Ladies and gentlemen, thank you for standing by and welcome to the MillerKnoll First Quarter Fiscal 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ken Diptee, Vice President of Investor Relations, you may begin your conference.

Good evening. And welcome to MillerKnoll's first quarter conference call. I'm joined by Andi Owen, Chief Executive Officer; and Jeff Stutz, Chief Financial Officer. Also available for during Q&A are Debbie Propst, President, Global Retail; and John Michael, President, 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, 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 assumes no obligation to update or supplement these statements. You 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'll turn the call over to Andi.

Thanks, Ken. Good evening, everyone, and thank you for joining our call. MillerKnoll was created to lead our industry and deliver results by offering customers modern design solutions for their workspaces and homes through unique collective of brands and channels. We continue to leverage and build on the competitive advantages we established during our first year as MillerKnoll. This quarter, we successfully launched our MillerKnoll sales organization and dealer network, introduced new products at the company's first Design Days and continue to capture synergies through our integration work. First quarter results are a testament to our diversified global business. Our multichannel, multi-brand collective is designed to sustain shifting economic conditions and drive growth. During the first quarter, we experienced the impact of economic softening in various parts of the world, and our results reflect how we can drive strong performance in different segments and regions to balance the performance in others. Around the globe, we hear from customers that the workplace matters. Companies see the benefits of a hybrid model and want to bring teams together for culture, collaboration and productivity. However, the pace at which companies are placing orders and enhancing their workspace varies based on location and sector. In the Americas segment, we posted healthy growth in revenue compared to last year but saw a slowdown in order activity. We are feeling the impact that the economic uncertainty is having on our customers, particularly in the U.S. They are concerns about inflation, piloting smaller orders and requiring more revisions to projects as they learn to operate in a mostly hybrid environment. Given this macroeconomic backdrop, we are proactively taking actions, including continued pricing increases and careful management of discretionary spending. Our International Contract & Specialty segment sales and orders continue to grow after a strong fourth quarter. Our…

Thanks, Andi. Good evening, everyone. Our results for the first quarter reflect the steps we've taken to position MillerKnoll for growth. These results also leverage the benefits of our diverse business model, which has helped to mitigate some of the pressures from the current macroeconomic environment. We also saw signs of stabilization in our supply chain, and lead times returned to near normal levels, although some pockets with longer lead times still remain. As we look ahead, we continue to focus on what we can control and providing solutions to our customers. As you saw in our press release issued today and the 8-K filed on September 8, we changed our reporting segments to align with changes in our organizational structure, which was effective at the start of the first quarter. As a quick reminder, our segments now consist of Americas Contract, International Contract & Specialty and Global Retail. Turning to our results. Consolidated net sales in the first quarter were $1.1 billion, an increase of 37% on a reported basis and 12% organically compared to the same quarter last year. Consolidated orders continued to exceed prior year levels on a reported basis with orders of $1 billion reflecting an increase of 11% year-over-year. On an organic basis, orders were down 11% compared to the same period last year, primarily driven by the Americas Contract and Retail segments. In the Americas Contract segment, sales in the first quarter were $537 million, an increase of 41% on a reported basis compared to the same period last year and up 15% organically. Order levels in the first quarter increased 3% to $511 million compared to the same quarter a year ago on a reported basis and declined 17% organically. The decrease was due to several factors. These include a challenging comparison due…

[Operator Instructions] Your first question comes from the line of Budd Bugatch with Water Tower Research.

Good afternoon, Andi, Jeff, Ken and Debbie. I guess I just would love to get a little bit more color on the order book maybe versus what you expected in the quarter in terms of orders and what you're seeing in terms of what your customers are telling you and what you can see in terms of visits and sales activity that I know you monitor?

Hey, Budd, nice to hear you. It's Andi. As far as customer visits, I think that's a really encouraging sign. Our customer visits are up 10% to last year and also up on the quarter. I think the order trend for us in the Americas was slightly lower than we were hoping that it would be, but I think it was varied throughout the quarter. I would say stronger than we thought it would be in International, and the demand in Retail has been, I think, on par with our competitors from an orders standpoint. John, what would you add from a contract standpoint on orders?

I think I would agree, Andi, and add that there's robust activity. If you talk to the dealer network, they're all incredibly busy. I think some of the things that we're seeing is a lot of hesitation on the part of customers in terms of pulling the trigger on a new and more hybrid-focused work environment and also probably some hesitation in terms of the size of projects going forward in terms of what's going to be required. That said, most companies that we talk to realize they have to do something and they're in the process. It's just -- it's an iterative process and it takes a little bit longer to get the order to close than in a pre-pandemic kind of environment.

Okay. And for my follow-up question, I guess I would like to -- inventory came in pretty much higher than I expected as the debt. So I would like to get maybe some color on inventory and debt, and maybe if we can get the ratio for the banks and for the debt holders. But Jeff, if you could comment on inventory and debt? It looked to me like you were maybe $60 million higher in inventory than I thought you were going to come in, and same for debt.

Yes. Budd, great question. Good to talk to you. I hope you're staying clear of the store. I assume you are, given that you're on the call.

It's here and it's notable, but we are…

Yes, I can only imagine. Well, so clearly, we did have a build in inventory and you see that in the cash flow. I think our cash flow from operating activities was a negative, I want to say, [$67 million]. It's in that hut, Budd. And a big chunk of that is working capital tied up related to inventory, a couple of areas where we're seeing it. We do see some inventory buildup in the Contract business related to the continued relative strength in International, so I would make that point. That one will certainly take. I think that if you ring-fence the area that was a bit of a surprise, we did have an inventory build in the Retail business. And Debbie can unpack this a bit in a little more color. But I would just simply say that the lead times that, that business was contending with back in the spring and even the early part of summer were such -- and demand levels were such that we were ordering in front of it, right? We were trying to get in front of it. And with the falloff in demand that we saw in the quarter, as I mentioned in my prepared remarks, orders organically were down 8% for that business. We did see a buildup in demand or in inventory levels, they piled up. And in fact, we had to incur some costs related -- that we weren't expecting related to warehousing and storage and transportation of that inventory that weighed on margins in the period. So that's really the primary area. Debbie, I don't know if you had any color.

Budd, I'd just add, this is Debbie. We in our dedicated retail inventory increased quarter-on-quarter by 7% as a result of the shift in demand trend; and as Jeff alluded to, that 7% increase was largely stored in short-term warehousing locations. We've now secured longer-term locations that are at much lower cost impacts than we've always been storing that buildup that we've had over the last few months. The great news is, is that our inventory is largely not liable inventory. Only 3% of our total inventory for Retail is seasonal, meaning outdoor. We did, however, have a year-out outdoor business and about 3% is what we would call discontinued, and we're moving through that in our outlets in our clearance section.

Yes, Budd, and then just to kind of close it out on your question on the leverage ratio, the net debt to adjusted EBITDA for our lending agreements ended the quarter at 2.9 turns.

Your next question comes from the line of Greg Burns with Sidoti & Company.

I just wanted to start off with the order trends. When we look at the 17% decline organically in the Americas, how much is that price versus volume?

Greg, this is Jeff. So I don't have those numbers split out precisely. But I mean, your question is, it's a fair one that you've got a fair amount of pricing that's built up, right, over the last 12 months. So in the Americas, it wouldn't surprise me to see unit volume demand declining 20%, 25% in that hunt, 25%, whereas order entry levels in dollar terms were down 17%. I think that's directional.

Okay. And then just the early part of this quarter, has there been any kind of shift in the trajectory or a similar type trajectory in the early part of this quarter?

Yes, yes. The first three weeks of the quarter, Greg, Americas orders were improved a little bit, down 12% organically to last year.

Okay. And then when we look at the overall, I guess, corporate enterprise office business, are you able to size like how big the business is now versus pre pandemic? Like has the -- how much has it shrunk? And do you feel like you need to focus on maybe some adjacent areas like health care or education, maybe some other verticals to kind of grow that business?

Greg, this is Jeff. John will probably want to tag on to this. But I would say I don't think -- I think the big question that we're all anxious to find out is how much of this is macroeconomic dislocation and -- that has resulted in lags of return to office. We really simply can't answer size of industry types of questions right now. John, I don't know if you -- feel free to tag on.

Well, I think in terms of the question about verticals, we've got an active and healthy healthcare business. We're very active in higher education as well as public sector. So we -- in times when the office business is softer, we lean into those verticals that are more resilient. And certainly, we've been doing that. But I would say even in sort of the core office business, there are pockets where there is still a lot of strength in activity, professional service firms, investment banking, legal, life sciences, pharma. All those types of firms are still very active and providing a lot of opportunity. Tech companies, obviously, are down as compared to where they were in the last few years. And manufacturing is probably not quite as active as it has been. But there are definitely pockets of activity across verticals and in the office segment as well.

Your next question comes from the line of Alex Fuhrman with Craig-Hallum.

You guys have done a very good job of navigating through all of the supply chain crisis and passing on cost increases to your customers. Wondering as you look at maybe the next step of that with everything that's happening, particularly in Europe and just the surge in electricity prices and producer prices in general, do you think you're going to be able to continue to pass on a lot of those cost increase in Europe? Are there perhaps opportunities to increase manufacturing elsewhere in the world and import more product there? Just curious to how you're thinking about the spike in manufacturing costs for your European businesses?

Yes, Alex, it's a great question. I think when you look at how we're manufacturing around the world, we are localized as much as we possibly can be in all the markets where we sell. And I would say from a price increase, it is also market by market. So where we felt most of the branch of commodities, we've been able to raise prices. And I think so far, we haven't necessarily seen an increase in discounting or anything like that. But we're watching Europe very closely. Like everything else these days, it's changing minute to minute. But we feel we have a very flexible and agile approach because we are localized there. And I think that will make a difference in how we look at what's coming forward.

Okay, that's really helpful. And then just if I could ask another about the decline you're seeing in order volumes. I mean, it looks like it's been just the last couple of months that things have slowed since the last quarter. I know you talked about the -- perhaps the difference between unit and dollars here. But are there any other additional call-outs regionally or anything like that? I mean, it just -- it seems like a pretty meaningful decline in orders from the last quarter. Just wondering if there's any noise, like one or two just massive orders last year that maybe screwed up those comparisons that could shed more light on that?

I think from a comparison standpoint, if you look at last year, this quarter in the Americas specifically, we had a much bigger flurry of activity around kind of that first, if you remember, sort of post-COVID return to office. So I think comparatively, there is that in the numbers. I also think regionally, when you look at it, Alex, North America, United States, in particular, we have a lot more indecision. We have a lot of CEOs that are still kind of iterating and iterating on what they want their return to office to look like. In other parts of the world, we have a lot more decisiveness so we haven't seen this questioning. So the projects are taking longer. I think if you were to ask John Michael, what does your funnel look like in the Americas? He would say it's super healthy. It's just taking a lot longer. So I look at this order decline and I say not incredibly worried. I think we're certainly facing uncertainty and I think we will see some decline. But I also think there's a matter of people being indecisive and understanding how to work in a hybrid environment. So I would say activity is strong, projects are taking longer, and there's definitely a regional variant in how we're approaching the return to office post COVID.

The other thing -- real quick, this is Jeff. The only other thing I would add to that is a data point which I find encouraging, and by the way, lots of uncertainty, right? So no doubt about that. But the encouraging thing for me is, when you look across the book of business in the Americas segment, day-to-day business activity has been relatively healthy. That's maintained quite nicely. And if you just consider past cycles, that has been one of the things that has been kind of a leading indicator of significant decline. So I'm not saying that it's not down but it's hung in there better than in past down cycles. And I think that's certainly a positive and probably a testament to the activity that John talks about when we talk to dealers, when we talk to customers.

Your next question comes from the line of Budd Bugatch with Water Tower Research.

Thank you for taking the follow-up. I guess, Jeff, maybe I thought the question would have been asked about price versus cost in the quarter. Do you have any way to characterize that in terms of what's your realized pricing versus the commodity inflation and labor inflation and what you're seeing future on that?

Sure, Budd. So I'll just make sure we're level set. I'll talk year-over-year from a gross margin standpoint. We saw a nice benefit from pricing at the consolidated level, about 330 basis points of net price realization to last year, which is encouraging. Commodities remain at elevated levels. There's some signs, you probably see this, in some of the categories that they're beginning to stabilize and begin to roll over, but they still remain at elevated levels across most categories to prior year. So that accounted for about 240 basis point erosion in gross margin. The freight and transportation costs, as well, remain elevated. We estimated that to be 90 basis points of margin pressure. Bear in mind, some of that -- that includes some of that retail inventory-related costs that, while meaningful, are temporary as we work those balances down. And then labor and overhead collectively about 70 basis points of pressure. And then -- so that's kind of the cost price. And then if you kind of walk the rest of that gross margin, you've got product and channel mix changes that accounted for 60 basis points to 80 basis points of pressure year-over-year as well. So that should get you the walk.

So we got 330 positive and I'm looking at about 460 to 480 negative. Is that right?

Yes, inclusive of product and channel mix shifts, which is not a -- I'd factor that out of the price/cost equation in answer to your question. Yes, yes.

Your next question comes from the line of Greg Burns with Sidoti & Company.

Thanks for taking one more here. So I just wanted to dig into the price increases and the impact that has had on demand. Is there any element of pull-forward that's happened over the last couple of quarters, where now we're that's like exacerbating or why we're seeing such a significant decline this quarter maybe instead of maybe a more moderate slowdown? Like how do you think pricing has affected demand in previous quarters? And then going forward, if things are slowing down, do you still feel comfortable being able to pass along as much price as you've been passing along, especially with the new proposed increase?

Sure. Hi, Greg. This is John Michael. Yes, I think from a price perspective, conversations with customers, there's never been a better time to have a conversation with a customer about price increase because they all understand it, because inflation is pretty much across the board. And I think as we look at our competitive set and how prices have gone up, we see that we are in line with others. So I don't think we see any significant impact from the price increases. And I think the conversations we've had with customers and the projects we've been pricing of late would indicate that the market is accepting the pricing that we have, and we should be able to continue to realize it going forward.

There are no further questions. I'll turn the call back to Andi Owen for closing remarks.

Thank you. Thank you, everybody, for joining us on this evening's call. In closing, we're really proud of the resiliency demonstrated by our collective of brands and the progress we're making through our integration work. The leadership team and I feel strongly about the opportunity that lies ahead for MillerKnoll. And thank you again for your time today, and we look forward to speaking with you next quarter. Thank you.

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