the America segment, order trends improved as we moved through the quarter, and ended in positive territory for the month of November and through the first two weeks of Q3. Nonetheless, macroeconomic challenges, particularly in China and parts of Europe, have impacted the demand dynamics of this segment. In addressing these challenges and aligning with our commitment to agility and continuous improvement, we implemented targeted restructuring actions this quarter aimed at bolstering manufacturing efficiency and adjusting the operating expense run rate of the business. With all that said, our optimism for the medium to long-term growth prospect of this segment remains high, especially in markets like India, South Korea, and in the Middle East. To this end, we're continuing to focus on transitioning legacy Herman Miller dealers to full-line Miller & Old dealers. To date, we have transitioned just over 30% of the global network, and we have more planned in the second half of this fiscal year. Adjusted operating margin within this segment was 11.3% in the second quarter. down year-over-year, driven by lower sales volume. This was partially offset by improved gross margin performance, which continues to benefit from previous price increases, cost synergies, favorable regional and product mix, and the restructuring actions that I just mentioned. Moving to our global retail segment, net sales in the second quarter of $232 million were down 9.4% organically from the same quarter last year. And new orders for this segment of $273 million were 3% lower from a year ago on an organic basis. This relative decline in organic orders is, however, an improvement compared to the 6.4% decrease posted in the previous quarter. The retail team's agile and strategic approach to promotions enabled us to drive year-over-year organic demand growth in November. And as Andy highlighted, demand in this critical month of the retail calendar reached an all-time record level for the segment. Despite challenges posed by the slowdown in the housing market and elevated interest rates, we remain optimistic about the retail team's efforts to gain market share through direct-to-consumer channels. We believe the longer-term demand fundamentals for this business are robust, with the U.S. housing market facing undersupply and demographic trends pointing towards substantial future construction growth. Accordingly, our retail team remains focused on investments and initiatives geared toward market expansion, including assortment expansion and innovation, and enhanced digital capabilities. Adjusted operating margin in the retail segment was 7.1%. This is 570 basis points higher than Q2 of last year due to a host of operational improvements, including inventory management and enhanced shipping revenues. Now I'm going to turn my attention to our near-term guidance and outlook. Given the improvements we are seeing in gross margins across each of our business segments and continued signs of demand stabilization in the business, we're increasing our adjusted earnings guidance for the full fiscal year, which we now expect to range between $2.00 and $2.16 per share. As it relates to the third quarter of fiscal 2024, we expect net sales to range between 890 million and $930 million and adjusted diluted earnings per share to be between 40 and 48 cents per share. Consolidated orders through the first two weeks of the third quarter of fiscal 2024 grew 4% organically compared to last year. Our revenue guidance considers this as well as the size and scheduling of the beginning backlog. And it also considers the relative seasonal decrease that we normally experience from the second to the third quarter, which is characterized by lower demand and shipping activity in the contract segments driven by the holiday season.

So with those overview comments, I'll turn the call back over to the operator and we'll take your questions.

Thank you. If you have any questions, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, simply press star 1 again.

Just one moment for your first question. Your first question comes from the line of Greg Burns of Sidoti & Company. Your line is open.

Greg, are you there? You may be on mute.

We'll get back to him at a later time. Check again. Your next question then comes from the line of Ruben Garner of the Benchmark Company. Your line is open.

Thank you. Good evening, everybody.

Hey, Ruben.

Maybe we could start big picture in the Americas. Last couple of quarters, you've talked a lot about seeing kind of signs of a turning point and discussed an increased project funnel and order intake and visits to the showrooms and that sort of thing. Orders still seem a little bit choppy, I think. Is that fair to say? What do you think it's going to take for kind of the order level to turn the corner and maybe return to growth on a consistent basis?

It's a great question, Ruben. Actually, we're pretty optimistic about order growth in the Americas. As Jeff mentioned in his opening comments, Our comparisons to last year in September and October were pretty volatile and probably out of sync based on a price increase that we did last year. So if you normalize for that and you look at our trend coming out of October when we took the price increase last year, we're confident in the increases that we've seen from that point on. Jeff or John, what would you add to that?

I would just add, I think the work patterns that have really been sort of bouncing around sort of post-COVID have really begun to stabilize. and I think clients are now more in a position to take action than they have been previously. And I think the reference to funnel activity and share room visits and those types of leading indicators really demonstrates that fact, that they're getting closer to pulling the trigger on a lot of these projects, and there's a fair amount of them in the funnels.

Yeah, Ruben, this is Jeff. I agree with all of that. The only other color I would add, and I think you know this, but I think it warrants saying out loud, you know that in moments of kind of the beginning of a recovery in this business, I think your word was right. Choppy demand patterns are very typical. And so, as Andy said, we had a fairly volatile start to the quarter, I think in large part due to that timing of the price increase. But really, feels like things began to stabilize in November. And as I said in the opening remarks, up 8% in November, up 15% in the first two weeks of the new quarter. And a reminder, last quarter we were up 2% for the segment in total for the full quarter.

Got it. And any areas of particular strength or weakness within your contract business that you would call out, or are you starting to see some of the the bigger cities, bigger customers return in a bigger way? Is that what's driving kind of the recent stabilization?

I've definitely seen some of that.

I think if you looked at the sectors, energy, public sector, pharma, healthcare are all pretty vibrant now sort of across the board. I think there are still some geographic soft spots, certain large cities that were maybe tech-heavier. Then others are still a little bit slower to recover. But in general, they all seem to be coming back. And then, of course, there are those that have been pretty robust throughout all of this, be that areas like Texas, Midwest, et cetera, that have been relatively stable.

And Ruben, I would say globally, we continue to see strength. In the Middle East, we continue to see strength. In India, We're seeing China sort of slowly come back, which is encouraging. And then I think Europe is starting to feel a little bit better than it had usually. So internationally, we have markets that are definitely seeing strength.

And you made reference to, I think, in the same vein as synergies and cross-selling and some other initiatives you have, ongoing product and regional mix optimization. Can you refresh me on what you've got going on there and what kind of benefits you're seeing? Reuben, this is Jeff.

I'll start, and Debbie, you might want to jump in because I think some of this certainly relates to yours. So part of the mix that I'm referring to, it becomes segment and channel mix, Reuben, and when we index into retail, we get the benefit of the retail margin profile at the gross margin level. And, of course, November is, as we highlighted in the opening remarks, kind of the critical month of the year for that. Within the international business in particular, there are certain regions of the world where we tend to index a little higher into seeding, for example, and we've had some strength in those parts of the world in particular. So that's kind of the regional mix comment. Debbie, I don't know if you want to add any comment on the retail side.

Before we get to retail too, Ruben, as you've heard us talk about in the past, as we see our contract customers, Wanting to look more at ancillary options, those are obviously a little bit better margin for us than kind of workstations. So that's another piece of the contract business from a product mix standpoint. And then retail, Debbie?

And from a retail perspective, with a promotional posture, we took this holiday season, we really focused on driving demand through our owned brands, specifically the Herman Miller brand, where we saw really nice increases in performance. in our gaming category and nice resilience out of our upholstery category. We were able to sell our large ticket items with rich margins and drive margin growth both year-over-year and sequentially from Q1.

Got it. Thanks, guys. That's it for me. Happy holidays and Happy New Year.

Thank you very much. Thank you.

Your next question comes from the line of Alex Furman of Craig Hallam Capital Group. Your line is open.

Hey, guys, thanks very much for taking my question. Andy, it sounds like you're pretty optimistic about your customers' return to the office plans. There continue to be a lot of really negative headlines out there about office occupancy in North America and expectations for next year. Can you help us bridge that gap a little bit? You're obviously on the front lines here of the return to the office. Do you think some of the headlines out there are maybe getting it wrong or are too pessimistic? for next year? Or is it possible that maybe your large multinational customers are returning to the office perhaps faster than small and medium-sized businesses? Just trying to better understand what you're seeing and how that squares with some of the headlines that are out there.

Yes, funny, Alex. I actually think there's a little bit less headlines than there were about six or eight months ago. But I think every market is a little bit different. But what we're hearing and seeing as we sit and with our customers in the contract market. So there's a lot more momentum around getting people back together for all the reasons that you see in the press as well. So we're seeing people come to us with Instead of, hey, we're thinking about, they have ideas about what they want to do. They have plans to bring people back to the office. So I think the key here is flexibility. I think return to office is absolutely picking up. I think, as John said, there are markets where we see much more momentum than others in the U.S. You would agree with that, John? But certainly momentum is building.

What would you add? I would add that a lot of companies are downsizing their real estate portfolio. But going to smaller spaces really triggers project activity for us. So even though from an overall commercial real estate perspective, there's a lot of headwinds, the movement within the commercial real estate creates activity for what we do and what our dealers do. So whether that's moves, adds, and changes or new workplaces to reflect new ways of working, it creates demand. And I think our clients realize that the real estate has to work harder than ever. in order to attract people back into the office to make the social connections that they can't get working remotely or hybrid. And that's really our focus is helping them figure that out.

Okay, that's really helpful. Thanks, guys. And then you guys have done a really good job of growing EBITDA so far this year in a year when revenue has been down pretty significantly. How should we think about your margin profile heading into next year? Is it possible that you could continue to see... you know, further gross margin increases here, you know, even if revenue remains kind of at current levels or, you know, at a certain point are you going to need revenue growth to resume in order to start getting earnings, you know, continuing to move higher?

Yeah, this is Jeff. I think we still have a little bit of room, I believe, in some of the more recent pricing actions, but I think you hit on a key point, and that is at some point, and I don't think we're too far off from it, We do need to see some top-line growth to drive leverage in our manufacturing operations. I think that the retail team is doing a really nice job. We talked on the prepared remarks about assortment expansion and some of the newness. I think we've got some real opportunity there to drive some margin-rich products into that business and growth. But within the contract business in particular, I think our margin profile is is at some point going to be reliant on top-line growth for meaningful further expansion. I mean, our teams are constantly working on VAVE-type initiatives to drive efficiencies. They're really good at it. We expect that we plan for those every year. And so I think there's a window here where, without top-line growth, we still can show some improvement with that plus some of the pricing that we still have in place. But at some point, history would say you've got to have that top line moving. The good news is, as we've said, we've got growing optimism that that's coming.

That's terrific. Thanks, all of you, very much.

Your next question comes from Greg Burns of Sidoti & Company. Your line is open.

Hey, afternoon. Can you hear me this time?

Yeah, hi, Greg.

Okay, great. So I just wanted to, I guess, touch on the kind of the relative strength in the retail segment, or I guess the better than expected. It was definitely stronger than I was expecting, given some of the macro headwinds facing the housing market. So can you just talk about specifically what you think you're doing right to – to drive market share gains there, and then also on the profitability of that segment. Is that sustainable, what you put up this quarter, or is there some kind of one-off type of items that are driving the operating margin this quarter?

Yeah. Hey, Greg, I'm going to start very briefly, and then I'll turn it over to Annie and Debbie. But I wanted to say, no one-off items in the quarter. I mean, what was great about this quarter is that it was just really awesome to see the team deliver a real clean, kind of high-quality quarter of profitability. So there's nothing notable in terms of one-offs. And I don't know, Debbie, if you want to unpack that any further.

Yeah, I would give kudos to the team this quarter and to the last year, Greg, and really knuckling down and delivering strategic execution.

And they really did that this quarter. But, again, no one time. This is well done. Why don't you ask, Debbie?

Hi, Greg. It's Debbie. So a few things that I would just highlight. The first is we've been extremely focused on our foundational execution over the last 24 months. And we're really starting to see some of the operational investments and improvements we've made paying off. That's driving up customer lifetime value. We're improving across all of our operational metrics. We had our fastest ship leave times ever within the quarter. And that is fantastic. In fact, freeing up more time and capacity in our stores to focus on selling activity instead of post-purchase activity. Second thing is our marketing effectiveness. We actually spent 11% less in marketing expenses year over year, and our organic sales are down 3%. So we got really nice leverage out of our marketing capabilities. That's driven by the beginnings of optimizing the customer data platform we stood up in the last year. And then in terms of our promotional posture, that obviously drove really nice progress. We had our best month ever in November, November up 5% to last year in organic orders. That was really driven by the position we took to capture as much demand late in the quarter as possible. We've seen a shift over the last three years of customers waiting till later and later in the month to purchase. And so we wanted to be agile and have a promotional strategy that we could stair-step depending on the customer behavior we saw, and we managed that business real-time to make sure that we were driving demand in terms of profitable categories. So we're really proud of the demand trends versus the industry in the quarter. We're really also proud of the margin trends, and we expect to see forward-looking trends from a margin perspective in line.

Okay, great. And then, Jeff, the interest in other expense line item, I think you were guiding to around $19 or $20 million to come in. It came in at $16 million, and you're guiding to that for the next quarter. What's driving the decrease there?

Yeah, the biggie is We generated some good amounts of cash. I said in prepared remarks, we've been pleased with working capital efficiency, and that's helped generate cash, not just in the U.S., but in a variety of jurisdictions around the world. And what we benefited from was higher interest rates, particularly outside the U.S., driving interest income. So that was a biggie below the line. That was a positive. We also had a slight currency, good news on the currency line, which we tend to, currency transaction gains and losses, we tend to guide those as flat. We had a slight gain and some good news related to an international pension plan. So it was really those three things.

Okay, great. All right, thank you.

Your next question is from the line of Bud Bugat of Water Tower Research. Your line is open.

Good evening, Andy, Jeff. Hi. Happy New Year and happy holidays and happy New Year to everybody there. I guess the – and congratulations on the margin performance. It's very nice. And I guess, Jeff, my first question is the 30 – on the 34% gross margin in America, can you hang on to that? The backlog is – continues to be looks depressed to me and that your comment about leverage is one that I worry about.

Yeah, but I think over the more than just one quarter, we're rolling into our, as you know this very well, we're rolling into what is historically a seasonal low quarter from a manufacturing volume perspective, and that tends to drive some reduction in gross margin, but that's in the best of times we see that in this business. So I think it would be fair to say that in the Americas segment, will we see a slight sequential step down in margin performance? I think that's reasonable to expect, and that's implied in our guidance for the quarter. But like for like to Q2 going forward, we don't see anything in this performance that we don't think we can hold on to. I mean, obviously we're keeping an eye on discounting pressure in the business, And I think we've seen some signs of it on the edges, but nothing significant that's of great concern. And as we see larger project opportunities, those are going to be priced more aggressively. That always happens. But with that comes more manufacturing production and an opportunity to leverage. So nothing that causes us any great concern there.

So in contract, the normal, as I recall, in normal times, the discounting Impact used to be about 50 basis points, or that's what was discussed. Is that what is normal and what you're expecting?

You know, it's funny. I don't know that I think of it in terms of basis points. I mean, that doesn't strike me as crazy, but I'm kind of going from – I don't have any data from history in front of me. Typically, you do see some contraction in margins, and it can happen in short bursts until the volume picks up, and you start to be able to offset that with – opportunity growth. And that's why these forward indicators that we've been following so closely are so important and have us fairly optimistic.

And the difference between orders and shipments in the Americas implies about a $40 million drawdown of the ending backlog from the beginning backlog in the quarter. And I'll ask you, is that correct? And That strikes me as a number that I haven't seen that low, and I don't remember when. So help me understand, when do you start building that back? And it was nice to see it come back in retail, and I know international is down a little bit, but America's was significant from what I can see from the numbers.

I think your numbers are right, Bud. That's correct. And I think that puts us down about 15% or 16% year-on-year in the Americas segment backlog. The number sounds right.

I think 19 is the number I look at. It's like around the 380 level versus 470. I think it was at the end of Q2 of last year.

It's just under 384. Okay. Yeah, 383.3. Yeah. Okay. Okay.

And that's about – yeah, that's a big number. That worries me. I mean, a small number. So when do we start seeing that build? I was hoping that maybe that's the real thing because I think that's the key here.

Yeah, I mean, clearly we're watching that closely too. I think the best indicators we have are what we've already highlighted and the fact that we've seen a nice improvement in the year-on-year order comparisons in the month of November and thus far through two weeks of – So that's, I mean, you know, at the end of the day, order growth is what it's going to take to drive that. And so far, we like what we see as we close the quarter and move into Q3.

Okay. I'm rooting for you. So, yep, that's what I would like to see. Okay. Well, Happy New Year to everybody there. And stay warm if you can.

Same to you, bud. Thank you.

There are no further questions at this time. We now turn the floor over back to President and CEO, Andy Owen, for any closing remarks.

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

This concludes today's conference call. You may now disconnect. Thank you. Thank you. Thank you. Thank you. Good evening and welcome to the Miller Knowles Quarterly Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Vice President of Investor Relations, Carola Mengolini.

Good evening and welcome to Miller Knowles Second Quarter Fiscal 2024 Conference Call. I am joined by Andy Owen, Chief Executive Officer, and Jeff Stutz, Chief Financial Officer. Also available during the Q&A session is John Michael, President of America's 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 we 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 for joining our call. Millernol has delivered another quarter of strong financial performance, marked by a 28.3% year-over-year increase in adjusted earnings per share. Our second quarter results speak to the benefits of strategic emphasis we have placed on diversifying our business model, the benefits of our synergy capture, and the resilience of our company as we continue to navigate various global challenges. By leveraging the synergies across our collective and focusing on what is within our control, the team drove year-over-year margin improvement in all three areas of our business again. And while we face relative high interest rates and geopolitical concerns, Positive signs are emerging throughout our industry. Metrics such as project funnel activity, order intake, and recent measures of dealer optimism reflect that CEO confidence is improving. As it pertains to each of our segments, revenues for America's contract declined quarter over quarter, but we delivered another quarter of margin expansion, mainly due to positive price dynamics and synergy capture. Since our integration of Miller Knoll, we have invested resources into our dealer network, and we continue to see the fruits of this labor. Our immersive dealer training session this fall was one of our best attended sessions to date. Cross-selling is up from the same period last year, along with digital tool adoption. The faster and easier we can make our processes, the more we see a direct correlation to a larger share of the wallet and higher sales. We're also delighted to see how our dealers are investing in their showrooms. tell the story of all our brands and products. Similarly, we opened our first Miller-Knoll showroom this past quarter in Dallas. The first of its kind, this showroom showcases Herman Miller and Knoll, as well as an immersive Miller-Knoll area designed with settings from a variety of our collective brands. Spaces like this, which integrate our wide portfolio of solutions under one roof, will continue to enhance our leading position within the contract furniture industry. Consistently, our corporate customers express their desire to discover innovative ways to foster team connections and enhance the overall quality of the work experience. This includes the creation of more purposeful, inclusive spaces, even in situations where downsizing may be a factor. Corporate leaders seek guidance and information about available options, and our team is actively responding to these requests by offering carefully curated and thoroughly researched solutions. As an observation, we perceive a stabilization and return to office trends. In the fall, we conducted a survey involving 5,000 people across nine countries relevant to our business. The results indicated that 49% are employed by organizations with full in-office policies, while 37% work for organizations with hybrid policies. Notably, only about 13.6% of organizations have adopted a remote-first approach. Shifting our attention to the international contract and specialty segment, we continue to see strength in healthcare, tech, and the financial services vertical. We continue to focus on these market-resilient sectors where our products compete strongly due to our scale, agile manufacturing capabilities, and distribution network. We are continuing to help our existing dealers transition to selling our full Millernull portfolio while also attracting strong new dealers to our international network. This quarter, we also saw demand increase in our specialty businesses, including a double-digit increase within our luxury trade-focused business, Polyhunt. Turning to global retail, the team delivered its strongest day in the company's history with a record-breaking number of orders, followed by a record number of shipments in a single day. We were thrilled to see customers turn to us as a destination for key furniture pieces, with November being the largest sales month ever for our retail business. Investments in our digital capabilities, excellent customer service, and enhanced marketing capabilities, along with the focus of driving traffic to our largest banners and improved reliability, all played crucial roles in bolstering sales this period. Our team also adopted an agile, strategic approach to this critical period that resonated with our customers in its highly promotional environment and significantly contributed to driving demand toward our highest margin brands and collections. Design Within Reach remains a key avenue for reaching retail customers. In 2024, we have plans to enhance our DWR spaces through incremental assortment displays and enhanced store design services. We will leverage revenue opportunities and also increase our brand awareness, enabling new customers to sit in their very first Eames lounge chair and personally experience some of our most iconic designs, while also getting to know newer designers and third-party brands. Furthermore, as we continue to expand our e-commerce business and enhance AI and visualization tools in order to enhance conversion. Throughout this quarter, we continue to innovate and reimagine our product portfolios. We reintroduced Knoll's classic model 31 and 33 designs for purchase, launched a high-profile limited edition gaming chair with G2 Esports, and at Herman Miller, we debuted a new nesting chair and further expanded our essential OE1 workspace collection for our contract clients. Knot One introduced a playful new lounge chair, which received many notable accolades, and Maharam celebrated 20 years of continued collaboration with iconic British designer Paul Smith. Shifting gears, this past quarter we issued our first Better World Report of Miller-Knoll. This report is a broad view of our efforts across the environmental, social, and governance areas. Also during this quarter, and for the 15th consecutive year, we received a top score from the Human Rights Campaign's Corporate Equality Index. Inclusion and a sense of belonging are integral elements within our organizational culture and of the experiences we design, and it's an honor to have our commitment to equality recognized in this way. In November, we organized our annual Companywide Day of Purpose, providing our employees across the globe a day away from the office to contribute to their communities, and ensuring our U.S. team members are able to participate in regional elections. Our associates organized over 150 day-of-purpose events around the world. This initiative brought greater support to our commitment to improve our local communities and our planet. We reaffirmed once more that when we come together as one Millernal family, we can achieve more. In summary, while remaining agile and nimble in this environment, we will continue to focus on meeting our customers' needs. increasing our employee engagement, and adding value to our shareholders. This is an exciting time for us, strengthening our business and accelerating as the market rebounds. As always, we appreciate your support. Now I'll ask Jeff to walk us through the financials. Jeff?

Thank you, Andy. Good evening, everyone. As Andy just said, we're happy to deliver another quarter of strong earnings and a further increase to our full-year EPS guide to a midpoint of $2.08. despite what remains a rather challenging macroeconomic backdrop for our industry. Our consolidated adjusted operating margin for the second quarter was 7.9%, an all-time high since we became Miller & Old, and our adjusted EPS was 59 cents, up 28.3% year-over-year. Moreover, we continued to improve our gross margins. This quarter, we delivered a consolidated gross margin of 39.2%, up year-over-year in all three of our business segments. As we mentioned in the press release, this marks the fourth consecutive quarter of consolidated year-over-year adjusted gross margin expansion. Notably, these results were achieved in an environment largely affected by high interest rates and geopolitical concerns, both of which influenced the housing market as well as sentiment measures. Our second quarter results reinforce themes that we've communicated over the past several quarters, namely the impact of strategic pricing initiatives, ongoing benefits of acquisition-related synergies, our focus on improved working capital management and product and regional mix optimization. Our strong profitability in the quarter, despite softness on the top line, demonstrates the resilience that we are building around our operating margin. With respect to cash flows in the balance sheet, we generated $82.4 million of cash flow from operations this quarter. This enabled us to pay down $19 million of outstanding debt and provided an opportunity to repurchase approximately 1.4 million shares amounting to a total cash expenditure of $28 million. As the quarter concluded, our net debt to EBITDA ratio stood at just under 2.5 turns. New orders at the consolidated level totaled $944 million in the second quarter, reflecting an organic decrease of 6% from the same quarter last year. While new orders in total were lower than last year's level, we were heartened to see the sequential trend improve steadily as we progressed through the quarter. Within our America's contract segment net sales for the quarter were 476 million, representing an organic decrease of 10.3% from the same quarter a year ago. New orders in the period totaled 437 million, down 8.1% from last year on an organic basis. Within the quarter, order comparisons to last year were somewhat volatile between September and October. This is largely due to the timing of a price increase that became effective in October of last year. Setting this aside, order growth in the month of November stabilized, with segment orders coming in 8% higher than last year. Additionally, for this segment, orders in the first two weeks of Q3 were up 15% year-over-year. Our confidence is further bolstered by other forward-looking demand indicators, including project funnel activity and a notable increase in requests for project pricing and mock-up builds. Customer showroom visits were also higher this quarter, with West Michigan visits up 28% year-over-year. We remain committed to providing our dealers with compelling content and dynamic tools to aid them in their projects, and our investment in technology is playing a key role in accelerating these efforts. In November, we launched a significant upgrade to our proprietary B2B e-commerce platform. This platform will substantially improve our ability to onboard new clients at a much faster pace. The onboarding process is already underway, and the backlog of new opportunities is growing. I'd also like to highlight the fact that our America's contract team delivered another strong quarter of earnings, with its adjusted operating margin totaling 9.4%. This was the sixth straight quarter of year-over-year margin improvement for this segment, despite lower revenue. This year-over-year expansion reflects the positive price-cost dynamics and benefits from Synergy Capture, which are contributing to the overall resilience and operational success of the segment. Turning to our international contract and specialty segments, Net sales for the quarter totaled $241.2 million, down 10.4% organically year-over-year, while new orders came to $234 million, reflecting a year-over-year organic decrease of 5%. Similar to the Americas segment, order trends improved as we moved through the quarter and ended in positive territory for the month of November and through the first two weeks of Q3. Nonetheless, macroeconomic challenges particularly in China and parts of Europe, have impacted the demand dynamics of this segment. In addressing these challenges and aligning with our commitment to agility and continuous improvement, we implemented targeted restructuring actions this quarter aimed at bolstering manufacturing efficiency and adjusting the operating expense run rate of the business. With all that said, our optimism for the medium to long-term growth prospect of this segment remains high, especially in markets like India, South Korea, and in the Middle East. To this end, we're continuing to focus on transitioning legacy Herman Miller dealers to full-line Miller & Old dealers. To date, we have transitioned just over 30% of the global network, and we have more planned in the second half of this fiscal year. Adjusted operating margin within this segment was 11.3% in the second quarter, down year-over-year, driven by lower sales volume. This was partially offset by improved gross margin performance, which continues to benefit from previous price increases, cost synergies, favorable regional and product mix, and the restructuring actions that I just mentioned. Moving to our global retail segment, net sales in the second quarter of $232 million were down 9.4% organically from the same quarter last year. And new orders for this segment of $273 million were 3% lower from a year ago on an organic basis. This relative decline in organic orders is, however, an improvement compared to the 6.4% decrease posted in the previous quarter. The retail team's agile and strategic approach to promotions enabled us to drive year-over-year organic demand growth in November. And as Andy highlighted, demand in this critical month of the retail calendar reached an all-time record level for the segment. Despite challenges posed by the slowdown in the housing market and elevated interest rates, we remain optimistic about the retail team's efforts to gain market share through direct-to-consumer channels. We believe the longer-term demand fundamentals for this business are robust, with the U.S. housing market facing undersupply and demographic trends pointing towards substantial future construction growth. Accordingly, our retail team remains focused on investments and initiatives geared toward market expansion, including assortment expansion and innovation, and enhanced digital capabilities. The adjusted operating margin in the retail segment was 7.1%. This is 570 basis points higher than Q2 of last year due to a host of operational improvements. including inventory management and enhanced shipping revenues. Now I'm going to turn my attention to our near-term guidance and outlook. Given the improvements we are seeing in gross margins across each of our business segments and continued signs of demand stabilization in the business, we're increasing our adjusted earnings guidance for the full fiscal year, which we now expect to range between $2 and $2.16 per share. As it relates to the third quarter of fiscal 2024, we expect net sales to range between $890 million and $930 million, and adjusted diluted earnings per share to be between 40 and 48 cents per share. Consolidated orders through the first two weeks of the third quarter of fiscal 2024 grew 4% organically compared to last year. Our revenue guidance considers this, as well as the size and scheduling of the beginning backlog, and it also considers the relative seasonal decrease that we normally experience from the second to the third quarter. which is characterized by lower demand and shipping activity in the contract segments driven by the holiday season.

So with those overview comments, and I'll turn the call back over to the operator, and we'll take your questions.

Thank you. If you have any questions, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, simply press star 1 again.

Just one moment for your first question. Your first question comes from the line of Greg Burns of Sidoti and Company.

Your line is open. Greg, are you there? You may be on mute.

We'll get back to him at a later time. Check again. Your next question then comes from the line of Ruben Garner of the Benchmark Company. Your line is open.

Thank you. Good evening, everybody.

Hey, Ruben.

Maybe we could start big picture in the Americas. Last couple of quarters, you've talked a lot about seeing kind of signs of a turning point and discussed an increased project funnel and order intake and a visit to the showrooms and that sort of thing. Orders still seem a little bit Choppy, I think, is that fair to say? What do you think it's going to take for kind of the order level to turn the corner and maybe return to growth on a consistent basis?

It's a great question, Ruben. Actually, we're pretty optimistic about order growth in the Americas, as Jeff mentioned in his opening comments. Our comparisons to last year in September and October were pretty volatile and probably out of sync based on a price increase that we did last year. So if you normalize for that and you look at our trend coming out of October when we took the price increase last year, we're confident in the increases that we've seen from that point on. Jeff or John, what would you add to that?

I would just add, I think the work patterns that have really been sort of bouncing around sort of post-COVID have really begun to stabilize. And I think clients are now more in a position to take action than they have been previously. And I think the reference to funnel activity and share room visits and those types of leading indicators really demonstrates that fact, that they're getting closer to pulling the trigger on a lot of these projects. And there's a fair amount of them in the funnel.

Yeah, Ruben, this is Jeff. I agree with all of that. The only other color I would add, and I think you know this, but I think it warrants saying out loud, you know that in moments of kind of the beginning of a recovery in this business, I think your word was right. Choppy demand patterns are very typical. And so, as Andy said, we had a fairly volatile start to the quarter, I think in large part due to that timing of the price increase. But really, feels like things began to stabilize in November. And as I said in the opening remarks, up 8% in November, up 15% in the first two weeks of the new quarter. And a reminder, last quarter we were up 2% for the segment in total for the full quarter.

Got it. And any areas of particular strength or weakness within your contract business that you would call out, or are you starting to see some of the the bigger cities, bigger customers return in a bigger way? Is that what's driving kind of the recent stabilization?

I've definitely seen some of that.

I think if you looked at the sectors, energy, public sector, pharma, healthcare are all pretty vibrant now sort of across the board. I think there are still some geographic soft spots, certain large cities that were maybe tech-heavier. Then others are still a little bit slower to recover. But in general, they all seem to be coming back. And then, of course, there are those that have been pretty robust throughout all of this, be that areas like Texas, Midwest, et cetera, that have been relatively stable.

And Ruben, I would say globally, we continue to see strength. In the Middle East, we continue to see strength. In India... We're seeing China sort of slowly come back, which is encouraging. And then I think Europe is starting to feel a little bit better than it had usually. So internationally, we have markets that are definitely seeing strength.

And you made reference to, I think, in the same vein as synergies and cross-selling and some other initiatives you have, ongoing product and regional mix optimization. Can you refresh me on what you've got going on there and what kind of benefits you're seeing? Reuben, this is Jeff.

I'll start, and Debbie, you might want to jump in because I think some of this certainly relates to yours. So part of the mix that I'm referring to, it becomes segment and channel mix, Reuben, and when we index into retail, we get the benefit of the retail margin profile at the gross margin level. And, of course, November is, as we highlighted in the opening remarks, kind of the critical month of the year for that. Within the international business in particular, there are certain regions of the world where we tend to index a little higher into seeding, for example, and we've had some strength in those parts of the world in particular. So that's kind of the regional mix comment. Debbie, I don't know if you want to add any comment on the retail side.

Before we get to retail too, Ruben, as you've heard us talk about in the past, as we see our contract customers, wanting to look more at ancillary options, those are obviously a little bit back margin for us than kind of workstations. So that's another piece of the contract business from a product mix standpoint. And then retail, Debbie?

And from a retail perspective, with a promotional posture, we took this holiday season, we really focused on driving demand through our owned brands, specifically the Herman Miller brand, where we saw really nice increases in performance in our gaming category and nice resilience out of our upholstery category. We were able to sell our large ticket items with rich margins and drive margin growth both year over year and sequentially from Q1.

Got it. Thanks, guys. That's it for me. Happy holidays and happy new year.

Thank you, Robin. Thank you.

Your next question comes from the line of Alex Furman of Craig Hallam Capital Group. Your line is open.

Hey guys, thanks very much for taking my question. Andy, it sounds like you're pretty optimistic about your customers' return to the office plans. There continue to be a lot of really negative headlines out there about office occupancy in North America and expectations for next year. Can you help us bridge that gap a little bit? You're obviously on the front lines here of the return to the office. Do you think some of the headlines out there are maybe getting it wrong or are too pessimistic? for next year? Or is it possible that maybe your large multinational customers are returning to the office perhaps faster than small and medium-sized businesses? Just trying to better understand what you're seeing and how that squares with some of the headlines that are out there.

Yes, funny, Alex. I actually think there's a little bit less headlines than there were about six or eight months ago. But I think every market is a little bit different. But what we're hearing and seeing as we sit in with our customers in the contract market. So there's a lot more momentum around getting people back together for all the reasons that you see in the press as well. So we're seeing people come to us with Instead of, hey, we're thinking about, they have ideas about what they want to do. They have plans to bring people back to the office. So I think the key here is flexibility. I think return to office is absolutely picking up. I think, as John said, there are markets where we see much more momentum than others in the U.S. You would agree with that, John? But certainly momentum is building.

What would you add? I would add that a lot of companies are downsizing their real estate portfolio. But going to smaller spaces really triggers project activity for us. So even though from an overall commercial real estate perspective, there's a lot of headwinds, the movement within the commercial real estate creates activity for what we do and what our dealers do. So whether that's moves, adds, and changes or new workplaces to reflect new ways of working, it creates demand. And I think our clients realize that the real estate has to work harder than ever. in order to attract people back into the office to make the social connections that they can't get working remotely or hybrid. And that's really our focus is helping them figure that out.

Okay, that's really helpful. Thanks, guys. And then you guys have done a really good job of growing EBITDA so far this year in a year when revenue has been down pretty significantly. How should we think about your margin profile heading into next year? Is it possible that you could continue to see... you know, further gross margin increases here, you know, even if revenue remains kind of at current levels or, you know, at a certain point are you going to need revenue growth to resume in order to start getting earnings, you know, continuing to move higher?

Yeah, this is Jeff. I think we still have a little bit of room, I believe, in some of the more recent pricing actions, but I think you hit on a key point, and that is at some point, and I don't think we're too far off from it, we do need to see some top-line growth to drive leverage in our manufacturing operations. I think that the retail team is doing a really nice job. We talked on the prepared remarks about assortment expansion and some of the newness. I think we've got some real opportunity there to drive some margin-rich products into that business and growth. But within the contract business in particular, I think our margin profile – is at some point going to be reliant on top-line growth for meaningful further expansion. I mean, our teams are constantly working on VAVE-type initiatives to drive efficiencies. They're really good at it. We expect that we plan for those every year. And so I think there's a window here where, without top-line growth, we still can show some improvement with that plus some of the pricing that we still have in place. But at some point, history would say you've got to have that top line moving. The good news is, as we've said, we've got growing optimism that that's coming.

That's terrific. Thanks, all of you, very much.

Your next question comes from Greg Burns of Sidoti & Company. Your line is open.

Hey, afternoon. Can you hear me this time?

Yeah, hi, Greg.

Okay, great. So I just wanted to, I guess, touch on the kind of the relative strength in the retail segment, or I guess the better than expected. It was definitely stronger than I was expecting, given some of the macro headwinds facing the the housing market. So can you just talk about specifically what you think you're doing right to drive market share gains there? And then also on the profitability of that segment, is that sustainable what you put up this quarter? Or is there some kind of one-off type of items that are driving the operating margin this quarter?

Yeah, hey, Greg, I'm going to start very briefly, and then I'll turn it over to Annie and Debbie. But I wanted to say, no one-off items in the quarter. I mean, what was great about this quarter is that it was just really awesome to see the team deliver a real clean, kind of high-quality quarter of profitability. So there's nothing notable in terms of one-offs. And I don't know, Debbie, if you want to unpack that any further.

Yeah, I would give kudos to the team this quarter and for the last year, Greg, and really everyone.

knuckling down and delivering strategic execution, and they really did that this quarter. But again, no one time. This is well done. Why don't you add, Debbie?

Hi, Greg. It's Debbie. So a few things that I would just highlight. The first is we've been extremely focused on our foundational execution over the last 24 months, and we're really starting to see some of the operational investments and improvements we've made paying off. That's driving up customer lifetime value, We're improving across all of our operational metrics. We had our fastest ship leave times ever within the quarter. And that is, in fact, freeing up more time and capacity in our stores to focus on selling activity instead of post-purchase activity. Second thing is our marketing effectiveness. We actually spent 11% less in marketing expenses year over year, and our organic sales are down 3%. So we got really nice leverage out of our marketing capabilities that's driven by our the beginnings of optimizing the customer data platform we stood up in the last year. And then in terms of our promotional posture, that obviously drove really nice progress. We had our best month ever in November, November up 5% to last year in organic orders. That was really driven by the position we took to capture as much demand late in the quarter as possible. We've seen a shift over the last three years of customers waiting until later and later in the month to purchase. And so we wanted to be agile and have a promotional strategy that we could stair-step depending on the customer behavior we saw. And we managed that business real-time to make sure that we were driving demand in terms of profitable categories. So we're really proud of the demand trends versus the industry in the quarter. We're really also proud of the margin trends. And we expect to see forward-looking trends from a margin perspective in line.

Okay, great. And then, Jeff, the interest in other expense line item, I think you were guiding to around $19 or $20 million to come in. It came in at $16 million, and you're guiding to that for the next quarter. What's driving the decrease there?

Yeah, the biggie is. We generated some good amounts of cash. I said in prepared remarks, we've been pleased with working capital efficiency, and that's helped generate cash, not just in the U.S., but in a variety of jurisdictions around the world. And what we benefited from was higher interest rates, particularly outside the U.S., driving interest income. So that was a biggie below the line. That was a positive. We also had a slight currency, good news on the currency line, which we tend to, currency transaction gains and losses, we tend to guide those as flat. We had a slight gain and some good news related to an international pension plan. So it was really those three things.

Okay, great. All right, thank you.

Your next question is from the line of Bud Bugat of Water Tower Research. Your line is open.

Good evening, Andy, Jeff. Hi. Happy New Year and happy holidays and happy New Year to everybody there. I guess the – and congratulations on the margin performance. It's very nice. And I guess, Jeff, my first question is the 30 – on nearly 34% gross margin in America. Can you hang on to that? The backlog is – continues to be, looks depressed to me, and that your comment about leverage is one that I worry about.

Yeah, but I think over the more than just one quarter, we're rolling into our, as you know this very well, we're rolling into what is historically a seasonal low quarter from a manufacturing volume perspective, and that tends to drive some reduction in gross margin, but that's in the best of times we see that in this business. So I think it would be fair to say that in the Americas segment, will we see a slight sequential step down in margin performance? I think that's reasonable to expect, and that's implied in our guidance for the quarter. But like for like to Q2 going forward, we don't see anything in this performance that we don't think we can hold on to. I mean, obviously we're keeping an eye on discounting pressure in the business, And I think we've seen some signs of it on the edges, but nothing significant that's of great concern. And as we see larger project opportunities, those are going to be priced more aggressively. That always happens. But with that comes more manufacturing production and an opportunity to leverage. So nothing that causes us any great concern there.

So in contract, the normal, at least as I recall, in normal times, the discounting impact used to be about 50 basis points, or that's what was discussed. Is that what is normal and what you're expecting?

You know, it's funny. I don't know that I think of it in terms of basis points. I mean, that doesn't strike me as crazy, but I'm kind of going from, I don't have any data from history in front of me. Typically, you do see some contraction in margins, and it can happen in short bursts until the volume picks up, and you start to be able to offset that with opportunity growth. And that's why these forward indicators that we've been following so closely are so important and have us fairly optimistic.

And the difference between orders and shipments in the Americas implies about a $40 million drawdown of the ending backlog from the beginning backlog in the quarter. And I'll ask you, is that correct? And That strikes me as a number that I haven't seen that low, and I don't remember when. So help me understand, when do you start building that back? And it was nice to see it come back in retail, and I know international is down a little bit, but America's was significant from what I can see from the numbers.

I think your numbers are right, Bud. That's correct. And I think that puts us down about 15% or 16% year-on-year in the Americas segment backlog. The number sounds right.

I think 19 is the number I look at. It's like around the 380 level versus 470, I think it was at the end of Q2 of last year.

It's just under 384. Okay, yeah, 383.3, yeah, okay. Okay.

And that's about, yeah, that's a big number. That worries me. I mean, a small number. So when do we start seeing that build? I was hoping that maybe that's the real thing because I think that's the key here.

Yeah, I mean, clearly we're watching that closely too. I think the best indicators we have are what we've already highlighted and the fact that we've seen a nice improvement in the year-on-year order comparisons in the month of November and thus far through two weeks of November. So that's, I mean, you know, at the end of the day, order growth is what it's going to take to drive that. And so far, we like what we see as we close the quarter and move into Q3.

Okay. I'm rooting for you. So, yep, that's what I would like to see. Okay. Well, Happy New Year to everybody there. And stay warm if you can.

Same to you, bud. Thank you.

There are no further questions at this time. We now turn the floor over back to President and CEO, Andy Owen, for any closing remarks.

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

This concludes today's conference call. You may now disconnect.