Good evening and welcome to MillerKnoll's Third Quarter Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Kevin Veltman, Senior Vice President and Integration Lead for MillerKnoll.

Good evening. Joining me today on our third quarter earnings call are Andy Owen, Chief Executive Officer; Jeff Stutz, Chief Financial Officer; and John Michael, President of Americas contract. We have posted the press release on our Investor Relations website at millerknowle.com. Wherever any figures are presented on a non-GAAP basis, we have reconciled the GAAP and the non-GAAP amounts within the press release. Before I turn it over to Andy for a brief overview of the quarter, I would like to remind everyone that this call will include forward-looking statements. For information on factors that could cause actual results to differ materially from these forward-looking statements, please refer to the earnings release as well as our annual and quarterly SEC filings. Any forward-looking statements that we make today are based on assumptions as of this date and we undertake no obligation to update these statements as a result of new information or future events. At the conclusion of our prepared remarks, we will have a Q&A session. Today's call is scheduled for 60 minutes. With that, I'll turn the call over to Andy.

Thanks, Kevin and good evening, everyone. Thanks for joining us tonight. For nearly a year now, you've heard us say that MillerKnoll's competitive advantage is our unique combination of a strong global contract business and a well-positioned retail business. We leveraged that to drive sales and growth in all segments this quarter and our momentum is continuing to build as we move through our integration journey. Every day, it becomes more evident that we have created something special, a business built for long-term growth with the ability to have a tremendous impact on the world around us. Jeff will take you through the details of our third quarter performance. But before I hand it off to him, I'd like to share a few remarks about our business and the progress we're making relative to the integration. During the quarter, many parts of the world began shifting their focus to emerging from the pandemic and contract clients begin activating their return to office plans. Employers are not pulling back. They're investing in new office experiences that their employees will love. There's a push for premium experiences. And thanks to our extensive product portfolio across many brands, MillerKnoll is ready to meet that demand. We benefit from our ability to meet the needs of a global customer base through our portfolio of premium product solutions. Our global footprint allows us to serve local clients and global accounts around the world. We take great pride in our thought leadership in the future of work. We have the insights our customers need to create their workplace strategies. Most of our customers are telling us that they're headed towards hybrid work arrangements and we know from our research that they will likely continue to evolve their approach over time. This creates amazing opportunity for MillerKnoll.…

Thank you Andy . Good evening, everyone. It's great to be with you. To be sure, the tragedy in Ukraine is top of mind for all of us these days. And Andy, as a follow-up to your comments, FY '21 annualized revenue from the region was approximately $10 million. We don't have manufacturing facilities or offices in the region. And in terms of our independent dealer network, we have a relatively small presence with two dealers in Ukraine, two in Russia and two in Belarus. We're not fulfilling existing orders or accepting new orders in the region at this time. Now turning to our third quarter results. We drove growth across every segment and every region of the business. Even with continued macroeconomic challenges pressuring margins in the near term, it was a strong quarter for demand generation. We're confident about our future, including our ability to further mitigate inflationary pressures and deliver on the cost synergies associated with the Knoll acquisition. Consolidated net sales of $1 billion were up 74% on a reported basis and 20% organically over the prior year. Sales growth was again constrained by our ability to produce and ship orders due to global supply chain and labor supply challenges. We estimate these disruptions adversely impacted net sales by approximately $34 million in the quarter. Orders in the period of $1.1 billion were 94% higher than the prior year on a reported basis and increased 32% organically. International Contract segment delivered strong performance again this quarter with sales and orders up in all regions and across all brands. On an organic basis, sales were up 30%, in organic orders of $162 million were up an impressive 74% over last year, achieving an all-time record for this business. Strong demand from local customers, especially in China and…

[Operator Instructions] Our first question will come from the line of Steven Ramsey from Thompson Research.

I wanted to start on the retail segment maybe with sales kind of been a bigger context, quarterly sales from Q3 '21 and to Q3 '22, we're all between $202 million and $222 million each per quarter. Does the Q4 guide imply stepping up off of that level in Q4? And does that imply a step-up in sales per quarter going into FY '23? And then lastly, what factors go into driving that step-up in growth?

Steven, this is Jeff. Let me start and Andy, you can certainly pile on. So yes, I would say, in general, it does imply we had good order entry for the retail business, good demand levels overall. And so yes, we would expect to see a ramp-up in revenue as we move into the fourth quarter. I'm not going to comment on FY '23 at this point. Although I will tell you that overall, we feel quite good. I mean, across most product categories, we're seeing good traction. Bear in mind, we are up against a fairly tough prior year comparisons in the workplace category, just given the strong e-commerce demand we saw in workplace furnishings. But we're feeling good that overall as we move forward, we'll be able to comp those certainly in total over the next 12 months.

Yes. And what I would add to that, too, Steven, is as you think about our retail business, it's still sort of nascent. We have a lot of opportunity in new product growth -- and Debbie and the team have been working diligently at that. So we have categories to fill in. We also have new channels that we're delivering. We have a very strong wholesale business globally. So we continue to see growth in the retail sector of the business.

Okay, great. That's helpful. And then I wanted to get a little bit more color on delayed sales which were down on a dollar basis and a percentage of quarterly sales basis, what all does that improvement reflect? Do you think this keeps improving -- or is there some embedded delay of sales in the Q4 guide? Maybe some helpful color there to balance that. You talked about North America contract lead times getting better? Is that part of the driver there?

Yes, Steven, Jeff again. Yes, it's a good question. I would say a couple of things. So the trend -- let me summarize by saying that the trend line is positive in the business in terms of some of the constraints that we've been facing all year. Now I don't want to leave you with the impression that we're all the way out of the woods on this by any stretch. But we're moving in the right direction. So to give you some specifics areas that we've made real good improvement on and I'll credit our operations teams in partnership with our recruitment efforts through, we've improved overall production staffing levels quite significantly from this time last quarter. We're not all the way to the levels we would like to be. Certainly, you can see the backlog. We've got good demand levels but we're much improved from where we were. That's helping -- so that contributed to the improving trend line, albeit we're still feeling some of those constraints. Overall -- and as a result of that, overall lead times are improving. No question. There's some pockets of challenges that remain. I'll give you a couple of categories as an example in the contract business case goods and upholstered products continue to be an area where we're seeing a bit more extended lead times but an improvement. And then in the retail business, we're seeing, on average, longer lead times compared to prior years on the order of about four weeks longer in total for The business compared to where we were last year at this time. The contract business is a little better than that, moving in the direction of normal, not quite there yet. So I think expectations would be and implied in our guidance is, we don't think we're out of the woods yet, as I mentioned, we will likely see some continued constraint on shipments but feeling pretty good where we stand at this moment.

I would just add to that, Steven, what we've done to attract and hire labor right now has paid off. We are starting to see a lot less open rolls. However, you'll notice in the margin we're paying more for it. So what we've had to do to attract labor in this market has been tougher but as we've gotten more people in the roles we're starting to see reliability and production increase across the board.

Very good. And last quick one for me on the range on gross margins. Maybe go into is that segment dependent? Or is there a certain component of cost of goods that's driving that? Or is it sales dependent and operating leverage?

Well, Steven, Jeff again, certainly, in this business, if we can push more out in the form of shipments, we'll get leverage on that. So volume plays a role here without a doubt. I think overall channel mix matters as well. As you know, the retail business has structurally higher gross margins than our contract business does. So if we can if we overperform our current internal forecast in retail or vice versa, if we underperform, that will be a factor just from a mix perspective. And then lastly, it's a dynamic environment. While we feel quite good about our performance this quarter and we feel like we've got good momentum. We're also well aware that there's a lot of change in the air with energy prices with interest rates and so all of those things can flow through as a factor. But as a general real, I'd say, mix and overall volume levels are probably the biggest factors.

Next question will come from the line of Greg Burns from Sidoti & Company.

So I just want to follow up on that last line of question around the gross margin. So -- can you just quantify how big the price cost gap was either this quarter or maybe year-to-date? Like how much of a headwind that has been? And at what point do we start to see the pricing increases that you have been passing close that out and maybe it turns -- either close the gap or turns to a tailwind for margins. Is that -- do you see that happening over the next couple of quarters?

Yes. Greg, it's Andy. We do. And as you guys know, you're super familiar with this business. Price lag is a big deal for the contract side of our business. So we've been very aggressive with price increases and we will continue to try to capture as much of the inflationary issues as we can in pricing. But given the backlog and given the amount of orders that we're working through, it will take us several quarters to get there. As we look into the next quarter, we will see improvement there. We'll see it over the next two or three. So we believe very strongly that we've done the right pricing movement so far. But we -- it is slower to come than we would like but getting better. What would you add, Jeff quantifying.

And Greg, just to kind of get to the numbers, I'll give you a bit of a sense for year-over-year Q3 kind of the walk between last year to this year from a price/cost perspective. First of all, on the negative side, commodities, were a drag on gross margins to the tune of about 220 basis points. Then you add to that about $210 million related to freight and transportation costs, so another 210 basis points. a bit of impact from labor, as Andy mentioned, we've had to raise wage rates a bit and you've got some drag on productivity. That's 40 basis points. So those are the kind of the negatives. The price increases that we've announced have been quite substantial, as you know and are slower than we would like to see layer in. And we -- the early impact on this quarter was about 110 positive a 110 basis points positive impact from pricing. And as Andy said, we expect that to ramp up as we move forward.

Yes. And the one thing I'll add to, Greg, because the contract business is known for the price lag but I would say in retail, Normally, we would expect to see a much faster turnaround in pricing because it's much more dynamic and agile. However, if you look at the lead times in some of our third-party suppliers and some new categories that we still have on boats waiting to come in, haven't captured the full kind of 10% increase that we've actually put on the books for retail. So there's a little bit of a lag in the retail business as well due to the same constraints that we're seeing in the contract, not as much but it's still there.

Okay, great. And then when we look at some of the retail initiatives you mentioned some of the growth investments you're making. How should we think about that business over the next couple of quarters? Are we spending on to rise and margins take a step back and then we kind of hopefully realize some growth on those investments? How should we think about the model for that business over the next couple of quarters?

I'm sorry, Greg, you broke up a little bit in the middle of your question. Can you repeat it?

Yes. Just in terms of the growth investments you plan on making in retail, how is that going to impact the business from a margin perspective over the next few quarters?

Yes. We expect in this quarter, we'll still continue to see a little bit of pressure. The big bad guy in retail is really about product mix. So, if you recall, in the beginning of the pandemic, we were selling a lot of task shares which are incredibly high-margin products for us. And we've entered into new categories but we've actually seen a decline in our tax share business which we're expecting. But we expect that, that will continue to push down our margins a little bit along with inbound and outbound freight. But some of the investments we've made, specifically the customer data platform, some of the planning and allocation systems that we have in are really focused on improving the customer experience as well as our efficiency driving up the long term with the lifetime value of our customers and also driving down customer acquisitions. So over time, we also expect to see a gradual step up in our retail margins throughout 2023 and Q4. Would you add to that?

Yes. And the only thing I would add, Greg, is in the very near term, bear in mind, we are -- because they're working, we are leaning into opening new retail stores, the seating store -- we're very, very pleased with the performance of those. It's one of the chief levers that the team has pulled as they've pivoted to respond to the shift in product mix as that high volume of e-commerce task share orders has begun to normalize and it's working for us. And so, we're going to lean into that. We're going to open more stores. Of course, in the near term, they take a little time to get up to speed. And so you have to take on a lease, you have to staff -- so that is likely in the next quarter or so to take a bit of a step backwards in terms of overall margin flow through, we're very, very confident, though, that, that's accretive for the business is the right move going forward. The other thing I would mention is, I think[indiscernible], they've been really focused on looking at transportation costs which are up. That's another -- in addition to the mix that Andy mentioned, inbound freight expenses have really spiked over the course of the last three months or so. So the team is looking at and has actually already announced and implemented changes around things like increasing threshold delivery charges, modifying the proximity thresholds around delivery charges as well. So they're doing everything they can to control it. And I think in the longer term, we're going to see these investments in stores. And a lot of the digital technology that is going to help improve data analytics in that business. We're very, very comfortable it's the right stuff to do. And as Andy said, in the medium to longer term, those margins are expected to rise. In the near term, you might see them take a bit of a step backwards.

Our next question from the line of Reuben Garner from Benchmark.

Thank you, everybody. So orders growth in the Americas and with Knoll even very strong, I think, 36% across the board. Can you talk about what you're seeing in those orders? What kind of product mix? Any signs that this is more than just a catch up from offices being closed down for a period of time and maybe folks looking at companies looking at how they're going to set up their offices into the future what we work?

Ruben, this is Andy and I want to turn it over to John Michael. I think there's certainly across the globe but pent up demand but I think the bigger news for us is that there really is a complete rethink about how people are working and how they're thinking about their office space shared, remote and hybrid -- and I think that's what's really contributing to kind of the -- that we're seeing in the A&D community and the design community about office space. So I think it's more than just we were out of the office for the pandemic. I think most people are taking a look at their space and trying to figure out how to work more productively and that's really fueling the demand. John, what would you add to that?

Thanks, Andy. Reuben, I'd say we're seeing a few different things. The first is, I think C-level executives understand that their space has to work harder now than ever before. In terms of attracting people back into the office and being a destination where people want to come to work for culture and connectivity and collaboration. In terms of product mix, a lot more amenity spaces which lends itself more to sort of lifestyle or ancillary product as opposed to maybe the core workstation type products that were popular sort of pre-pandemic but I do think companies aren't hesitating any longer as they were previously. I think once we got through the omicron surge in late January, customers became much more definitive about when they were going to be back to work, whether that was April 1, June 1 or September 1. And as opposed to sort of easing into that work, it began in earnest and at a lot faster pace. So we think the continued change to more of a hybrid environment will continue and that spaces are going to have to do different things now than they have in the past. And I think that bodes well given the portfolio that we have as the collective of MillerKnoll.

Perfect, very helpful. While I have you, the integration, when I see 36% order numbers, I think that's I'm not sure I'm fully up to date on [indiscernible] data but that's at the very least growing with the market, if not.

Outpacing the…

That's what it looks like to me, what -- how sustainable is that? I mean, is there -- I'd imagine that parts of your business maybe have easy comparisons, especially with Knoll, but other parts are -- other parts don't. So, what is it that is allowing you to do that? Are you already -- are you seeing any kind of negative impacts of revenue dissynergies from the merger with Knoll's is there still more to come? Or is this kind of outperforming your expectations internally?

I don't know that it's outperforming our expectations. I think there's a couple of factors that are favorable. The first is demand is strong with people returning to the office and the increased focus on that. I would tell you in terms of the unified MillerKnoll sales organization as well as the work we're doing to unify the MillerKnoll dealer network. That work is really just taking off and just getting started. I think we're just beginning to feel the impact of those powerful combinations. Andy made reference to our sales conference that we had about a month ago in the energy level and the positivity there was incredible. We are the second week into three weeks of a dealer activation experience, where we've got more than 500 dealer sellers and designers with us in Chicago, getting oriented to the brands, the products, that's going to be followed up by eight weeks of virtual training to reinforce the product specifics, ordering processes, installation, et cetera. So momentum is building. from a MillerKnoll perspective and we expect to see that continue for the next several months.

Okay. And last one for me, Jeff, I appreciate the price cost color that you gave in the third quarter. So just trying to think about how that plays out over the next year plus. I mean you're still behind -- by my math, roughly 350 basis points on the price cost front. Does that -- I assume that you want to not only make that up but make up for some of the last few quarters? Like how quickly does that progression happen? Are we looking at 100 basis points a quarter improvement over the next five quarters to get back to kind of where margins were before? Or will we see a step change? How do we model out '23? And I know it's early but just conceptually, how do you think about it?

Yes. No, it's a fair question. And to confirm, yes, we wanted to accelerate. There's no question. I would say this, Reuben, first of all, we think that we're -- I mentioned it's a dynamic environment. There's a lot changing, we feel very good about the aggressive price actions we've taken through it would be February kind of mid-February on the Knoll brand would be the most recent and absent some of the recent moves in oil prices and that are filtering through the economy in transportation costs, we felt like we had moved enough to cover these costs given enough time and that we would exit FY '23 ahead of pre-COVID margin levels on a combined basis. We're -- this is happening in real time but we're evaluating that closely, as we said in our prepared comments and we will take additional actions if we deem that that's necessary. I think I maybe would just suffice it to say, our expectation would be that we see a continually ramping margin performance. I don't know that I want to commit to 100 basis points a quarter but I mean, that doesn't -- of the comp that doesn't sound absolutely crazy to me -- and the point being that we would exit FY '23 at levels ahead of pre-COVID overall performance. I don't know if that helps you or not but that's kind of the best color I can give you.

Jeff, just to clarify that last part, exit, say that last part again, exit what quarter at pre-COVID levels?

Well, our belief is that because this is expected to ramp quarter after quarter over the next year. Our expectation would be that we would exit next fiscal year at a combined gross margin level that exceeds the pro forma combined margin for the two companies combined.

Our next question will come from the line of Alex Fuhrman from Craig-Hallum Capital.

I wanted to ask more about your retail channel. Obviously, growth there has slowed relative to the real dark days of working from home in 2020 but continues to be showing positive year-over-year growth. Can you unpack that a little bit where that's coming from? I think you mentioned earlier the Herman Miller seating stores are driving some of that growth. Is it the same kind of product assortment that we see in your corporate business that's been driving retail like seating? Or is it more home decor options. Just kind of wondering, big picture, not thinking about any specific quarter here. But as that business seems like it's on track pretty quickly to become a $1 billion segment for you. And then so I'm just wondering -- how should we think about this kind of three, five years out? I mean could this be 30% of your business? Is this something that could potentially be 100 or more Herman Miller branded stores. Just wondering if you've even kind of started to see signs of where the end of the line could be or if it's just open-ended growth for you?

Alex, thank you so much for using the word billion-dollar -- we love that. These are great questions. The answer to where is the growth coming from is everywhere. So all of our categories are outperforming last year. I would say the one exception to that is past seating but that's not surprising to us. We're seeing solid growth in DWR. We're seeing solid growth in Hay. Our HM stores have been incredibly productive, comping in double digits, the ones that have been open over a year in very small spaces. We're seeing growth in upholstery, bedroom dining room, you name it. It's happening across the board. I would say any slowing in growth that we're seeing is really related to kind of Omicron that happened in December, January, a little bit of slowdown in what we were able to ship in that time based on labor shortages, all the things that everyone else is saying, it all happened to us, too. But I think the opportunities that we have in this business are vast. If you look at our competitors, we have a lot of ground to gain in the amount of assortment that we could still add in the new categories that we're pushing in and don't forget gaming. Gaming is a big category for us. And from nothing next year, we could be looking at a $90 million to $100 million business in gaming alone which is a huge sweet spot for us. So when you add all of that together, we are incredibly optimistic about what Herman Miller as a brand can do about what all of our collective brands can do in the retail space.

Great, that's really helpful. And then just as you think about building out the retail channel more with more stores, I mean, are there any other brands that you think could be a really big source of investment for additional stores over the next few years?

Yes. I can't elaborate but of course, we have a great collective of brands. And of course, we look at all of them with that lens.

[Operator Instructions] Our next question will come from the line of Rudy Yang from Berenberg.

So obviously, going forward, your expecting pricing actions to further benefit margins. But just curious how much of your backlog is now comprised of orders under new pricing versus oil pricing? And then it sounds like supply chain constraints are getting better. So I guess just what tangible aspects can you talk to that just give you confidence we'll be able to see improvements in moving your backlog better going forward?

Yes, Rudy, good question. This is Jeff. So maybe I'll step back and say, as you can saw from the report, we've got a backlog that exceeds $1 billion. We were chatting a little bit before the cost started that -- for those of us who have been in the business for a while, that's a kind of a shocking number. But that -- candidly, that backlog is dated a little longer than it typically, as you might imagine, with supply chain constraints that's a little bit longer dated. This has been the same story in the past few quarters. So we certainly expect a smaller percentage of that backlog to ship in the fourth quarter than we historically would have in pre-COVID days, maybe just to kind of ground you on that. Remember, we have been implementing price increases going back to May of last fiscal year. The Herman Miller and the Knoll brands did price increases initially in May and June and then again in October, November and then again in January, February. So there's a good portion of that backlog that has some semblance of -- it's a mix, of course but some semblance of pricing. And because orders have been quite strong throughout the third quarter, even our most recent price increases which for the contract business was a 10% list price increase there's a good chunk of the backlog and has that in it as well. So, I don't have the blended number to give you but it is certainly a mix -- and that's why as order -- and we hope that this continues that the order pacing continues at a good rate, that will absolutely continue to ramp up as we move forward.

Yes. No, I really appreciate the color there. That's super helpful. And I know we talked a lot on retail already but orders were pretty strong year-over-year, especially given the tough comps but I think retail orders declined sequentially from last quarter. So just curious on any thoughts you have on trends that may be permanently changing there that's just the reduction in seating or anything else that may have drove that?

Yes, Rudy. So it's a good question. So I think a couple of things come to mind. First of all, we did have some weather-related disruption earlier in the quarter that impacted our distribution center. So I think there is a factor that I don't -- I certainly don't want to point to that alone. Obviously, we're getting at -- we are continuing to run up against the tougher comps to last year from a task seating perspective.

And one thing to add, Jeff, is if you look sequentially in the retail business also, there is a pretty consistent decline from Q2 to Q3 in general, if you strip out last year in the pandemic-related kind of boost we had. So I would say that sequential quarter-to-quarter would be expected for us readying this business. So we're not alarmed by it.

Okay, great. And then just last one for me. I know it's early but -- are there any results you can share so far from your new MillerKnoll dealer group in Europe, I think you were also doing some testing with pilot groups in Texas and Arizona. So just curious if any results were different between each of them? And if there are any major differences to note when it comes to the integration of your domestic versus international dealers?

It's really early days with international. But I would say, Rudy, is that the pilots are going well. We're learning a lot from them all over the world. And really for our international dealers, it's almost an easier left because this is really just one more product category and it's upside for them. So I think the place where we have more complexity will be in the Americas and all of our pilots there have really helped us to formulate our dealer activation strategy that we're undergoing now and launching in June. So comes up across the board internationally.

I'm not showing any further questions in the queue. I'll turn the call over to Andy for any closing remarks.

Well, great. Well, thank you guys for joining us and MillerKnoll really has the momentum and unique competitive advantages that are fueling growth and creating exciting new opportunities for all of our stakeholders. So we appreciate your time with us today. We appreciate your continued interest and we look forward to updating you again next quarter. Take care, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.