Title

Presentation

MillerKnoll, Inc. beats earnings expectations. Reported EPS is $0.41, expectations were $0.39.

Operator: Good evening, and welcome to MillerKnoll’s Fourth Quarter 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. Carola Mengolini Good evening, and welcome to MillerKnoll’s fourth quarter fiscal 2023 conference call. I am joined by Andi Owen, Chief Executive Officer; and Jeff Stutz, Chief Financial Officer. Also available during the Q&A session is John Michael, President of Americas Contract. Before I turn the call over to Andi, 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 from 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 millerknoll.com. With that, I will turn the call over to Andi.

Andi Owen: Thanks, Carola. Good evening, everyone, and thank you so much for joining our call. Our fourth quarter results demonstrate the power of our business model and the ability of our team to seize opportunities and innovate in an uncertain macroeconomic environment. By leveraging our diverse channels, geographies and brands, we connected with customers around the globe, delivering innovative design, while improving our margin performance and strengthening our balance sheet. As we’ve shared in recent quarters, the environment is still challenging. Customers are staying cautious and deliberate about their spending. We continue to see demand softness across our channels but there are strong performances worth noting in several areas of our business and our pattern of orders has started to improve.

Jeff will highlight as he provides a closer look at our financials. From my seat, I want to highlight that we have done a lot of work to future-proof our business. We were early movers in our industry combining the two best collective of brands in our space to form an unrivaled portfolio of products, market reach and innovation. Since then, we’ve worked to streamline our global operations network across MillerKnoll, moving production and capability efficiently and creating centers of excellence, along with investing in e-commerce and retail as we know these will drive future growth opportunities. We prioritized our strong partnership with our dealer network in North America, and that alignment is resulting in positive traction quarter-over-quarter.

We’re arming our dealers with the tools they need to sell out collective. From developing a MillerKnoll contract e-commerce site to more dynamic tools that allow customers and specifiers to envision and specify our solutions. Additionally, as we continue to expand our presence globally with our MillerKnoll dealer network, we’re taking our collective of brands into high-growth regions such as India, the Middle East, Southeast Asia, and China. This allows us to leverage our capacity to develop, expand and design solutions that meet the demand of our clients, [indiscernible]. While I have no crystal ball, I believe that this year’s economic outlook will gradually improve as time progresses. Our efforts to future-proof, plan ahead and model our business with the successes of tomorrow will serve us well.

I was recently in Chicago for Design Days, our largest state wide presentation of our brands to our contract market audience, and the response to our product launches and showrooms was overwhelmingly positive. Having had the opportunity to connect with many of our customers in person, I’ve come across some key findings. First, while the unpredictability surrounding the return to office persists in North America, we’re starting to observe an inflection point; and second, in order for companies to achieve the desired success in their return to office strategy, it is crucial to construct a workplace that revolves around collaboration, wellness, productivity and flexibility. Products like Herman Miller and Naoto Asari, as well as the movable height-adjustable [indiscernible] work table, and they’re seemed to be introduced four nesting chairs, a perfect example of new innovative designs that will help our clients to rebuild their spaces with flexibility and productivity.

And while we’re an industry leader in workplace design, we’re also expanding our solutions into resilient verticals, including healthcare and the public sector. In the healthcare sector specifically, we’ve been active for over 50 years. However, as MillerKnoll, our scale enables us to bring a fully realized spaces to life at a faster pace. During Design Days, we offer customers a distinctive showroom experience that highlights some of our healthcare solutions. [indiscernible] engagement and excitement generated by this space underscores the leadership and momentum we’ve built in this vertical. For higher education and public sector our combined MillerKnoll portfolio presents a comprehensive range of solutions and services giving us the unique advantage and delivering larger-scale projects to our customers.

We’re experiencing positive traction in this space as well. As an organization with over a century of success, navigating through varying economic conditions, we have confidence in the long-term health of our industry and the advantages of our business model. We will continue to balance our approach for the long term, using a playbook that has served us well through multiple cycles. We’ll focus on our customers. We’ll be thoughtfully prudent in managing our costs. We’ll align our teams and talent to our strongest competitive advantages, we’ll deliver innovation, and we’ll invest for long-term growth opportunities. In the near term, we’ll continue to prioritize operating efficiently, focusing on free cash flow and ensuring our spending aligns with sales and order levels.

With that, I want to thank you for your continued partnership with us on this path. And I’ll now turn the call over to Jeff for a deeper look at the financials.

Jeff Stutz: Thanks, Andi. Good evening, everyone. It’s good to be with you. I’ll start by providing an overview of our performance in the fourth quarter and some full-year highlights, followed by some insights into our outlook and targets for both the first quarter and the full fiscal year. For the fourth quarter, we generated adjusted earnings of $0.41 per share, slightly above the midpoint of our guidance. Overall, stronger than expected net sales and gross margin helped to alleviate certain cost pressures stemming from increased marketing, product development and variable expenses. At the consolidated level, net sales in the fourth quarter were $957 million, slightly above the midpoint of our guidance, driven by strong performance in the Americas Contract segment.

Additionally, supply chain enhancements, improved production reliability and better inventory management facilitated faster order fulfillment across all segments. This allowed us to shift more of our backlog than we initially anticipated coming into the period. We’re pleased to report another quarter of improvement in gross margin performance. Our consolidated adjusted gross margin was 37% at the high end of our guide. This result was 220 basis points higher year-over-year and 130 basis points higher on a sequential-quarter basis, mainly driven by the realization of price increases and benefits from integration-related synergies. Our consolidated adjusted operating margin was 5.9% for the quarter. Turning to cash flows and the balance sheet.

This quarter, we generated approximately $93 million in cash flow from operations, driven by sales and a meaningful reduction in working capital, primarily attributed to our inventory management efforts. Consequently, we paid off $48.4 million of debt. We finished the fourth quarter with a net debt-to-EBITDA ratio of 2.5 times, putting us comfortably under the maximum limit defined in our lender agreements. New orders at the consolidated level totaled $922 million in the fourth quarter, reflecting an organic decrease of 7.8% from the same quarter last year and a sequential increase of 4.2% when compared to the third quarter. And while the absolute level of new orders were lower than last year, the rate of decrease improved this quarter, providing evidence that we’re moving to a point of demand stabilization in the business.

And I’ll take a moment to summarize our fourth quarter operating performance by segment. Within our Americas Contract segment, net sales for the quarter were $474 million, down 11.8% organically year-over-year, while new orders came to $454 million, reflecting an organic decrease of 8.2% year-over-year. Clearly, the general economic uncertainty has weighed on this segment’s sales and order rates. Still, our team feels very optimistic for the medium to long-term, which is supported by various indicators. These include year-over-year growth and order rates observed thus far in the first quarter and robust project funnel activity. I’ll also highlight that despite the macro challenges, this quarter we achieved an adjusted operating margin in excess of 10% in this segment, which is up both sequentially and year-over-year, driven by continued price cost benefit and savings from integration-related synergies.

As it pertains to Global Retail, net sales for the quarter were $245 million, down 12.1% organically year-over-year, while new orders came to $228 million, which reflects an organic decrease of 14.2%. The North American housing market slowdown and reduced spending on discretionary goods continue to affect demand levels for this segment. In response, we are focusing heavily on effective inventory management and product mix optimization to drive operational efficiencies. Additionally, we are enhancing brand awareness while also prioritizing investments in our most established channels and brands in order to better leverage our scale. Turning to our International Contract and Specialty segment, net sales for the quarter totaled $237 million, down 12.3% organically year-over-year, while new orders came to $240 million, reflecting slight year-over-year organic growth.

Make no mistake, we are very optimistic about the growth potential in this segment. We’ve witnessed strong demand from India, Korea and the Middle East, and we’re beginning to see improved demand in China. And we’re also encouraged by the scale and reach that we are achieving with our global dealership network. To date, International Contract distribution has transitioned more than 80 legacy Herman Miller dealers into full-line MillerKnoll dealers. In the year ahead, the team plans to keep this momentum going by phasing in an additional 60 full-line dealers. For the full fiscal year, net sales at the consolidated level totaled $4.1 billion and adjusted earnings totaled $1.85 per share. Throughout this year, we’ve made remarkable progress in achieving our target synergies related to the Knoll integration, and this synergy capture has been critical to our ability to deliver margin improvements, especially given the impact of elevated input costs and constrained production volumes.

This has been a complex journey enabled by the talent and dedication of our team members around the world. We’re better because of this work and I’m grateful for their efforts. I’ll conclude my prepared remarks with a few comments on our outlook for fiscal 2024. As we are all aware, the COVID-19 pandemic introduced unprecedented dynamics into our business, which resulted in abnormal trends over the past couple of years. As we begin the new fiscal year, we anticipate certain shifts in sales and earnings patterns in comparison to previous periods. Consequently, we recognized the significance of providing improved visibility for both the upcoming quarter and the entire fiscal year. Overall, we expect slightly lower year-over-year consolidated net sales in fiscal 2024.

As it pertains to the quarterly cadence of sales and earnings, and giving consideration to factors such as recent order trends, historical seasonality, expected benefit from price increases, the current funnel of project opportunities and our beginning backlog, we expect operating earnings to be back half weighted in fiscal 2024. We do maintain a cautious near-term outlook due to macroeconomic dynamics. However, I will also highlight several indicators that make us feel optimistic about the upcoming year. In this regard, the following points are worth noting. Order trends in the first five weeks of the New Year have shown improvement, both at the consolidated level and in the Americas Contract segment. Our prior-year comparisons are easing and the sequential and year-over-year trends in the project funnel are encouraging.

Second, various indicators such as consumer sentiment, the Architectural Billings Index, and new home sales, although still relatively low are showing signs of improvement. And third, we’re well positioned in several key international markets where we expect supportive GDP growth bolstered by an increasing number of full-line MillerKnoll dealers. Taking all these factors into consideration, we expect to generate adjusted earnings in the range of $1.70 and $2.00 per share for the full fiscal year 2024. As it relates to the first quarter, let me elaborate on a few factors impacting our guidance. First, the sluggish order rates over the past two quarters have resulted in a reduction in the consolidated order backlog. In effect, we don’t have the same running start that we had heading into Q1 of last year.

Second, it’s important to remember that the first quarter of last year fiscal 2023 included 14 weeks of operations versus the standard 13 week calendar. That extra week added an estimated $77 million to consolidated net sales last year. And lastly, as we enter the new fiscal year, our first quarter expense run rate will reflect on-target incentive bonus expenses as well as a partial quarter of higher employee salaries and wages. Taking these factors into consideration, we expect net sales for the first quarter to be in the range of $880 million and $920 million, operating expenses in the range of $288 million to $298 million, and adjusted earnings per share to be between $0.18 and $0.24. Okay. With that overview of the numbers, I’ll now turn the call back to the operator and we’ll take your questions.

Operator: Thank you. [Operator Instructions] We’ll take our first question from Greg Burns with Sidoti.

Greg Burns: Good afternoon. So I just wanted to, I guess, touch on the guide for the year. So, as we think about the cadence of revenue and earnings, what was driving the stronger back half on the earnings side? And how should we think about, I guess, maybe the split of revenue percentage-wise, or split of earnings maybe percentage-wise first half, second half? Can you just give us a little more color on the expected cadence for the year?

Jeff Stutz: Yeah. Greg, this is Jeff. Good to be with you. Let me start and then Andi and John, you might want to lean in if you have a perspective here, but let me start with a few. I kind of talked on some of these, but a few factors that give us growing confidence that we’re going to see improved top line as we move through the year. So we talked about already the fact that in the first five weeks of the quarter, we’ve seen a notable improvement in order entry levels in the Americas Contract segment in particular. We’ve already been seeing several quarters of relatively strong performance internationally, and I mentioned in my prepared remarks that we expect the international dealer network to expand in this next year and to gain further traction.

But the specific things I’d point to are the trends that we’re seeing in funnel opportunities continue to be encouraging. We are seeing growth in the funnel year-over-year. I mentioned the order trends. When you look at some of the leading indicators I think are important to us to maybe reiterate consumer confidence levels. The ABI has turned into expansion territory again. That tends to be an indicator nine or so months into the future based on history, and we’re starting to see home sales began to show some signs of life. So those are more forward indicators that I would reiterate. The other thing I would say is the bulk of the integration — we’re not done with integration but we’re — but the bulk of the heavy lifting is largely behind us and that’s important because the focus of the sales team and our dealer network, they’ve already got many months behind them now getting up to speed on all the learning that it takes to sell the full offer.

And so, while we still expect that to ramp, we’ve come a long way and we expect to see that flywheel begin to spin a little faster. The other thing I would say, Greg, is on the earnings front, we do expect further pricing benefit. We’ve got a good track record now showing pricing benefit layering in quarter after quarter. We expect that to continue. We still have price increases that we’ve put in place that we expect to ramp up and realize throughout fiscal 2024, which lands itself to back-half earnings, and as volume levels pick up, so will the leverage benefit against fixed overhead costs. So those are the major factors. I’m not — I’m going to fall short of giving you a quarter-by-quarter view. We’ll just simply tell you that all of those factors collectively give us some confidence that we can hit that full-year number.

And I’ll pause there and see Andi if you want to add anything.

Andi Owen: Yeah. Jeff, if you hit on most of it. The thing I would add, Greg, is probably as we look at return to office, particularly in North America, where it has been more sluggish than I think we would have hoped as an industry, we’re definitely starting to see people moving to decisions. We’re starting to see more people — having people come back together. All of our research would indicate that this is the way that we need to be moving, so I think we’re optimistic about that as well. Jeff touched on the funnel, but I will say this is better than it’s been in two years, which I think is a really encouraging sign for us.

Greg Burns: Perfect. Thanks. And then lastly on the retail side of the business, how do you look at operating that business now in the current demand environment? I know you’ve been investing there, but it was about breakeven this quarter. So are there things you can do to optimize that business — optimize spend? How do you view the demand environment there and how that impacts how you run that business?

Andi Owen: Yes. I mean, I think if you look at all our competitors there, Greg, and kind of across the industry, the residential home furnishings industry, we expect will probably be softer for the next couple of quarters. We are encouraged by new home sales going up. We are encouraged by the real estate market rebounding a little bit, but we still think it will take some time to work through. So we’re really simplifying. We’re focusing our efforts on the DWR brand. We’re focusing our efforts on Herman Miller and Knoll. And where we’ve seen some real struggle this past year has been working through inventory, and not just an inventory in North America, but many of our wholesalers internationally, whether that be with HAY, with Knoll around the world have really been sitting on piles of inventory.

And as these people are working through that inventory, we expect we will see further profitability. But really we’re addressing that through simplification and continuing to focus on building the categories where we are not necessarily maximized right now. So we expect to see a slow climb as demand improves over the year, but we’re being very, very prudent in how we invest further in that business right now until the customer comes back full force. I will say, however, that we’ve invested quite a bit and quite successfully in building our brands and where we have invested there from a marketing perspective had paid off.

Greg Burns: Okay, great. Thank you.

Operator: We’ll take our next question from Budd Bugatch with Water Tower Research.

Budd Bugatch: Good afternoon, and thank you for taking my questions. I hope everybody is doing okay there.

Jeff Stutz: Hi, Budd.

Andi Owen: Hey, Budd.

Budd Bugatch: Thank you. And Jeff you talked a little bit about net sales for the year. I know we’re starting off with a really low backlog compared to where it’s been and the excessive backlog has been largely clear. Where do you think orders will come in for the year? And what do you think the ending backlog will look like for the year?

Jeff Stutz: Well, we didn’t — we intentionally didn’t provide a specific guide, but prepared remarks kind of outlined the level of detail we’re willing to go to from a revenue standby, which is simply to say, that softer running start with the lower backlog, and I will acknowledge specifically backlog being down about 25% year-over-year heading into fiscal 2024 means that we’re likely to see slightly lower revenue. I would expect qualitatively, orders in total for the year to be higher than FY 2023 because we do expect that to accelerate as we move through the balance of the year. But I’m not going to provide any more detail than that, Budd.

Budd Bugatch: So if orders are higher year-over-year that would imply that the backlog goes up at the end of the year if you’re able to meet your plan, or meet your thinking. Is that correct…

Andi Owen: That’s correct. That’s correct, Budd.

Jeff Stutz: You got it. We expect to build a backlog throughout 2024.

Budd Bugatch: Okay. And looking at the guide for Q1, can you kind of maybe give us some help on where the GAAP guidance is? We’ve got some impairment and restructuring that affected this quarter and I’m going to ask a little bit about if you can give us some color on those programs. I know that no trade name was impaired, but the restructuring specifically. But where would they — where do you think the GAAP EPS comes in? My quick pencil work and it could be very slow. It says around $0.20. Is that reasonable?

Jeff Stutz: Well, so our EPS guide is at the midpoint $0.21, but I want to make sure I understand your question. Are you talking about GAAP EPS?

Budd Bugatch: GAAP. Yes, I’m trying to figure out [Multiple Speakers] what’s in the adjustments going forward.

Jeff Stutz: Well, frankly, but part of the reason we’re guiding to an adjusted number is the timing of some of the adjustments related to restructuring, past restructuring and integration costs, they tend to be a little lumpy and they’re not terribly easy to predict with the level of precision. But what I would tell you is, we have amortization cost related to the Knoll acquisition that has been a consistent adjustment item in the fourth quarter, that was $6 million. I would expect that to be comparable in Q1. So that’s there about $0.06 of earnings that would be — that would reduce that adjusted earnings number. And then we will have some integration costs that are a little tougher to predict. So that’s why we fell short of giving you the number. But for sure, you’re going to see that amortization charge come through on a GAAP basis.

Andi Owen: And Budd, just one thing, I don’t know if this is really ahead or not, but as Jeff pointed out in his prepared remarks, the bulk of our integration activities and cost to achieve are behind us. We would expect those adjustments to gradually continue to decrease over time.

Budd Bugatch: Thank you. Yes, I know that, that $6 million, how long do you think that [indiscernible]I think we still have a number of years before that leaves, right?

Andi Owen: Yes.

Jeff Stutz: Yes. That’s a long-term asset that will amortize over a long period of time, Budd. Yes.

Budd Bugatch: Okay. One thing confuses me. And Andi you may have given as part of the answer to that is the retail gross margin really has been quite volatile at least quarterly, and I imagine maybe daily or weekly to you as well. And is that basically inventory reduced? Is that a markdown issue? Or is there something in the original mark on that’s an issue in the retail gross margin?

Jeff Stutz: Yes. But I would — the two factors that I would point to that plagued us quite a bit throughout fiscal 2023. And frankly, that we expect will improve moving forward. the first Andi alluded to is inventory related. We had — you’ll remember, earlier in the year, we had demurrage and storage fees that we were feeling in the fourth quarter, we also had some inventory-related charges that were recognized in the period that reduced margin. In addition to that, though, the other big category I’d point to is freight and distribution costs, mainly outbound freight parcel delivery to customers. Those rates have been elevated and have continued to pressure margins. And I know the team has a number of strategies that they’re working on to defray those including some potential price decisions that they have to make.

Andi Owen: And Budd, I would say from a discounting perspective, we’re not seeing pricing pressure. We’re not degrading our margin and discounting a ton. That has not been our problem from a margin perspective.

Budd Bugatch: And what about geographically because we have some — we have DWR domestically, but we’ve got HAY and Muuto, some overseas stuff. What’s the geographical disparity of gross margin at retail?

Andi Owen: I would say that the international retail businesses, which are primarily wholesale, are the most challenged from a top line and bottom line perspective as most of those wholesalers bought a ton of inventory and based on the supply chain challenges that everyone faced. And when the war in Ukraine started, I think everyone bought up and then demand dropped. So we’re seeing a lot of pressure with those wholesalers. Now the good news is we’re starting to see them work through that inventory and demand is coming back, but that’s really pressured our European businesses.

Budd Bugatch: And that does flow through the retail seg, right? That…

Andi Owen: Yes, yes. Absolutely, yes. It didn’t used to which makes it a little bit confusing now, but yes, it does now as part of the global retail member.

Budd Bugatch: Okay, all right. And the last question. Have you got inventory overall? Where you want it? What’s the target inventory for the end of the year or during the year? How much excess inventory are we carrying now if any?

Jeff Stutz: I think, Budd, we’ve got inventory that we’ve come a long way. Inventory came down significantly in the quarter. That unlocks some working capital cash flow. I think the team feels pretty good with inventory levels, albeit we’ll have seasonal changes in inventory levels as we move in towards like, for example, in the retail space, the holiday period, there will be some stocking related to that. But I think by and large, we are where we need to be.

Andi Owen: Yeah. Where we need to be internally, Budd, it’s really just our wholesale partners working through their inventory.

Budd Bugatch: And that is their inventory. You’ve already turned a title to that so you’re just waiting —

Andi Owen: Yeah. That’s — exactly. Not our inventory, but it does affect their ability to buy from us.

Budd Bugatch: Got you. And lastly, Jeff, CapEx for the year, did you give a number?

Jeff Stutz: We did not give a number, but I’m happy to. We spent $83 million in CapEx in FY 2023.

Budd Bugatch: And what do you think in 2024?

Jeff Stutz: We’re going to do our level best to try to keep that flat to that number as we can. But as I sit here today, I give you a range on the year of $80 million to $100 million.

Budd Bugatch: Thanks, Jeff. Thank you very much. Good luck on the near term and the full year. Thank you.

Jeff Stutz: Thank you, Budd.

Andi Owen: Thanks, Budd. Take care.

Operator: We’ll take our next question from Reuben Garner with Benchmark.

Reuben Garner: Thanks. Good evening, everybody.

Andi Owen: Hi, Reuben.

Reuben Garner: Jeff, any quantification you could give us on the growth in orders and the robust funnel and pipeline that you talked about in the early part of this fiscal year?

Jeff Stutz: Sure, Reuben, happy to. Let me start with the order pacing through the quarter and maybe what I’ll start with because we made a point in the prepared remarks to highlight the fact that in the first five weeks of the quarter, we’ve seen some nice improvement in order entry levels. So maybe to begin, just to reiterate, in the Americas Contract segment, order entry levels on an organic basis were down 8% year-over-year in the fourth quarter. In the first five weeks of Q1, we’ve actually moved to positive growth of about 5%. Now — and because of our conference call here is a little later than it normally is, we normally only have a couple of weeks’ worth of activity to share with you, but we’ve got a full five weeks and — so we’re very encouraged by that.

The only other thing I would say in order trends is that at the consolidated level, we saw improvement as we moved through — modest improvement as we moved through the quarter. We were still negative year-on-year, but that was beginning to show signs of easing as well. So let me pause there. John, maybe you can speak to the funnel.

John Michael: Sure. Thanks, Jeff. Reuben, just to maybe add some color commentary to the progress we’ve seen in the funnel and in the order rate, I’d point to a couple of things. At the start of the calendar year, we put together a plan to compete and win in a recessionary environment, and really in terms of deployment of sales resources and the value proposition that we bring to customers, I think we’ve really fine-tuned that and those strategies are beginning to pay off and we’re seeing that in order rate. The other thing I would say is, we just passed the one-year anniversary of what we originally called cross-sell which was when we had legacy Knoll dealers beginning to sell Herman Miller products and vice versa. And anecdotally, I was with a group of dealers last night and the comment was made that they are so much more confident and feel so much more ready with the full collective of brands today versus a year ago that it’s really noticeable.

And their confidence in the market is improving and I think that drives order rates as well.

Reuben Garner: Great. That’s helpful. And then if we could switch back to the guidance for this year, at a high level, Jeff, can you help us with what the price versus volume assumptions are? I recognize that you kind of gave a general view of the top line. Maybe a better way to ask it is, how much pricing just from a carryover perspective from things you’ve already announced that have that will benefit FY 2024.

Jeff Stutz: Yes. Maybe it’s easy for me to just take the latter, Reuben. So, as you know how pricing flows through and over what period of time it tends to take in this industry, so maybe just a reminder that it was last October we did it. It was a tailored price increase, but think of it as an average of about an 8% price increase in the Americas Contract business and in the contract elements of our business. So that is still layering it. It takes a better part of a year to get the full impact of that. So we still — and that has contributed meaningfully to the sequential margin improvements that we’ve been seeing since then. And then in addition, we just put in place a price increase that averages 3%, and when I say just beginning of July.

So those factors collectively will — are fully expected to provide margin support as we move through the year. The harder one to quantify — so I’ll just again speak qualitatively about it is the volume impact because you’re right to highlight that. That’s where my earlier comment about leverage comes in. as volume levels improve, we’re very sensitive. Our factories, particularly in North America, but really around the world, are sensitive to volume increase levels. And so, as those order levels ramp as we expect that they will. That too will support margin performance, but that’s probably the best I can offer you right now.

Andi Owen: Reuben?

Operator: All right. And we’ll move on to our next —

Jeff Stutz: Reuben, are you still with us?

Operator: Reuben has dropped.

Jeff Stutz: Okay, got it.

Andi Owen: He either didn’t like it.

Operator: All right. And we’ll move on to our next question from Alex Fuhrman with Craig-Hallum Capital Group.

Alex Fuhrman: Hey, guys, thanks for taking my question. Andi, I wanted to ask about the retail business. How does that factor into the guidance for the upcoming year? And obviously, have been up against them incredibly tough comparisons. Is the consumer there starting to come back a little bit? What’s your expectation there for the rest of this year as it relates to your guidance for this year?

Andi Owen: Alex, it’s a great question. Listen, I think, as I said earlier, we think these first couple of orders we’re going to continue to see softer demand. As we turn into calendar year ’24, we that we will start to see the consumer come back. We’re encouraged by home sales. When people move, that makes a big difference for us. We think as people adapted to interest rates where they sit today, that makes a difference in what they’re purchasing. The great news is our AOV as we look at what the quality of consumer that we’re looking at, hasn’t really changed. So we’re very optimistic about that. We’re not having to discount. Our inventory levels are where we want them to be. So right now we are really just focusing on those important brands to us those kind of top three.

Focusing on categories that we don’t currently maximize and sort of kind of looking to reduce our investment business while we wait for the consumer to come back. I think they’re there. But I think right now, they’re still spending on travel, they’re still spending on other experiences, and we expect that will change as the year goes on.

Jeff Stutz: Alex, this is Jeff. Just one more bit of color, and I didn’t mention this in my prepared remarks, but I think it warrants the mentioning. The other thing that I think affects the cadence of performance through the year is, bear in mind, our fiscal quarter one is the seasonal long watermark for the retail business. And that’s just seasonality and where promotional events are scheduled, consumer behaviors in the summer months all play into that. So we do expect improved performance just based on seasonal trends as we move into Q2 and beyond.

Alex Fuhrman: Okay. That’s really helpful. And then just thinking about the — some of those comments about the consumer. Are you seeing anything differently in the US versus abroad? And then all of your brands are certainly premium, but some of them are kind of mega premium price points. Are you seeing any sort of a difference in demand based on the prices in your portfolio?

Andi Owen: I would say a difference in demand really kind of goes back to what I was saying earlier. I think we’re seeing a little softer demand internationally with our wholesale partners. I really believe that has to do with inventory buildups, I don’t necessarily think that has to do with price points in the product. As I said, we’re not having to discount. And that to us is a really important piece of this puzzle. And the quality of the consumer is there. It’s taking a little bit longer for people to pull the trigger and purchases, but the quality of the consumer is definitely there.

Alex Fuhrman: That’s really helpful. Thank you, guys, very much.

Andi Owen: Thank you.

Operator: All right. And we’ll take a follow-up question from Reuben Garner with Benchmark Company.

Andi Owen: You’re back.

Reuben Garner: Thanks. Sorry, guys. Yes, I got dropped as soon as I finished asking it and then I came back into the tail and I did not drop because I didn’t like the answer. I just didn’t hear it.

Jeff Stutz: [Multiple Speakers]

Reuben Garner: Yes, I’ll have to get that in the transcript, but I do have — I have one more I want to ask about. So the turn-in orders and the robust pipeline, I mean, you could see it at the show at NeoCon. It was definitely — it seems more upbeat. I’m just curious about your conversations with customers, specifically on the North American Contract side. Do you think it’s just the macro uncertainty that’s holding businesses up at this point? Or is there still some angst about what the future of the office is going to look like kind of longer-term with the return to office trend?

Andi Owen: John, do you want to take that one?

John Michael: Sure. I think the future of the office and how it plays in work is something that is still evolving and I think it’s going to continue to involve, but I think more times than that. And as Andi mentioned earlier, there is an inflection point that we are feeling where companies see the benefit of having their people together, see the benefit of providing opportunities for connection for belonging, for well-being to address things like stress and burn out, and the right environment helps with that. So I think that there’s still some hesitation but definitely companies are moving towards really working hard and asking us for the help in how do I get — how do we get our people back. The other thing we’ve seen happen is hybrid work is changing in and of itself.

It was six months to 12 months ago, pretty loose in terms of how companies approached hybrid work. It is becoming much more structured, still offering employees flexibility but putting some guardrails around time in the office, et cetera. And I think those are all positive trends that will bode well for us as the year goes on.

Reuben Garner: Great. And I said, just one more, but I’m going to sneak another one and a quick one. Did I hear you say inventory had normalized? And was that a comment specific to the international wholesale retail or consumer business? Or was that a broad-based comment from MillerKnoll?

John Michael: No. Reuben, I’m glad you asked for clarification. So the comment on, it was more related to our own inventory levels that we have in either in work in progress waiting to be recognized as revenue on the contract business, or in the retail business that we actually have in our own warehouse and storage facilities. Those are the levels of inventory that have become more normalized. We no longer have the buildup or glut of inventory that we had earlier in fiscal 2023. I think Andi’s comments, there is still elevated inventory held by wholesale partners that is affecting the business but that’s not our inventory if that makes sense, Reuben.

Andi Owen: Yeah. And maybe just one more thing to add to that that we can’t forget throughout the integration process is that as we integrate with Knoll and Miller had a much more robust and efficient operating management system in our plants, and as we’ve gone through our Knoll operation, we have also reduced inventory pretty substantially as we implemented our Toyota production system that we call MKPS across those plants. So that has also reduced inventory on the contract side and that has been work that’s taken us about better part of the last 12 months to 24 months. So we’re seeing that efficient and effective inventory management really start to come — to show up across the entire business.

Reuben Garner: Great. Thanks again, guys, and sorry about the drop call there. Congrats and good luck in the year.

Andi Owen: Thank you, Reuben.

Operator: All right. And there are no further questions. We turn the floor back to CEO, Andi Owen, for closing remarks.

Andi Owen: Thanks again, everyone, for joining us on the call. We really appreciate your continued support of MillerKnoll, and we are looking forward to updating you on our next quarterly call. Have a great night.

Operator: And that does conclude today’s presentation. Thank you for your participation and you may now disconnect.