Herman Miller, Inc. Stock

Good morning and welcome to MillerKnoll Quarterly Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Wendy Watson, Vice President of Investor Relations.

Good morning and welcome to our first quarter fiscal 2027 conference call. With me are Jeff Stutz, MillerKnoll's Interim Chief Executive Officer, and Kevin Veltman, Chief Financial Officer. Joining them for the Q&A session are John Michael, President of North America Contract, and Debbie Propst, President of Global Retail.

We issued our earnings press release for the quarter ended August 29, 2026, before market opened today, and it is available on our investor relations website at millerknoll.com. A replay of this call will be available on our website within 24 hours. Before I turn the call over to Jeff, please remember our safe harbor disclosure regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties, and other factors which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release.

The forward-looking statements are made as of today's date and except as may be required by law, we assume no obligation to update or supplement these statements. We also refer to certain non-GAAP financial metrics, and our press release includes the relevant non-GAAP reconciliations. With that, I'll turn it over to Jeff.

Thanks, Wendy. Good morning and welcome, everyone. Before Kevin reviews our financial results and outlook, I'd like to update you on the priorities we outlined last quarter and our commitment to driving improved performance and disciplined execution across the organization. Overall, we delivered solid margin performance, earnings, and cash generation despite revenue headwinds. First quarter sales were $923 million, down 3.4 percent year over year, primarily reflecting softer than anticipated revenue in our North America Contract and Global Retail segments. Adjusted earnings per share were $0.53, and excluding an $0.11 per share net benefit from IEPA tariff refunds, adjusted earnings per share were $0.42. This was above our guidance range and reflecting disciplined execution and cost management. Demand conditions varied across our business.

Orders were particularly strong in International Contract and continued to grow in Global Retail, while North America Contract orders were softer than we anticipated. At the same time, several of our internal demand indicators and customer verticals remained quite constructive. We're encouraged by the progress our teams are making against this backdrop and by the actions underway to strengthen MillerKnoll's performance. As I previewed on our last earnings call, we are focused on three key areas. First, we are elevating the level of operational discipline we bring to setting priorities and running the business by concentrating our resources on the initiatives where we believe we can create the greatest value for the organization and for our business. Last quarter I said this is about focusing on those efforts that will help us grow the top line and improve profitability. And across the company, our teams have sharpened their priorities and aligned resources behind the opportunities that can have the greatest impact.

Let me put a finer point on that. In North America Contract, we are concentrating our selling resources on winning global and national account opportunities and leveraging the strength of our brands and our credibility with A&D and commercial real estate specifiers. In International Contract, new products are gaining traction in the marketplace. Notably, our recently introduced Concert line by Knoll is driving early wins in the private office category, which is an area of our business previously underpenetrated in Europe. We are also targeting efforts aimed at training dealers and expanding distribution coverage in the Asia-Pacific region where we see premium growth opportunities. And in Global Retail, we're executing our store growth strategy and applying our learnings, such as an increased emphasis on our smaller format Herman Miller stores, while continuing to optimize our marketing investments to build awareness and customer acquisition. Second, we're maintaining rigorous cost discipline and aligning expenses with revenue levels.

In the near term, we're making more deliberate decisions about where we deploy capital and resources while reducing expenses where we can. Our first quarter earnings performance, excluding net tariff refunds, demonstrates early progress toward this goal. Third, we're sharpening our focus on capital allocation, cash flow, and balance sheet strength to support debt reduction during FY '27 while preserving our capacity to invest in growth. By bringing greater discipline to capital deployment, we're building upon our business's proven cash generation capabilities. Next, I'll offer some segment highlights for the quarter. In North America Contract, first quarter sales declined year over year due in part to the timing of orders pulled forward late in fiscal '25 that benefited sales in the first quarter of fiscal '26. Still, first quarter orders were softer than we expected, with trends varied across sectors.

We had continued strength in insurance, financial, and business services, and conversely, order patterns were soft in relation to last year within the healthcare sector and with federal, state, and U.S. local government customers. Looking more broadly, we continue to operate in a dynamic environment and are navigating the recent trade developments between the U.S. and Canada. Now, we manufacture in both countries, and our supply chain touches both countries. We're being proactive on both sides of the border and working closely with suppliers, customers, and our own production teams to manage the flow of product and make adjustments where we can. Our full-year outlook includes the most up-to-date assessment of the U.S.-Canada tariff actions. Based on that assessment, we estimate an approximate $0.07 per share impact from costs related to these new tariffs. Given this backdrop, we are managing expenses and production levels carefully while prioritizing investment in our most important growth initiatives. Tariff refunds were also beneficial to help mitigate these pressures to our full-year outlook. And Kevin will cover those details shortly.

Over the last several months, I've spent considerable time with the North America Contract team meeting with dealers and customers, one message has come through very clearly. Strong partnerships are a competitive advantage in this business, and our brands benefit from deeply credible key target markets alongside differentiated product offerings. Our dealers and customers tell us they need two things from us. First, we need to continue to simplify the process of doing business with us. And secondly, to maintain and expand our leadership in product innovation. We're delivering on these needs by improving responsiveness, service levels, and operational execution while also accelerating our new product innovation clock speed. We continue to be optimistic in this business.

Despite the demand softness we saw this past quarter, which varied by sector, our internal forward demand indicators continue to point to healthy conditions across North America. Project funnel and funnel additions were up year over year, along with particularly notable growth in awarded contracts. Externally, Class A leasing in the U.S. continues to show strength, with the latest four-quarter net absorption in Class A buildings improving to the highest total since mid-2020. All of this suggests the order softness we experienced in the first quarter represents a timing issue rather than a structural slowdown in general business conditions. Turning to International Contract, we remain encouraged by the opportunities in this business. Although sales declined year over year, reflecting difficult comparisons in several markets, orders increased across most regions. The activity was particularly strong in Asia, the Middle East, and portions of Europe and Latin America.

We saw healthy demand from financial services and private office customers, along with strength in healthcare and technology. We remain focused on expanding and strengthening our international dealer network, increasing engagement and improving alignment as we continue building our international business. During the quarter, our Asia-Pacific team hosted dealers representing more than 20 countries at an event in Jakarta, Indonesia. Key leaders from across the region all participated, helping us strengthen relationships in the region and position us for further growth. Within the Global Retail segment, we delivered another quarter of sales and order growth, together with meaningful year-over-year operating margin improvement, even after excluding the net benefit from tariff refunds. While June and July had softer than expected sales and orders, performance strengthened significantly across channels and geographies in the month of August. For the first quarter, North America orders increased 7.5 percent, and this represents our eighth consecutive quarter of North America Retail order growth, a key indicator of our ability to effectively navigate a challenging industry environment while advancing our long-term strategy.

During the quarter, we opened a DWR store in Raleigh, North Carolina, and Herman Miller stores in Columbus, Ohio, St. Louis, Missouri, and San Antonio, Texas. Looking ahead, we expect to open 5 to 7 new stores during the second quarter and continue to plan for approximately 14 to 18 new store openings throughout FY '27. Beyond expanding our physical footprint, the retail team is developing new ways to engage customers and build awareness of our brands. These initiatives are designed to reach more consumers across our target markets and included a DWR furnished home on Shelter Island, sponsorship of the Summer Celebration of the iconic Glass House, and increased storytelling on social media with design partners. So with those brief opening comments, I'll now hand the call over to Kevin, who will provide additional details on segment financial performance and our outlook for FY '27.

Thanks, Jeff, and good morning, everyone. I'll start with an overview of our first quarter results and segment detail, followed by our outlook for the second quarter and full fiscal year. As Jeff mentioned, first quarter consolidated net sales were $923 million, down 3.4 percent on a reported basis and 3.3 percent lower organically. Consolidated orders for the quarter were $914 million, up 3.2 percent as reported and 3.5 percent on an organic basis. Our consolidated backlog was $669 million at quarter end, down 3.1 percent from a year ago. First quarter reported gross margin increased 320 basis points to 41.7 percent, and adjusted gross margin was 41.8 percent. The recognition of $16.5 million in refunds from the U.S. government related to previously expensed IEPA tariffs contributed 180 basis points to the year-over-year increases.

Excluding this benefit, adjusted gross margin improved 150 basis points over last year, primarily reflecting pricing realization, partially offset by inflationary cost pressure. Including variable incentive impacts, the net benefit of tariff refunds was approximately $0.11 of adjusted diluted earnings per share. Our quarterly supplemental slide deck posted on our investor relations website provides further detail of the dollar and margin impacts by segment. Adjusted earnings per share were $0.53 in the first quarter compared to $0.45 in the prior quarter. Excluding the net benefit from tariff refunds, adjusted earnings per share were $0.42. This reflects price realization and improved cost management partially offset by lower sales volume and inflation pressure. Turning to cash flow and capital allocation, we generated $49 million in cash from operations during the quarter and invested $33 million in capital expenditures.

We ended the quarter with $580 million of available liquidity. Our net debt to EBITDA ratio was 2.75 times as defined by our lending agreement. In July, our Board of Directors declared a quarterly cash dividend of $0.1875 per share, payable on October 15 to shareholders of record on August 29 of 2026. At an annual indicated dividend of $0.75 per share, the yield is 3.7 percent based on yesterday's closing stock price. With that, I will move to our performance by segment in the first quarter. Net sales in the North America Contract segment were $506 million, down 5.3 percent on a reported basis and 5.2 percent lower organically, primarily due to a challenging prior year sales comparison associated with the order pull forward in the fourth quarter of FY '25 that we have discussed in prior quarters. Orders were $484 million, down 1.7 percent as reported, and down 1.6 percent organically from the prior year, despite a favorable orders comparison.

As a reminder, we estimate that $55 million to $60 million of orders pulled forward from Q1 FY '26 to fourth quarter FY '25 related to tariff pricing actions. The reported operating margin was 9.4 percent and adjusted operating margin was 10.7 percent, down 70 basis points year-over-year. The decline primarily related to deleverage and lower sales and inflationary cost pressure, partially offset by pricing realization and the net benefit from tariff refunds. International Contract segment net sales were $157 million, down 6.4 percent on a reported basis and down 6.2 percent organically year over year. Orders were $181 million, up 17.3 percent versus prior year on a reported basis, and up 17.9 percent organically, which included a notable project win in South Korea. First quarter reported operating margin was 2.4 percent, and adjusted operating margin was 4.6 percent, down 390 basis points compared to prior year. The decline primarily reflected the leverage on lower sales, showroom investments, and timing of sales events, as well as higher incentive compensation.

In the Global Retail segment, net sales were $261 million, up 2.6 percent on a reported basis and up 2.8 percent organically. Segment comparable sales were flat, and comparable sales in North America grew 1.9 percent. Orders in the quarter improved to $249 million, up 4.3 percent year-over-year on a reported basis and up 4.7 percent organically. In North America, orders grew 7.5 percent, reflecting continued market share growth. The reported operating margin was 6.1 percent in the quarter. An adjusted operating margin was 7 percent, up 580 basis points year over year. The improvement included a 410 basis point net benefit from tariff refunds.

Improvement also reflected pricing realization and cost savings, partially offset by planned investments in new store openings. Excluding the net tariff benefit, adjusted operating margin improved 170 basis points year over year as our priority to expand operating margins for this segment gains traction. Now let's turn to our Q2 and fiscal '27 full year outlooks, which includes our most up-to-date estimates on inflation, tariffs, and related mitigation efforts. For the second quarter of FY '27, we expect net sales of $972 million to $1.012 billion. At the midpoint, this represents a year-over-year increase of approximately 4 percent. We expect gross margin of 38.3 percent to 39.3 percent and adjusted operating expenses of $321 million to $331 million. Adjusted diluted earnings per share expected to be $0.43 to $0.49.

This outlook includes estimates for the most recent U.S. and Canada tariff actions. For the full year, with the lower than expected sales and orders in the first quarter, we reduced our expected net sales range to $3.88 billion to $4.03 billion, reflecting 3 percent growth year-over-year at the midpoint. We are maintaining our expected adjusted earnings per share range of $1.85 to $2.15. This includes an estimated $0.07 per share of unfavorable impact from the most recent U.S. and Canada tariff actions. As I mentioned last quarter in FY '27, from an operating expense perspective, our guidance continues to assume an estimated incremental new store expense of approximately $6 million per quarter on a year-over-year comparison. For all other details related to our outlook, please refer to our first quarter results press release. With that, I will turn the call back over to Jeff.

Thanks for that, Kevin. Before we begin Q&A, I want to thank our teams around the world for their continued focus and commitment to delivering for our customers. We are making progress against our priorities to strengthen the business and we remain focused on improving our operating performance, creating long-term value for our shareholders and serving our customers. So with those as opening remarks, we'll now open the call for your questions. Thank you.

We will now begin the question and answer session. [Operator Instructions] Your first question comes from Greg Burns with CD and Company.

Please go ahead.

Good morning. So, um, in the North American Contract segment, you mentioned that you're the internal funnel metrics remain positive. Some of the market dynamics also, I think, still constructive for demand. Could you just maybe give us a little bit more color on why that didn't work? Maybe translate to a stronger quarter in the first quarter?

Hey, Greg, good morning. I'll turn things over to John, and he can cover kind of his take on this. Maybe just would reiterate that we, we certainly are seeing in the background continued supportive indicators inclusive of corporate profitability. The Class A leasing commentary that we offered we think is bullish. CEO confidence has been relatively resilient. And so those are supportive. We have internal metrics that I highlighted in my prepared remarks. I think our issue is more of some of the resilient sectors that we've seen strengthened, just had a down quarter, and that happens in a project-driven business. But I'll let John unpack that further.

Sure. Thanks, Jeff. Hi, Greg. Yes, to tag on to what Jeff said, I think overall when we look at the indicators, they're positive. I mean, I'm looking at six. The six that we look at on a regular basis are all pointing in the right direction. I will say the reports from the sales organization are that customers seem to be taking a little bit longer to convert from awarded project to orders. And we see that in our indicators as well. We think there's a couple things driving that, certainly there's at the state and local level, which is part of our public sector group. We see some uncertainty and some hesitation, probably related to the midterms that are around the corner.

From a federal government perspective, a lot of activity in key agencies, but certainly some of the agencies that experienced some of the downsizing whatnot over the last 12 to 18 months have been a little slower to return than normal. And in our healthcare sector, a very positive outlook, but a little bit of a pause during the quarter really based on the timing of projects.

Okay, so the um, the outlook for the year, I mean, do you still expect growth from North American Contract this year, uh, even with the soft first quarter?

We do. Yeah, the forecast for the balance of the year shows growth, but obviously we're a little bit behind after the first quarter, but the teams are working hard to catch that up.

Okay. And then in terms of the Global Retail situation, store expansion um efforts. Could you just maybe give us a little color on the sales and margin contributions from stores that have been open for a year, just to give us a sense of kind of what kind of returns you're getting from, from maybe some of the more mature stores that, that have been in market for a little while.

Hi Greg, thanks for the question. This is Debbie. Um, so the great news is that the cohort of stores that we opened in the back half of FY '25 and all of FY '26 are really showing progress and getting to a point where we'll have profitability out of those stores in FY '27.

Okay, and they're performing to where you expected them to be from maybe a revenue and margin contribution at this point?

We're seeing the second, the first comp year ramp actually a little bit more than we expected. So what we've seen through the store growth strategy is a little bit of a softer initial ramp for DWR than we initially performed, but the second year actually showing more. We remain committed to our store growth strategy, and we like the economics and the progress that we're seeing.

All right, great. Thank you. Your next question comes from Reuben Garner with StoneX. Please go ahead.

Thanks. Good morning, everybody. Just to follow up on the North American Contract piece, any, can you give us some insight on the cadence in the quarter? Did it slow as the quarter moved on? Was there kind of a moment where there was a pause and we've since had a recovery? I mean, what is, what is the September kind of look like so far? Any just kind of thoughts on the progression in order patterns? Yes.

Yes, Reuben, this is Kevin. Let me talk you through that. So within the quarter, we saw generally improvement as the quarter went on, particularly in August for NAC as well as the overall business. August was a growth quarter year over year. And then as we look through the first three weeks of September, we're up 9 percent orders year over year, and that is growth across each of our three segments as well right now.

Okay, great. Very encouraging. And then in your outlook, can you talk about what you've assumed from a price-cost standpoint and how you guys have handled kind of the latest round? Obviously, steel has kind of trended up through the year. Diesel's moved higher. What's, what's the latest price increase or surcharges or any other metrics you look at to offset these factors and what's embedded for the full year from a price-cost standpoint?

Yeah, Reuben, in the first quarter, maybe to set the stage, as you may recall, we talked last quarter about some pricing actions that we took back in April across our retail in North America Contract in particular. And so those actions have been flowing through in the first quarter. Inflation ramping up, but frankly, it ramped up a little bit slower than we expected during Q1. But to your question, it's still very real. And so we had price cost as we look at it was was slightly favorable in Q1. We expect as inflation ramps up while our pricing actions are also ramping up, we expect it to be a slight headwind, you know, call it 20 to 30 basis points year over year in the second quarter. And it's the things you talked about, you know, oil continuing to remain close to $100 and the derivative effects of that.

Yes.

Okay, great. Yes, but we're following, maybe the other point I would make is, we're following the playbook we've done, whether it's tariffs or other inflation, we're following the playbooks we've used in the past to work our way through.

Yes, Reuben, this is Jeff. You had asked about what kind of pricing actions. Kevin, I agree with everything Kevin said. I might add to that that we had not done a surcharge action for the International Contract business. That has been the latest pricing action is actually effective earlier this month, an average of about 4 percent. So that should layer into our results going forward. And as Kevin said, we're following what has become a relatively familiar playbook for the business, but specifically as it relates to Canada tariffs, we're pulling out as many stops as we can, including pulling component inventory into inventory ahead of the implementation date, customer order timing, trying to get in front of that wherever possible. We're working really hand in hand with our key suppliers, uh, on some sharing arrangements and leveraging dual supply wherever we see the opportunity, supplying component parts or, in some cases, finished goods from, you know, outside of the tariff regime regions around the world.

So we're, again, these are all actions that we're familiar with from past experiences.

But these are things we're pursuing with vigor. Got it, and that's a good lead into my last question. The margin performance and the outlook is really showing strong, you know, even excluding the tariffs this quarter. Can you discuss, the cost actions that you've taken to date and how much is kind of, how much drove the outperformance this quarter. And then, you know, what you have going forward, you know, how much visibility do you have if revenue doesn't accelerate is there a dollar amount or any kind of quantification that you can give us on, um, on the moves you've been making that can drive kind of, you know, performance to meet or even exceed your your outlook without kind of help from the top line?

Yeah, Reuben, this is Jeff. I'll give you some just high level perspective on kind of under the heading of, of our focus on cost, discipline, and Kevin, you can fill in any additional color you see fit. This is really, I mentioned this last quarter, this is really an enterprise-wide effort to, and it's really about making smarter, deliberate choices on where we spend. I mentioned, I think, on the call last quarter that, you know, this all, it really all ties into some of the priority setting that you've heard us talk about, the idea that, you know, recognizing we do all kinds of things incredibly well at MillerKnoll, but we can't do everything. And so we have to be smart about and choiceful about where we, you know, put our resources. And so, and that includes a focus on expense on all expense lines. So we're really, we've tasked our our team to really make that evaluation. We're also including, that touches on the SG&A side of the business, but it also touches on cost of goods sold.

Our supply management team continues to do incredible work with our supply base and, you know, finding opportunities to reduce the water level on cost of goods sold. We're evaluating manufacturing capacity. We've already made moves in that category, which we've outlined for you in past calls. But just a reminder, we've closed 2 plants, and we're in the process of closing a third year in, uh, in West Michigan. Uh, and there there are longer-term opportunities to consider other actions down the line and we're certainly evaluating all of those things. So that's just a little kind of context to it. This is a ground up review on the part of the organization. And as we move forward, we'll certainly unpack more details on that for you.

I will say, and maybe Debbie you can feel free to talk about this, one of the actions we took this quarter that's reflected in the special charge line items or the restructuring line items relates to some workforce reductions and some reorganization we did with the Holly Hunt brand. So Kevin or Debbie, please feel free to chime in with some additional color. Thank you.

Yeah, maybe overall, and Debbie can share a little bit more on Holly Hunt, which this will be included in this. As we look at our OPEX bridge, there's $3 million to $5 million of savings reflected in that bridge. And obviously, we've talked about the other things. You have standard wage package and the new stores that that is helping to fund, but that's about what was flowing through when we look year over year, of which some of the target things at Holly Hunt is as we look at the performance improvement opportunities in that business.

We're working very quickly to improve the outlook of that particular business and was pleased to see the business from an order trend perspective return to growth in Q1 after four consecutive quarters of decline. Some of the restructuring elements that we've been working on, we talked in the last call about some of the leadership adjustment that we had made, and obviously we will have the wraparound effect of some of those cost savings throughout the course of the year. We're also looking at our overall corporate footprint supporting that entity and making adjustments there to right-size the corporate footprint, as well as looking at showroom rationalization. This quarter, we'll be closing our Minneapolis showroom and moving to an outside sales rep structure in that market. So those are a few of the examples of work that has happened thus far.

Great. Thanks for the detail, guys. One quick follow-up, that $3 million to $5 million, what you saw in the first quarter on a year-over-year basis? And was that specific to Holly Hunt, or was that broadly?

That was across the business, which would have included Holly, Hunt, and Reuben's.

Got it. All right. Thank you, guys, and good luck going forward.

Thank you.

Thanks, Reuben.

Your next question comes from Philip Blee from William Blair. Please go ahead.

Good morning, guys. Thanks for the question. So you slightly brought down your sales guide for the year. Can you just provide a bit more color on what specifically you're seeing in NAC and Global Retail that's giving you that additional caution? Do you think it's more of a temporary deferral on a choppy macro, or do you think it's potentially a temporary deferral on a choppy macro? a more structural hit here. And then what's your degree of confidence this is the right outlook now? Assuming that macro maybe remains at status quo, I guess any quantification on what you're seeing in terms of the contract pipeline or second quarter to date retail trends would be helpful here. Thank you.

John, why don't you start us off and Debbie, you can chime in. Yes, I think in terms of the pipelines from a contract perspective, it's encouraging. I think we've seen what's been interesting for the last 30 to 60 days is the activity, talking to our dealer network, the activity is still very robust. Some of the projects are larger, and as a result, they take a little longer to come to fruition. And I'd say in the immediate past, we've seen a lot of activity in smaller projects. So it requires a similar amount of effort from a dealer processing perspective, but the size of the projects have been a bit smaller. So it, we're really seeing customers in kind of two groups. That did some retooling of their workplace previously and are making some modest adjustments to it, and then some others that have waited and now realize that they have some significant work to do over the next six to 12 months to make sure the workplace is ready for the future of work, as you've seen in the headline. A lot of the larger organizations are bringing their workforces back to work for four or five days a week.

And I think over time that bodes well in terms of the project activity that we'll see.

From a Global Retail perspective, the change in our full year outlook is largely reflective of our soft June and July and not feeling like we can make up that softer than expected revenue. And that softness in June and July, those are typically our softest months of the year. The year was largely driven by web and in particular our outdoor category. We were missing some inventory due to the PFAS regulations. That is subsequently in a much better position and we saw a very strong August. around the globe, but in particular in our North America comp, where we outpaced the prior five or so months in terms of comp trends. And quarter to date, we're also seeing strength. And the back half of our year is forecasted more or less in line with what we're seeing right now.

Okay, very helpful. And just maybe doubling down then on the Global Retail side. I guess there was a lot of noise during the quarter between macro pressures and then changes in the digital marketing landscape. So I guess just from what you're seeing from an underlying fundamentals perspective, what we should see, I guess, an acceleration in trends from maybe the first quarter as we go through. Is that reasonable? And then I guess just from a contribution from the new stores entering the comp base, I guess, how do you think about that here going through the second half of the year, remainder of the year?

All right, there's a lot in that question, so let me make sure I capture it. So from a shifting digital landscape perspective, I think that's the first thing you mentioned, Philip. What you're referring to is obviously the rapid increase in AI search and I think some of the shifts in the price of digital advertising as a result of Google's shift to AI mode. We are definitely seeing increased digital advertising costs. And as such, in August, we leaned more heavily into our direct mail distribution, and we'll continue to do that throughout the balance of the year, particularly because of the upcoming midterms. Likely driving up digital marketing costs more as well. But we're very focused on making sure that we meet our customer where they are and and moving very quickly to evolve our digital product roadmap and our brand marketing strategies to ensure that we get the best results we can out of AI search. We feel like the heritage of our brands and the authenticity of our brands well positions us to speak to both humans and machines in the appropriate ways to drive traffic and progress in our business performance.

And we have seen a significant rebound of our web performance in August and into this month as well as we eliminated some of that inventory issue noise. As it pertains to the new stores, as I mentioned already, we're excited that we're going to be getting all our expansion in the Global Retail segment in FY '27 from the new stores that opened in '25 and '26. And in light of the changing digital customer journey, I think our store growth strategy becomes more and more important, more important than ever. And our store comparable performance in North America in Q1 was in line with Q4, but continues to be a real driver of our overall success as well. Okay.

Thank you. Yeah, no, you got it all. I appreciate it. And then just one quick last one, just as you kind of see improving profitability in the business through cost savings and the retail ramp, and then you've spoken about focusing on expansion for the Herman Miller store base, which requires less upfront capital, something that free cash flow should really improve here. How are you thinking about capital allocation? Any kind of changes to your thoughts, uh, going forward, especially just around debt pay down? Thank you, guys.

Yeah, Philip, this is Kevin. I'll cover that. So capital allocation, our priorities remain the same. Invest in those growth opportunities to the point, we're continuing to look at where the opportunities that we believe generate the strongest return. So the mixture and leaning into those Herman Miller stores is a good example of that. Paying down debt is our second priority, and we were at 2.75 from a net debt to EBITDA. From a covenant perspective this quarter, we were at 2.8 last quarter. Then maintaining the dividend and being opportunistic on share repurchase would round out the priorities.

Excellent. Thank you all. Best of luck.

Thanks, Hope.

Your next question comes from Linda Bolton-Weiser with Water Tower Research. Please go ahead.

Yes, thank you. Hi. So I was just curious about, you know, a little more explanation on the International Contract profitability. You talked about all the things you're doing to improve profitability, and it's evident in the North American Contract segment, but International seems to be going the wrong way on a longer-term basis. In the last few years, you've had modest revenue growth there, and yet the operating margin seems to be declining. So can you just explain a little bit more what impact to that margin and why the decline in the last few years and then sort of what are the factors that are going to improve it kind of going forward? Thanks.

That's a great question. This is Jeff. I'll start, and Kevin, welcome, any additional comments you have. Yes, we've been really working hard to try to bring more balance to the overall product mix that's sold through our International Contract segment, you know, historically. That business is really indexed very heavily into task seating, which is really good because as an individual product category, it is, uh, it's high profit, which is really good for us. And we want to continue to do that, and we are doing that. We're focusing very heavily on that. But we're also recognizing the importance of finding ways to to pull through other categories of furnishings because that's how you have access to larger project opportunities that will then bring you, I mean, carry with it profitable seating and ancillary products. And so part of the answer is we've seen a bit of a pivot towards some other relatively lower gross margin product categories, but with the broader goal in mind of driving improved top-line performance and more profit dollars over time, as opposed to just the percentage.

So some of it is a product mix. And I'd also be remiss if I didn't highlight the fact that, you know, we're, we're seeing cost inflationary pressures in that business and have been for some time like everywhere in the company. Energy prices have put a real pinch on all manner of businesses across our industry, contract markets, and so that's played a role as well. And the last thing would be, again, we have regional shifts and mix that well on one hand, you may pick up production volume in one part of the, of the world where you have a manufacturing presence. It may shift in fact has shifted away from other areas where we maintain fixed overhead in terms of manufacturing, and then you lose some overhead leverage in that instance. And that's particularly been true across our factories in Europe. So those are some initial thoughts. I don't know, Kevin, if you'd add anything.

Yeah, I think I would just add the comment that International is definitely project-based and moves around from quarter to quarter, whether it's the mix of the products in the projects or which regions were having activity. This quarter was a good example. So the operating margins this quarter were tied to the lower order levels and backlog going into the quarter. But then as you saw in our order numbers, up almost 18 percent for the quarter. And that's the kind of volume that will flow through. It's in Asia Pacific is a good region for us as well. And so you'll see that move around from time to time.

There are a few other things unique to this quarter. We have a new showroom that we're opening up in Mexico City, so you have some initial costs to get that ramped up. We had the timing of some sales and marketing events. One of the significant opportunities we see internationally is our share of wallet. Lower than it is in North America Contract as we expanded some of the new product categories that Jeff was talking about. And so training folks on those and then expanding our dealer relationships in certain faster growing regions. And so some of those sales and marketing events were tied to the opportunities that we see there.

Okay, thank you. That's all for me today. Thank you very much.

Thank you. There are no further questions. We will now turn the floor back to Vice President of Investor Relations, Wendy Watson, for any closing remarks.

Thank you all for joining us today. We look forward to speaking to you again next quarter.

This concludes today's call. Thank you for attending. You may now disconnect.

This live transcript is auto-generated without human intervention or review.

Good evening and welcome to Miller Knowles Quarterly Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Wendy Watson, Vice President of Investor Relations.

Good evening and welcome to our fourth quarter and full fiscal year 2026 conference call. with me are Jeff Stutz, Miller Knowles Chief Operating Officer and incoming interim CEO, and Kevin Veltman, Chief Financial Officer. Joining them for the Q&A session are John Michael, President of North America Contract, and Debbie Probst, President of Global Retail. We issued our earnings press release for the quarter ended May 30th, 2026, after market closed today, and it is available on our investor relations website at millernole.com. A replay of this call will be available on our website within 24 hours. Before I turn the call over to Jeff, please remember our disclosure regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties, and other factors which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information of these factors, which are detailed in today's press release.

The forward-looking statements are made as of today's date, and except as may be required by law, we assume no obligation to update or supplement these statements. We also refer to certain non-GAAP financial metrics, and our press release includes the relevant non-GAAP reconciliations. With that, I'll turn it over to Jeff. Thank you, Wendy. Good evening, everyone, and thanks for joining our call.

I'll start by sharing my initial observations and priorities as incoming interim CEO. And from there, I'll discuss highlights from fiscal 2026, including a recap of our consolidated results and our current outlook. Let me begin by saying that I am honored to step into this role at an important time for Miller-Noel as we build on the exciting work and momentum underway across the business. After 25 years with this organization, I continue to be proud to stand alongside this tenured and committed leadership team who work tirelessly to drive our organization's success. I've been spending significant time with our teams, dealers, and customers reinforcing that my focus is enabling their success while driving improved performance and execution. I've also recently had the opportunity to engage with our partners and A&E community at three marquee events for the contract and design industry. Clark and Will Design Week in London, where I'm going to be. our showrooms at the Sands.

We're at the center of the show. Three days of design in Copenhagen, where Hay and Muto served as anchor brands. and design days in Chicago's Fulton Market, where Miller & Oll is the pioneering tenant in what has become a vibrant and design-oriented district that more than 75 furnishings providers now call home. I always leave events like these with pride, knowing that Miller & Oll shines brightest in these settings. They serve as a good reminder of so many things we do well as an organization. At the same time, I want to be clear that our financial performance is not where we want it to be. And we're entering fiscal 2027 with three clear areas of focus. The first of these will be to elevate the level of operating discipline we bring to setting priorities.

Second, we're focused on cost discipline across our businesses. And third, we remain committed to strengthening our balance sheet by reducing debt and improving cash flow. Turning to our fourth quarter results, Kevin will cover the details shortly, but let me highlight a few points. We delivered another quarter of steady top line growth with revenue of just over a billion dollars, up 4.4% year over year and above our guidance. by growth in North America contract and global retail. Adjusted EPS of 55 cents was at the top end of our guidance range. And for the full fiscal year, net sales topped $3.8 billion with an adjusted earnings per share of $1.86. Moving on to some highlights and trends in our segments.

In North America, contract, we're pleased with another quarter of solid sales growth and year-over-year expansion in both gross margin and adjusted operating margin, driven by volume leverage and price capture. As expect that orders were down in the quarter compared to last year, primarily from lapping $55 to $60 million in prior year order pull-ahead as a result of customers placing orders ahead of tariff-related surcharges and price increases. We continue to see encouraging demand signals across key leading indicators despite macro uncertainty. Traffic and showroom visits during design days were up nicely. And the internal forward demand indicators we consistently track were all up, both year-over-year and sequentially. Industry benchmarks show that across geographies healthy leasing demand continues. In calendar Q1, four-quarter rolling net absorption reached its highest post-pandemic level, and Class A spaces continue to outperform, which reflects demand for the higher quality spaces that we are well positioned to support. serve.

And finally, you may recall that we recently announced the consolidation of our manufacturing plant in Muskegon, Michigan into other facilities. We will continue to evaluate capacity utilization opportunities across our manufacturing operations with the aim of improving overall operational efficiency. In the international contract segment, global geopolitical concerns impacted segment order activity in the core, but we remain encouraged by ongoing signs of strength in key Asian markets as well as Central and Eastern Europe, where order growth has been strong. Over the past year, I've personally spent a great deal of time on the ground with our team members and many dealer partners across these regions of the world. our potential for further profit growth is clear to me. Our international team is looking forward with a strategic approach to targeting key growth opportunities and managing costs in a disciplined manner. Our global retail segment delivered a strong fourth quarter and continued to gain market share, which Kevin will detail shortly. We remain confident that we have the right strategy and the right leadership to successfully scale our retail business.

As we grow, we're learning every day and applying our learnings to refine our approach. We will continue to expand our store footprint across North America. our product assortment and increase our brand awareness while focusing on operational discipline. Now, with that said, I want to be clear that we are making some strategic shifts to drive both growth and returns. Going forward, more of our new stores will be the smaller, approximately 1,800 square feet Herman Miller store format. These locations are resonating with customers, broadening our demographic reach, and delivering attractive economics. They require lower upfront capital, reach productivity more quickly, and generate payback in well under three years. These stores further build brand awareness and are an excellent lead generator for our contract business. serving as a gateway to our broader ecosystem to support demand generation across both retail and contract channels.

In fiscal 2026, we opened eight Herman Miller stores, and we expect to open nine to 11 in fiscal 2027. At the same time, we remain enthusiastic for Design Within Reach, our channel to market in North America for our portfolio of brands that serve residential and hospitality environments. We will maintain a measured pace of new openings, incorporating learnings around location strategy, store productivity, cost structure, and marketing effectiveness. In fiscal 2026, we opened seven DWR stores, and we expect to open five to seven in fiscal 2027. Another important priority within global retail is improving the performance of our Holly Hunt business. Holly Hunt remains a premier to the trade brand in the ultra premium segment of residential furnishings. Lagging demand patterns and operational inefficiencies for this business proved challenging for us in fiscal 2026.

In response, we've implemented a range of actions aimed at repositioning this storied brand for long-term success. These include restructuring to better align costs with demand and strengthening leadership to enhance commercial execution. We are confident that our repositioning efforts will help improve performance over time while preserving the brand's strong market position. And with those opening comments, I'll now turn the call over to Kevin, who will take us through the numbers. Thanks, Jeff, and good evening, everyone. I'll begin with our fourth quarter results in segment detail, followed by a review of our full year highlights, including an update on our uses of cash during the year. I'll conclude with details on our outlook for the first quarter and full year of fiscal 2027, along with some framing of the full fiscal year.

As Jeff mentioned, in the fourth quarter, we generated adjusted earnings per share of 55 cents compared to 60 cents in the same quarter last year. Consolidated net sales for the quarter were $1 billion, up 4.4% year-over-year on a reported basis and 3.7% higher organically, driven by growth in our North America contract and global retail segments. Orders at the consolidated level for the quarter were $972 million, down 6.3% as reported and 6.9% lower on an organic basis. As noted earlier, prior year orders included $55 to $60 million of pull forward ahead of price increases in our North America contract segment. Adjusting for this, orders in the quarter were down approximately 1% year over year. Our consolidated backlog was $679 million at quarter end, down 10.8% from a year ago, reflecting both the prior year order pull forward dynamic and the timing of shipments at year end. Fourth quarter consolidated gross margin increased 20 basis points to 39.4%.

Turning to cash flow and capital allocation, we generated $65 million in cash flow from operations in the quarter and reduced our total debt by $15 million. We finished the fourth quarter with $572 million in liquidity, and our net debt-to-EBITDA ratio was 2.8 times as defined by our lending agreement. In April, our Board of Directors declared a quarterly cash dividend of 18.75 cents per share. This dividend is payable on July 15 to shareholders of record on May 30, 2026. The annual indicated dividend of 75 cents per share brings a yield of 4.7% based on yesterday's close. stock price. For the full year we generated $200 million in cash flow from operations. invested $122 million in capital expenditures, reduced our outstanding debt by $41 million, and returned approximately $67 million to our shareholders in the form of $51 million in dividends and $16 million in share repurchases. Our capital allocation remains focused on reinvesting in the business. reducing debt and returning capital to shareholders.

With that, I will move to our performance by segment in the fourth group. Net sales in the North America contract segment were $530 million, up 6.9% on a reported basis and 6.7% higher organically. Orders were $511 million, down 10% on both the reported and organic basis from prior year. Adjusted for the prior year pull forward, THE SEGMENT WOULD HAVE BEEN ESSENTIALLY FLAT YEAR-OVER-YEAR. OPERATING MARGIN WAS 8.2% AND ADJUSTED OPERATING MARGIN WAS 10.4%, EXPANDING 40 BASIS POINTS YEAR-OVER-YEAR, primarily from gross margin expansion driven by leverage on higher sales and pricing realization, partially offset by inflationary cost pressures. The international contract sales were $179 million, down 3.8% on average, reported basis and 5.8% organically year over year. Orders were $173 million, down 8.7% versus prior year on a reported basis and down 10.6% organically, driven primarily by lower orders in parts of Europe, the UK, and particularly parts of Asia and Latin America, partially offset by strength in China and India.

Fourth quarter reported operating margin was 7.5%, with adjusted operating margin of 8.2%, down 470 basis points compared to last year, primarily from deleverage on lower sales, driven largely by the uncertain macro environment in many regions associated with the Middle East conflict. Regional sales mix, foreign currency impacts, and the timing of program spend. IN THE GLOBAL RETAIL SEGMENT, NET SALES WERE $295 MILLION, UP 5.5% ON A REPORTED BASIS AND UP 4.5% ORGANICALLY. COMPARABLE SALES INCREASED 3.6% AND COMPARABLE SALES IN NORTH AMERICA INCREASED 4.2%. BORDERS IN THE QUARTER IMPROVED TO $288 MILLION, UP 2.8% YEAR OVER YEAR ON A REPORTED BASIS, up 2% on an organic basis. In North America, where we continue to outpace the market, orders grew 8.7%. Operating margin was 4.6% in the quarter.

On an adjusted basis, operating margin was 5.4%, down 110 basis points year over year, primarily reflecting planned investments in new store openings and the underperformance of the Holly Hunt brand. To our teams across Miller Knoll, I am proud of your commitment to delivering the best products and experiences for our customers and dealers. Thank you for your diligence and hard work this fiscal year. Now let's turn to fiscal 2027 and our Q1 and full year outlook. Our Q1 guide reflects the normal seasonality we experience in the global retail segment as consumer shifts spending to experience and travel in the summer months. It also reflects the order pull ahead in Q4 of fiscal 2025 that shifted sales into Q1 of last year. Taking these things into consideration in the first quarter of fiscal 2027, we expect net sales to range between $928 million and $968 million.

Gross margin is expected to range from 38.7% to 39.7%. Adjusted operating expense is expected to range from $316 million to $326 million. And adjusted earnings are expected to range between $0.33 and $0.39 per share after tax. For the full year, we expect net sales of $3.93 billion to $4.13 billion, reflecting 5% growth year-over-year at the midpoint. Adjusted earnings per share are expected to be $1.85 to $2.15, an increase of 7.5% at the midpoint. We also want to provide expectations for the cadence of our fiscal results during fiscal 2027. Our guidance contemplates approximately 40% of our full-year estimated EPS in the first half of the year and 60% in the second half of the year.

Driven by two primary dynamics, first, as maturing retail stores opened in in fiscal 25 and 26, we're increasingly offsetting the incremental impact of new store investments. Second, as the benefits of reaching pricing actions to mitigate inflation layer into our results over the course of the year. In fiscal 2027, from an operating expense perspective, our guidance assumes estimated incremental new store expense of approximately $6 million per quarter on a year-over-year comparison. We are also returning to a more normalized incentive compensation program, which represents incremental year-over-year costs on a full-year basis of approximately $25 million. For all other details related to our outlook, please refer to our press release. With that overview, I'll turn the call back over to Jeff. OK, thank you Kevin. As we begin the new fiscal year, I'm optimistic about the progress we expect to make on our key initiatives this year.

To our employees, thank you for everything you do to drive this company forward. dealers, thank you for showing the industry what successful partnerships look like. And to our investors, customers, and other external stakeholders, thank you for your support as we embark on a new chapter to move this great company forward. And with those opening comments, we will now open the call and take your questions.

At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. To withdraw your question, simply press star one again. We will pause for just a moment to compile the Q&A roster. Your first question comes from a line of Greg Burns with Sidoti and Company. Please go ahead.

For the full year guidance for revenue, could you give us maybe a little bit of a bit of detail by segment of expectations for growth embedded in that guidance?.

Yes, Greg, it's Kevin. We're not providing a full year guide across the segments, but definitely we expect to see growth driven through retail as we continue on our new store opening journey. BUT NOT GOING TO CALL OUT SPECIFICALLY FOR ALL THE SPECIFICALLY FOR ALL THE SPECIFICALLY FOR ALL THE BUSINESSES, AS THERE'S A NUMBER BUSINESSES, AS THERE'S A NUMBER BUSINESSES, AS THERE'S A NUMBER OF MOVING PARTS RELATED TO THE.

mitigating inflation and things of that nature. Yes, Greg, this is Jeff. I just would tag one additional comment to that, and I agree with Kevin. We're not going to unpack details by segment, but I will say this. We have an expectation that our operating margin performance in the global retail segment will show year-over-year expansion in ETH. each of the four quarters. And I think that's just an important point to highlight in terms of our go-forward expectations. Thank you.

Okay, great. And then last quarter, you called out specifically some – water delays or shipment delays in the Middle East I think the number was like 12 million and some inflationary impact from oil now that looks like that's unwinding so You know, how will that impact? Do you see that still impacting the business in the first quarter or are we unwinding that and there'll be a little bit of a benefit going forward?.

GREG, THIS IS JEFF AGAIN. I'LL LET KEVIN KIND OF COVER ANY ADDITIONAL COLOR HE WANTS TO PROVIDE. BUT I WILL SAY THIS. IRONICALLY, THE ORDER PERFORMANCE IN THE MIDDLE EAST FOR OUR BUSINESS, IT EXCEEDED OUR EXPECTATIONS COMING INTO THE QUARTER. I THINK THAT WHERE WE FELT THE CHALLENGE WAS KIND OF THE derivative impact of the energy inflation on demand patterns, mainly across Europe, UK, and Ireland. Our opening comments kind of highlighted there were a couple pockets of like central and eastern Europe were pretty good. But the impact of the Middle East conflict seemed to have the biggest economic impact on our business, at least in the short run in those regions of the world. But the Middle East itself, we ended up. with an ability to ship more into the region than we thought, and we took more orders than we were expecting. Kevin, I'll ask you to add anything.

Yes, no, I think the ability to ship through some of the alternate ports in the Middle East was helpful. So part of our over-delivery of the top line was doing better from a Middle East perspective. And then on the demand view, As a reminder, we've sized the Middle East as typically been about $50 million a year of annual sales for us. And in the fourth quarter, our order levels were $13 million. So roughly the quarterly pace would be $12.5 million. So we had a fairly typical level of orders during the quarter. Longer term, we continue to expect the Middle East to be a growth region for us, particularly healthcare is an area we feel very suited longer term as an opportunity but that's kind of the state of where things are at for us right now in the region.

Okay. And then just lastly, Holly Hunt, how much revenue does that business generate and how much is it down? Could you just give us a little bit more color on the challenges that that business is currently facing?.

Greg, this is Jeff. Let me start with a perspective, but then Debbie, you can chime in and talk a little bit more about the types of things we're going after with the restructuring. We've never sized individual brands within the portfolio, so I'm not going to provide that level of color here. principally the challenges that we're facing are cost related. And candidly, we had some leadership challenges that are being addressed. And go ahead, Debbie, if you had any additional color.

I would say longitudinally we've had a lack of product development in that particular brand. And the newness that was launched has not been resonating. So we are course correcting on our creative and design capabilities in that brand. And then we think that there are many opportunities for leverage across our total businesses as it pertains to manufacturing, sample logistics, etc. So we've got a series of tactics underway to right-size the operating income and invest more in revenue-driving initiatives than we have been.

Okay. All right. Thank you. Your next question comes from the line of Philip Bleat with William Blair. Please go ahead. Thanks for the question.

There's been a lot of noise and volumes over the past few years. Things, I guess, seem to be moving in the right direction, but the macro still remains pretty choppy. So outside of sort of these larger forces that are outside of your control, what levers do you have at your disposal that could improve demand or accelerate share gains on the contract side?.

And then to what extent are you leaning on those currently? Let me take that, Jeff. Go for it, John. Sure. Thanks for the question. This is John. I think, you know, primary lever of demand is doing a great job solving customer problems. And as we're engaging with customers in the market today, we're seeing really a different set of questions from them and issues that they're trying to tackle than maybe we've seen over the past couple of years. specific employee experience and how tailoring the space to specific team needs, balancing focus and collaboration, those types of issues have an impact on their ability to attract and retain talent as well as get as much productivity out of those associations. as they can. They're also preparing for new ways of working, right? Obviously, a lot of talk across all channels around AI and the impact that'll have on teams, the future of work, et cetera. And I think they're also really rethinking real estate success. In the past, that conversation has been very metric-driven around cost, and I think we see a lot more alignment with HR and a focus on people outcomes in the workplace as more and more people are returning to the office.

And then finally, a lot of clients... jettisoned a lot of real estate over the last few years. Now they've got a lot more people coming back into the workplace and they're trying to figure out how to deal with that. But those are all things that we do really well in terms of supporting our clients in those areas. And we do that through research and insights, one-on-one consultations, as well as a lot of collaborative work on workplace strategy. So I think we've got a lot of levers, and we obviously have the portfolio of great people brands to support those solutions that we develop. Yes. Phillip Jeff here. And I might just add a little bit of color that's specific to the international contract segment of our business. I spent a fair amount of time on the ground with our team over the last year, uh, in many of those markets and I, and I'd say two, two levers or two opportunities for us.

We continue to expand dealer relationships in key markets. This past year, we added nine dealer relationships. This has always proven to be a helpful and effective tool for us because it's an opportunity to find more channel or more distribution or access to the customer, but it doesn't require a great deal of overhead investment on our part. So it's kind of a low cost way of finding a path to the customer. In addition to that, we've really been highlighting what we view as some of the highest growth potential markets and adding targeted selling resources that can kind of run alongside and work in conjunction with those new distribution opportunities or partners that we have. Okay, excellent. That's helpful.

Kind of on the flip side of that, so price, there's been a lot of price taken in furniture, both on the commercial and residential side of the industry over the past few years. So can you maybe talk a bit about demand elasticity on both sides of the business, contract and retail, if you leaned on discounts or promotions a bit more recently? Would the incremental volumes from winning a big new project or a new consumer be enough to help kind of offset the gross margin impact? Or are the macro factors that are impacting demand in the space just too tough to overcome, where even a bit of a giveback on price isn't really enough to help stimulate conversion here?.

Yes, Philip, it's Kevin. I'll start with maybe some contract commentary and then pass it over to Debbie for retail. But contract, one thing over time, the industry and ourselves within the industry has been very consistent and able to, when there are cost pressures, whether it's supply chain disruption from a few years ago, or tariffs or the current situation. It's tended to be something very consistent, and we've been able to, where we've needed to, pass along the cost. That said, we're also constantly looking at, are there other things that we can do within our business? And so the closure of the Muskegon facility is a good example. example of that. Are there things within our portfolio that can help mitigate the need to pass along price? And are there other ways that we can provide value? So that's the perspective I would provide from the contract side, and then I'll pass it over to Debbie for retail. From a retail side, Philip, we actually took our biggest price increase of the year in Q4. We took.

We had a net 8% increase in North America midway through the quarter. And we believe that the consumer absorbed that really well. We actually took our discounting rate down 50 bits year on year and held the number of promotional days flat. So we took that pricing increase really for two reasons. that the market has created room for that. As you noted, the market has taken a lot of moves over the last few years. But we're also just seeing incredible elasticity in our icons, where we feel like we have the authority to set the price on those products.

Okay, great. And then just one more if I could. So you talked a bit about prioritizing margin expansion or better fall through on sales and then a cleaner balance sheet during your opening remarks. what are some of these cost buckets that you're going after more near term? Is it more about kind of cutting overhead or improving efficiencies? And then to what extent could any sort of brand portfolio optimization play a role here? Thank you all.

Yes, thanks, Philip. Good question. So maybe let me take a step back and offer maybe this can be filed into the category of just observations, you know, after a short amount of time in this new role. You know, I maybe would just simply start by saying we are here at Miller & Old Good at many things, but we can't do everything that comes before us as an opportunity. There's a real need, I think, in internally here to establish clear priorities for the organization and establish improved hygiene and discipline around managing those priorities. You know, the great strength of this business has always been creativity in many ways. We're this kind of creative machine as an organization. And if I think back over our history, We're at our best when that collective creativity is focused on problem solving and unlocking opportunities and innovation. And as I look at our business today, I think there's no question we can do a better job turning up the volume, if you will, on that creativity and being guided by it, but making sure that it's within a framework of clear, wide-eyed, clear priorities and financial discipline.

And I think an important point I want to make, this does not... from my perspective, require reinvention of Miller-Knoll. This is more an exercise in reinvigorating skills and capabilities that we have and have always had. So now to your question, when we talk about elevating our performance, it's really about focusing all of those efforts that will help us grow the top line and improve profitability and to keep piece of that needs to be improved discipline on costs and cash flow. And that means finding ways to better leverage our manufacturing capacity, which was alluded to in the prepared comments, focus on productivity improvements and being really selective where we choose to add incremental costs to the business that support the priorities that we need to define. And I would also add cash flow and debt reduction really needs to be a renewed focus for the business as well. So that's just maybe a high-level overview of what we were trying to highlight in the prepared comments.

Excellent. Thank you, guys. Best of luck. Your next question comes from the line of Ruben Garner with Benchmark Company. Please go ahead.

THANK YOU. GOOD EVENING, EVERYONE. GOOD EVENING, EVERYONE. I UNDERSTAND YOU DON'T WANT TO necessarily breakdown of your outlook, but maybe just a little more color. Jeff and Kevin, you both obviously were at... design days a couple weeks ago, what specifically you're seeing in North America of late. It's kind of hard to tell with the results and the price increases in pull forward and everything else going on of late. How confident are you in that? app business and maybe kind of what's embedded in your outlook from just a macro perspective.

Yes, Ruben, thanks for your question. And as we step back and look at some of the elements of our business, to your point, the order pull ahead creates some comparison challenges to have a look through. And so we look to a lot of the pre-order metrics. And if you look at things like our full year funnel, much is getting added to the funnel, the value of projects won, mock-ups. We were seeing both year-over-year and sequential improvement in those types of metrics. So we feel like there's good activity from that perspective. As the quarter unfolded, maybe another point I would call out is if you set a some of the year-over-year noise from the order pull ahead, just our average weekly order rates on a consolidated basis.

We're going up each month as we went through the quarter. And so we're feeling fairly supportive. Obviously, in our prepared remarks, we talked about pockets in different places, like Middle East was flattish compared. compared to last year from an order perspective better than we thought it might be, but that will probably continue in that type of zone. But those are some of the things that we're kind of looking at. Some of the class A spacing and lease absorption I think are good things to call out as well. If you look at a couple of the external measures or even dealer sentiment and what their view of the world is recently has been fairly supportive.

Okay, great. And then in terms of the priorities, Jeff, you mentioned a couple of things on the retail side that sounds like gives you confidence that profitability is going to improve, um, on a year over year basis. Um, Is the same kind of thought process there in the contract space or are the operational and profitability improvement targets more?.

GEARED TOWARDS GLOBAL RETAIL? OH, NO. I THINK MY COMMENTS ON PRIORITIES WERE MEANT TO BE MAYBE AN ASSESSMENT OF AT THE ENTERPRISE LEVEL, I THINK WE WOULD DO OURSELVES A GREAT FAVOR BY HELPING OUR OWN ASSOCIATES THAT SHOW UP EVERY DAY AND ARE DOING GREAT WORK, HELPING THEM with a bit more clarity on where specifically we think we have some advantage to go leverage in the marketplace and as a result of that, provide a bit of a, maybe a better than we have in the past screen for how and where we should place our time and energy and investment dollars both expense and capital. So this is not a specific comment to retail. I think it's opportunity for us to just sharpen our execution across the broader enterprise. Okay, and then from a pricing perspective, Kevin,.

Kevin, I think you mentioned more of a layering expectation as the year comes along. Is that, I guess, update us on your latest pricing I know that there was a combination of surcharges and list increases have the surcharges been pulled and there's more of an emphasis on the list increase and that takes time to what we call to continue to flow through or is this a new increase that's recently been announced? Just an update on what you're seeing from a pricing and a price cost standpoint.

Yes, so there's a lot of moving parts right now in price cost, as we all know. And if you look at it, the three things we've been focused on have been, one, navigating tariffs, two, just regular, more traditional inflation, and then the recent inflationary pressures that are moving around a little bit, something like that. diesel has been a little bit sticky, even as oil has moved. But it's all of those moving parts that we've been focused on. And the way I would net it out in both Q4 and Q1 is slightly favorable from a price-cost perspective. And how that comes out is we continue to capture the tariff-related things that we're going to offset. So that's been helpful. In April, as Debbie was talking, in our retail business, but also in our contract businesses, we had a standard list price increase. And so that will start to flow through.

And that was a regularly scheduled type of increase for core inflation. And then, Right now we have an inflation surcharge in place that went live at the beginning of June. And we're also looking internationally at a September list price increase for that business. So we have a number of levers. We're utilizing the playbook that we've used, but some of those will continue to roll forward in the first half of the year, as I mentioned in the prepared remarks, as they gain traction. But the net of all of it has been slightly positive from our...

price-cost perspective. Great. Thanks, guys. I will pass it on.

Your next question comes from the line of Doug Lane with Water Tower Research. Please go ahead.

Yes, thank you and good evening everybody. I was looking at the sales number. It looks like the number beat pretty handily and as I go through the segments, the beat looks like it really came from North America contract where sales accelerated in the quarter on a much more difficult comparison. So did North America contract? What beat your outlook in the fourth quarter, and where was the upside versus maybe what you were looking coming into the quarter?.

Yes, so a couple that I would call out, and I'll let John provide some color on North America contract, but we had both North America contract and international sales. come in higher than our expectations. So those were the two key drivers for us relative to what we thought at the start of the quarter. I don't know if you want to chime in with any additional, John. I think we also saw the velocity of orders through the manufacturing facilities be even a little more, maybe even faster.

than we expected. So some orders that we thought maybe would have shipped out into Q1 actually entered and shipped into Q4. And so that was really more of a positive impact of some timing and And a shout out to our ops team who does a great job.

getting the products out the door in an efficient manner. Okay, fair enough, thanks for the color. And then looking at gross margins where, again, North America contracts showed nice gross margin expansion throughout the year and international contracts showed some gross margin expansion in the quarter, even with down sales. So are those, are we solidifying Probably in gross margin expansion mode in the contract business heading into 2027.

Hey, Doug, this is Kevin. Thanks for the question. Price costs in Q4 and Q1, I would echo the comment earlier that it's been slightly positive for us as we navigate. Some of it is the continued progress we made on tariffs as well as regular price increases and then interest rates. and then dealing with the more near-term inflation. So we have to get to the other side of the near-term inflation, and that's a little bit of the factor as to how our mix of earnings is in the first half of fiscal 27 versus the second half that we talked about in the prepared remarks. But when you step back overall, obviously, Volume is key to us as well. When we see growth, we're going to get leverage through our fixed manufacturing strategy.

plants as part of that. Right, right, of course. And then looking at the global retail business, I know you called out segment margin expansion in all four quarters, but should we – what is the cadence on gross margin expansion for retail next year or this year?.

Yes, so we expect that a key driver to the operating margin expansion comes from the scale. You know, we started this journey towards the back half of FY25, and as we continue to open stores, and then I think the other key is as we've shifted our fuel mixture to the Herman Miller stores, in the DWR stores, both important vehicles for us, but as those Herman Miller stores in particular ramp up quickly, that's going to be a key driver of it. Pricing is another area that we're looking at and continuing to be very disciplined about what's the level of discounting that's required in the market. Debbie referred to, the pricing activity that we had in Q4 that is just really beginning to flow through our business. So a number of levers that will contribute to helping us expand operating margins next year. I may just add we're continuing to get sequential improvement in our marketing economics as well, where our marketing space is.

as a percent of orders was down 40 bits year on year. And so as we continue to invest differently in our marketing funnel, we're getting more leverage out of that.

Okay, that makes sense. And just lastly, Kevin, let's talk about capital allocation in 2027. I noticed that your leverage ratio actually stepped back half a point from 2.75 to 2.80 in the fourth quarter, and I thought the goal was to go the other way. So, what do you see for leverage as the year progresses, and what does that mean for stock buyback and capital.

EXPENDITURES. Yes, DOUG, THE MINOR TICK UP IN THE QUARTER WAS REALLY TIED TO OUR TOTAL DEBT WAS PAID DOWN DURING THE YEAR, BUT THE BANK DEFINITION OF NET DEBT, THERE WAS A LITTLE BIT OF TIMING NOISE, SO WE TICKED UP JUST A TOUCH. BUT THAT WAS REALLY A BLIP, AND THE GENERAL, THE TRAJECTORY THAT WE HAVE CONTINUES TO to be we want to get in the midterm to the 2 to 2.5 range for our net debt to EBITDA. And so the priorities as we have them right now is invest in areas where we see an opportunity to earn a strong return on capital, pay down debt, and then continue to maintain a dividend and be opportunistic on share repurchase when we see opportunity.

Okay, that's very helpful. Thanks, everybody. There are no further questions. We turn the floor back to Vice President of Investor Relations, Wendy Watson, for any closing remarks.

Thank you everybody for joining tonight and we look forward to talking to you again next quarter.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

[Call has ended.]

Good evening, and welcome to MillerKnoll's Quarterly Earnings Conference Call. As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Wendy Watson, Vice President of Investor Relations. Please go ahead.

Good evening, and welcome to our third quarter fiscal 2026 conference call. On with me are Andy Owen, Chief Executive Officer; and Kevin Veltman, Chief Financial Officer. Joining them for the Q&A session are John Michael, President of North America Contract; and Debbie Propst, President of Global Retail.

We issued our earnings press release for the quarter ended February 28, 2026 after market close today, and it is available on our Investor Relations website at millerknoll.com. A replay of this call will be available on our website within 24 hours.

Before I turn the call over to Andy, please remember our safe harbor disclosure regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors, which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release. The forward-looking statements are made as of today's date and except as may be required by law, we assume no obligation to update or supplement these statements. We also refer to certain non-GAAP financial metrics, and our press release includes the relevant non-GAAP reconciliations.

With that, I'll turn the call over to Andy.

Thanks, Wendy. Good evening, everyone, and thank you for joining us. I want to begin our call by expressing my appreciation to our 10,000 associates across the globe for their hard work in delivering their third quarter results. Our team's dedication and focus on our strategy to drive long-term value delivered another solid quarter with continued sales and order growth and disciplined execution.

Despite ongoing macroeconomic and geopolitical uncertainty as well as the impact of severe weather during the quarter, we were able to deliver quarterly results within our expectations, and we continue to be optimistic about the impact that our strategic initiatives can deliver.

Before I move to segment-specific highlights from the quarter, I want to congratulate the operations team on the 30th anniversary of MKPS, our MillerKnoll performance system used across our manufacturing footprint. We have successfully worked with Toyota for 30 years and remain a model for efficient and reliable production. MKPS is a significant competitive advantage for MillerKnoll and enables us to produce all of our products efficiently and at the highest quality.

So let's move to the current macro environment. From a tariff perspective. We don't expect the most recent developments to result in any meaningful changes to our approach, and we expect to continue to fully offset tariff costs for the remainder of this fiscal year as we did in the third quarter. Recognizing that things can develop quickly, however, we are very experienced in navigating tariff changes and continue to monitor both policy and rates closely.

With respect to the Middle East, this region remains an important long-term growth opportunity for our international contract business. In the near term, the current conflict is creating disruption, and we do expect some impact to fourth quarter sales and costs. Kevin will provide additional detail on this later in the call.

Moving to some highlights and trends in our segments. In North America contract, the power of this business as a cash generation engine was on display this quarter with gross margins and operating income stream building as seal continued to grow year-over-year. Industry benchmarks continue to show improving trends in Class A leasing, net lease absorption and return to office. When looking at dynamics by industry sector, we saw order growth in most sectors and are pleased with the resiliency of demand as our customers continue to invest in their spaces and are in commute.

We've designed as our largest industry trade show coming up in early June. We are looking forward to showcasing launches for the Workspace in health care from Herman Miller, Knoll, Geiger, NaughtOne, Hay, Muuto and Maharam. Our marketing, product insights and North America contract teams are in full preparation mode and we are looking forward to welcoming our customers and our dealers to flip the market.

In international contracts, we're advantaged with the most desired product portfolio and continue to be bullish about our ongoing opportunities in faster growing underpenetrated markets, as well as expanding our dealer share of wallet across these markets while generating enviable margins.

As we discussed in previous calls, another strength in our international business is our diverse regional footprint, and localized production, where strong performance in certain regions can mitigate softness in others. With these varied regional dynamics, we can sometimes see quarter-over-quarter choppiness and our team is both deliberate and nimble on where and how to target growth. In particular, this quarter, we saw sales strength in India, China, Japan, Southern Europe, Germany and the U.K.

In Global Retail, we continue to grow and take market share in the approximately $150 billion global premium home furnishings market. In the third quarter, segment comparable sales increased 5.5% and in the North America region, we had comparable sales growth of 3.9%. Our cost sales include both sales through e-commerce as well as stores that have been open for 13 months.

While adverse weather conditions across North America during the quarter resulted in lower traffic than normal as well as store closures, we were pleased to deliver comparable sales growth despite these headwinds. We continue to expand our store footprint in the third quarter, opening new DWR locations in Fort Worth, Texas in Pittsburgh, Pennsylvania; and a Herman Miller store in Phoenix, Arizona. We plan to open 3 former locations before the end of fiscal 2026 and ending the year with 14 to 15 new stores in the U.S., executing on our strategy to approximately double our DWR from a Miller store footprint over the next several years.

As a reminder, our North American tell growth being driven by 4 strategic levers: new store openings, expanded product assortment, e-commerce acceleration and increased brand awareness. During the quarter, we executed several high-impact brand campaigns designed to attract new customers and drive store traffic across our design within reach and Herman Miller banners. We launched our very first Herman Miller seating campaign with engaging video and targeted marketing in key regions around the world.

During Modernism Week in Palm Springs, or our recently opened DWR store continues to perform well. We held an exhibition of modern seating from the millennial archive and partnership with the Palm Springs Artisan, connecting us more deeply with the Palm Springs community, and reinforcing our leadership in modern design. And just in the past few weeks, DWR unveiled a collaboration with Tracee Ellis Ross. Our designers work directly with Tracee to transform her pattern beauty offices. The collaboration was covered in Vanity Fair, Forbes, asset that sold beautiful and has generated more than 200 million media impressions.

In summary, I'm proud of our solid performance in the third quarter and continue to be optimistic about both our contract and retail businesses. Regardless of the macroeconomic and geopolitical landscape, our team will continue to execute on our targeted initiatives new product launches and growing retail footprint.

As Kevin will discuss, we made meaningful progress strengthening our balance sheet during the quarter, and we remain well positioned for profitable growth. We are focused on creating long-term value across our powerful collective of brands through our balanced strategy of sustained revenue growth, margin expansion, cash generation and shareholder returns.

Finally, I want to welcome Claire Spofford to our Board of Directors. Claire most recently served as President and Chief Executive Officer of J. Jill, and she brings a powerful combination of consumer insight, retail strategy and governance experience that will enhance our Board as we continue to grow our global collective brands and drive long-term value creation.

With that, Kevin will discuss our financial results in more detail and share our outlook for the fiscal fourth quarter.

Thanks, Andy, and good evening, everyone. I will begin with a summary of our quarter results and then discuss our outlook. In the third quarter, we generated adjusted earnings per share of $0.43 compared to $0.44 in the same quarter last year. Consolidated net sales for the quarter were $927 million, up 5.8% year-over-year on a reported basis and 3.8% higher organically.

Orders for the quarter grew to $932 million, up 9.2% as reported and 7.2% higher on an organic basis, driven by growth in our North America contract and Global Retail segments. Our consolidated backlog was $712 million at quarter end, up 3.7% from a year ago. Third quarter consolidated gross margin increased 20 basis points to 38.1%, driven by gross margin strength in our North America contract segment.

Turning to cash flows in the balance sheet. We generated $61 million in cash flow from operations in the quarter and reduced our debt by $41 million, lowering our debt-to-EBITDA ratio to 2.75x as defined by our lending agreement. This moved us meaningfully towards our midterm goal of a net debt-to-EBITDA ratio in the range of 2x to 2.5x. We also finished the third quarter with $594 million in liquidity.

In January, our Board of Directors declared a quarterly cash dividend of $0.1875 per share. The dividend is payable on April 15 to shareholders of record on February 28, 2026. At an annual indicated dividend of $0.75 per share, the yield is 3.9% based on yesterday's closing stock price. Our capital allocation priorities continue to balance our investments in growth with improving our debt-to-EBITDA ratio, retaining our commitment to our dividend and maintaining a strong balance sheet.

With that, I will move to the third quarter performance by segment. Net sales in the North America Contract segment were $489 million, up 4.4% on a reported basis and 4.1% higher organically. Orders increased to $491 million, up 13.1% on a reported basis and up 12.8% organically from prior year.

Operating margin was 8.6% and adjusted operating margin was a strong 9.8%, up 70 basis points year-over-year, primarily from gross margin expansion, driven by leverage on higher sales and operating efficiency. International contracts and net sales were $157 million, up 7.8% on a reported basis and up 1.9% organically.

Orders were $160 million, up 0.7% versus prior year on a reported basis and down 4.3% organically, driven primarily by lower orders in Latin America and the Middle East, partially offset by strength in Asia Pacific. Third quarter reported operating margin was 7.7% with adjusted operating margin of 8.2%, down 110 basis points compared to prior year. primarily related to regional and product sales mix in the quarter as well as foreign currency impact.

In the Global Retail segment, net sales were $281 million, up 7.1% on a reported basis and up 4.4% organically. Orders improved to $280 million, up 7.9% year-over-year on a reported basis and up 5.1% on an organic basis. Operating margin was 2.2% in the quarter. On an adjusted basis, operating margin was 2.8%, down 340 basis points year-over-year, primarily due to a freight benefit in the prior year targeted promotional actions to offset adverse weather in the quarter and the impact from opening new stores.

Andy mentioned we opened 3 new stores in the third quarter. We expect to open 3 to 4 additional stores in the fourth quarter and anticipate opening a total of 14 to 15 new stores in the full fiscal year.

Turning to our Q4 guidance. This outlook incorporates our current best estimates for items that we believe will impact our fourth quarter sales and earnings from the conflict in the Middle East. In the fourth quarter, we expect net sales to range between $955 million and $995 million, up 1.4% versus prior year at the midpoint of $975 million. This includes an expectation that we will ship only a minimal amount of approximately $12 million in Middle East related orders in the fourth quarter.

Gross margin is projected to be between 37.5% and 38.5% and includes higher expected logistics costs from higher oil prices related to the conflict in the Middle East. Adjusted operating expense is expected to range between $311.5 million to $321.5 million higher year-over-year, primarily due to increased compensation variable selling expense, new store costs and the impact of foreign exchange.

Adjusted diluted earnings are expected to range between $0.49 and $0.55 per share. This includes our current estimate that the direct impact of the Middle East conflict will be $8 million to $9 million in the quarter or $0.09 to $0.10 per share. Included in our expectations for operating expense and EPS are approximately $3.5 million to $4.5 million in incremental year-over-year operating expense for new store locations in global retail.

These investments are aligned with our strategy to expand our retail footprint and drive long-term profitable growth. For further details related to our outlook, please refer to our press release.

With that overview, I'll turn the call over to the operator. As always, we welcome your questions and look forward to discussing our progress outlook and strategic priorities.

[Operator Instructions] Your first question comes from Doug Lane from Water Tower Research.

Yes. Just want to clarify or maybe you could put some color on how the snowstorms and ice storms and all that weather we had earlier in the year impacted your business, maybe the contract versus the retail?

Yes, Doug, let me give you a kind of a high level. This is Andy, by the way. We definitely saw lower traffic than normal across our retail stores. We had quite a few closures during that frigid weather period. We had several plants that were also closed during that forge weather period. So for us, we would say that the impact range, Kevin, you would probably give us?

Yes. When we look at -- relative to our guidance, we obviously did not incorporate the severe weather, most of it was in our retail business, which was when we look at where our miss was relative to guide on the top line, a little under half of it was related to our North America retail business.

And I would say just from a contract perspective, when you look at order patterns in the quarter, we certainly saw a slowdown in showroom visits and visits to kind of our corporate headquarters during that month of January to the order patterns reflected that weather trend a little bit, but primarily in retail is where we saw the biggest impact, Doug.

Okay. That makes sense. And then it's -- I get that it's a volatile situation in the Middle East, and I can see the demand being impacted. That's pretty obvious. But I'm wondering throughout the P&L, where else you're seeing potential cost pressures? Have you seen any movement on plastics or aluminum or some of these commodities that go through that part of the world has it begun to be impacted yet? I know it will take a while to work through your inventories. But what are you seeing? And what are you doing about the potential for elevated costs coming through?

Yes. We're looking at a variety of things, Doug. Obviously, we haven't seen much except for increase in diesel and things that are really impacting oil-related fuel so far, but we anticipate we'll see increase in cost of plastics, foam, all the things where you see petroleum-related products. We haven't seen it yet. This was a really hard quarter to take a look at because the situation is obviously very chaotic and moving every day.

So what we've tried to layer into this guide is what we know today, which has higher oil costs. potentially higher logistics cost shipping containers. And we've really looked at that across all of our businesses as well as our inability to ship orders we have directly into the Middle East. As we've done in the past with tariffs and the kind of changing environment around tariffs, we'll watch the situation closely and we'll continue to react as we can with pricing and surcharges as needed as we see other situations continue to develop. But we're looking at it every day and scenario planning as the situation changes.

Kevin, what would you add?

You covered it very well. .

Are you starting to build inventories just out of precaution? Or is it just too early to make any of those judgments.

We're looking -- we have dual supply in a variety of places for most of our really important components. We learned that lesson in COVID. And so we're looking at that right now. We don't see a lot of areas where we're going to need to take supply or inventory yet, and we're being very cautious as we look at that, but so far, not yet.

Okay. That's helpful. And just one last thing, if you could characterize the office environment. I mean the tone has been fairly positive from a macro standpoint. And again, I don't know if you're seeing anything shift here with all the geopolitics? Or do you just see the underlying business continuing to firm as it has for the past several quarters?

As it always is, Doug, it's a different story depending on what region of the world you're in. And I've been on a plane a lot in the last couple of months. I would say, in North America and certainly, John Michael can add color to this. We continue to see momentum. We continue to see architectural billings moving in the right direction. We continue to see lots of customer visits and demand and orders, and we're very pleased about that.

I would say when you step out of the U.S., it really varies by region. I think we're seeing a little bit of price sensitivity. We're seeing a little bit of a different reaction in different parts of the world. We're not seeing major pullbacks anywhere, but I think in places that are touched more closely, whether it's the conflict in Ukraine or whether the latest concept in the Middle East, and we're certainly seeing a little bit more caution but not necessarily reflected in order trends that have changed.

Your next question comes from the line of Philip Blee from William Blair.

This is [ Olivia Wittie ] on for Philip. So can you talk a little bit about the volatility, if any, you've seen from the recent market volatility and rise in gas prices -- do you have any concerns that the uncertainty could cause a bigger pullback or deferral in the contract business that could be prolonged? And then what kind of impact does the market volatility have on your traffic or conversion in the retail segment?

Okay. So great questions. I would say from a contract perspective, like I was telling Doug, I think we have built in some caution around oil prices and how that might impact taking new spends in diesel certainly in shipping containers Olivia, so we're looking at that for the contract business. We will continue to monitor component costs and costs that go into the products that we make. We haven't seen any movement yet, but we anticipate we will if this is prolonged.

And then from a retail standpoint, whenever you have a consumer that has seen prices rise, that could potentially see inflation go up and also is paying more at the gas pump. We watch that carefully. So far, we have a consumer that tends to be premium and tends to be rather unaffected by many of these changes. So we have a resilient consumer that continues to come back and continues to buy from us, but we're still making sure that we are balancing our price and our demand so that we're not beginning to kind of outprice the demand levers that we have in the business.

Debbie, would you add anything from a retail perspective or John in contract?

I would just add on retail that I think we're well placed to continue to navigate macroeconomic conditions that are unfavorable, as we have been. And are well poised to do that because we have demand levers and initiatives that we're deploying such as assortment growth, which drove the majority of our comp demand growth in the quarter, such as our new stores and our e-commerce acceleration and our marketing funnel mix investments. So we continue to be optimistic that we can bend macroeconomic trend curve.

And I would say from a contract perspective, customers have become accustomed to the uncertainty in the geopolitical risk. So whereas maybe uncertainty a couple of years ago would have -- they would have put the brakes on. They're proceeding cautiously. So it maybe is slowing down time lines a bit, but activity still seems to be pretty robust.

Okay. Great. And then in the contract business, I know government isn't a huge contributor, but still a decent chunk of the North America business. So could you talk about recent trends here and how the partial shutdown could potentially impact spend there?

Yes, John, do you want to take that one? .

Sure. I think we came into this year expecting that the federal government business would be rather tough and would be down a bit year-over-year. I think we still saw -- there were sort of a number of agencies that were still -- had a lot of activity. I think one store started in Iran. We saw that sort of slow down because a lot of the a lot of the agencies that were getting funded. We're now involved in supporting that conflict. So I think it's had an impact.

On the other hand, there are a number of projects coming out of the ground for the federal government, buildings that are going to be need to be filled with furniture. So it will be rather choppy with the federal government for the next several months probably, but there's still activity there.

Your next question comes from the line of Reuben Garner from The Benchmark Company.

Maybe to start, just a clarification. Kevin, the $8 million to $9 million or $0.09 to $0.10 of earnings drag. Is that -- is there something specific about the fourth quarter? Or how quickly this evolved that's kind of making the earnings impact a little bigger in the near term? Or is this more drags out. Is that kind of $0.10 a quarter the right way to think about it on an ongoing basis? .

So the sales that we don't expect to be able to ship in the quarter is pretty close to what our run rate has been, that $12 million that I mentioned. The cost side that's the piece where initially you're seeing it in diesel prices and things of that nature. But some other elements of cost, if this becomes a prolonged situation would not have fully flowed through yet, right? I think container rates or foam resin type costs. So not a huge impact of that, mostly it's logistics-related things that are reflected in what we see as the fourth quarter exposure.

And I would say just like tariffs Reuben, when these things come up quickly, it's harder for us to cover them in the immediate quarter. We just -- by the nature of the contract business, we're not able to get that pull-through. So you'll see it sort of gradually come through as we see what happens with costs.

Which gives us time to think about the different pricing limits that we have as well. .

Exactly.

Great. And is this an opportunity to use surcharges in a way, given the abrupt nature of it and how it could very well be temporary? Or do you not see a path to use that mechanism this go around?

It's a tool we have in the toolbox, and it's definitely one we'll consider but there's a number of other levers that we could look at as well. And as you know, our 2 segments operate on a little different cadence from a pricing perspective. So retail is one where we can react without needing to think about surcharges.

Got it. And then a lot of discussion in the market about AI and its implications on various industries. I think office furniture is one that's been topical of late. Just curious, I know you guys have had some insights in the past from your own Board even how you're thinking about that? What are you seeing today from your technology clients from an order perspective? Are they building out their offices in a bigger way? Any insights into kind of sector-specific growth within contract would be helpful.

Reuben, it's John. Yes, the tech sector is very active right now, particularly in the Bay Area. As you might imagine, we've seen a significant uptick in activity in that area. And I think the other sort of tech-focused areas around the country, whether that be Austin or other areas like that, the activities are really robust.

And I think we would just like any other sort of technological step change, we're seeing some organizations that are talking about laying off certain types of employees and others that are adding on just as many of other types of skill sets. So we're really seeing it kind of balance out as AI impacts different parts of the economy and of businesses. But so far, we're seeing quite a robust tech business.

Reuben, one other item I would call out is we just look at some of the different sectors in the third quarter. general business services and insurance and financial are big categories of activity and both of those were showing nice activity in the quarter.

Great. Very helpful. And then last one for me. I don't know if you gave it if I missed it, I apologize, but quarter-to-date order growth rate for retail and North American contract, do you have those numbers or did you already share them?

Yes. So let me unpack that with you. And you'll recall this from discussions last year in the fourth quarter. At this time last year, we were starting to see some of the order pull ahead related to the tariff surcharges and price increases we are putting in place. And so our comps are a little bit tricky early in the quarter. But if you look at international and retail, which did not have the surcharge scenario pushing through, those are both up here through the first few weeks of the quarter. [NAC ] is down, but if you adjust for the estimate of the pull-ahead impact, it's more flattish. And so kind of if you take that noise out around 2% year-over-year growth at this point with some normalization.

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

I just wanted to clarify the $12 million ship to the Middle East, was that what you are going to be able to ship? Or what you're not going to be able to ship?

That's what we anticipate we will not be able to ship.

Not be able. Okay. Perfect. Okay. And then in the retail business, I know we're not into fiscal '27 yet, but would you expect the pace of store openings to remain about the same next year? Or do you expect to continue at the current pace? And would that mean that the incremental cost per quarter will kind of remain the same into next year?

Yes, we're expecting next year's store openings to be in a similar zone to the 14 to 15 this year, maybe a touch higher based on our plans. And so I think that would be a good modeling assumption to assume you continue to have somewhat similar year-over-year OpEx growth, that kind of $3.5 million to $4.5 million that we had mentioned.

Okay. And then in terms of product assortment, can you just talk about maybe some of the -- where you're adding to your product portfolio? And maybe what areas are still opportunities for you to round out?

Yes. Debbie, I'll let you take that one and give some specifics.

Absolutely. So from a retail perspective, we continue to grow what we call the lifestyle category, which is really our residential home furnishings. We've made significant progress in areas of upholstery, bedroom storage, but we still have a lot more latitude in those areas. And we're also continuing to invest in our gaming portfolio, which is continuing to show major traction. All of our categories were positive to last year in Q3, but the biggest opportunity areas continue to be rounding out the home furnishings areas of the home.

Okay. And why was the retail gross margin down?

Our gross margin was impacted versus last year by a couple of things, predominantly that we had a favorable freight true-up last year, just over a couple of million dollars. And then we had some incremental ship revenue costs in Q3 as we pushed into some free shipping promos to try and adjust the trends during the time that we had a weather impact. So those are the largest areas, but we also had a little bit of OI impact -- sorry, a little bit of FX impact and variable incentive impacts at OI as well.

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

Thanks, everyone, for joining us on the call tonight. We really appreciate your support, and we look forward to updating you again next quarter. Have a nice day.

This concludes today's meeting. You may now disconnect.

Good evening, and welcome to MillerKnoll's quarterly earnings conference call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Wendy Watson, Vice President of Investor Relations.

Good evening, and welcome to our second quarter fiscal 2026 conference call. On with me are Andi Owen, Chief Executive Officer; and Kevin Veltman, Chief Financial Officer. Joining them for the Q&A session are Jeff Stutz, Chief Operating Officer; John Michael, President of North America Contract; and Debbie Propst, President of Global Retail.

We issued our earnings press release for the quarter ended November 29, 2025, after market closed today, and it is available on our Investor Relations website at millerknoll.com. A replay of this call will be available on our website within 24 hours.

Before I turn the call over to Andi, please remember our safe harbor disclosure regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors, which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release. The forward-looking statements are made as of today's date and except as may be required by law, we assume no obligation to update or supplement these statements. We also refer to certain non-GAAP financial metrics, and our press release includes the relevant non-GAAP reconciliations.

With that, I'll turn the call over to Andi.

Thanks, Wendy. Good evening, everyone, and thank you for joining us. I'm pleased to report MillerKnoll delivered another strong quarter, exceeding expectations and demonstrating the effectiveness of our strategy to drive long-term value. Our performance this quarter is a result of disciplined execution across our core growth levers. Expanding our total footprint, delivering innovative new products across our portfolio and deepening customer engagement globally.

We are entering the second half of our fiscal year with solid order growth in every segment.

Let me begin with our Global Retail segment. Second quarter orders increased 6% year-over-year, with sales up 5% and comparable sales growth of 3.5%. In North America retail, we navigated one of the busiest periods of the year. Our orders were up 8% and comparable sales growth was also up 8%, while holding promotions and marketing spend flat to last year. During our holiday/cyber Promotional period, the 12 days from the Friday before Thanksgiving through Giving Tuesday, orders rose 12% compared to the same period last year when orders were up mid-single digit. We set multiple records in North America retail, including the highest orders in DWR brand history, both in-store and online as well as the most single day web visits for DWR. We continued our store expansion, opening 4 new locations in Q2, a DWR in Salt Lake City and Herman Miller stores in Nashville and in El Segundo in Walnut Creek, California. We also relocated 2 stores, opening a new DWR location in Houston and a new Herman Miller location in Berkeley, California. For the full fiscal year, we now anticipate opening 14 to 16 new stores in the U.S., advancing our strategy to double our DWR and Herman Miller store footprint over the next several years.

Our North American retail growth is driven by 4 strategic levers: new store openings; expanded product assortment; e-commerce acceleration; and increased brand awareness. We are encouraged by our customers' engagement with our brands and positive response as we execute this strategy. Another key advantage we have in this business is the strength of our supply chain. With approximately 70% of North America retail cost of goods sourced from the U.S., our pricing is significantly less exposed to tariff risk compared to most competitors.

Turning to our contract businesses. Momentum continues to build in North America and internationally as organizations prioritize bringing employees together and refreshing their workspaces. Orders, industry benchmarks and dealer sentiment were all up this quarter. The return to office trend is positively impacting demand for commercial real estate, design services and in contract furniture. And we're winning projects globally in resilient sectors such as healthcare, where solutions for the entire care journey from waiting rooms to labs to patient rooms are making a meaningful impact. Our total healthcare orders are up 5% year-to-date.

New product innovation also remains a key driver. Our Knoll Dividends Skyline launch has been met with strong enthusiasm from customers in the A&D community, resulting in several large project awards well ahead of the official order entry date in January 2026.

Internationally, we continue to enhance our global showroom footprint. Last month, we introduced the MillerKnoll showroom in Shanghai to engage A&D, global accounts and key partners in Mainland China. Through my ongoing conversations and visits from our international dealers, I am energized by the significant growth opportunities these markets present. Looking ahead, we expect to grow share with the most desired product portfolio in the market and through expanding our dealer share of wallet while continuing to generate enviable margins.

In closing, we remain optimistic based on our execution and accomplishments in the first half of the fiscal year. Looking ahead, we see encouraging signals that indicate we will continue to grow through our enhanced innovation initiatives, our expanding retail footprint and our powerful partnerships and dealer networks. Our strategy is developing as planned. We are highly focused on flawless execution. We have demonstrated that we are tenacious, and we have the capacity to adapt in order to capture our full potential and navigate disruptions. We are on pace to our plans and disciplined, focused on meeting our potential as a growth-minded company. We have the cash flow and balance sheet strength to capitalize on our opportunities and drive continued momentum. December is also a time to reflect on our achievements and look forward. I want to extend a heartfelt thank you to our associates across MillerKnoll for their extraordinary commitment every day. Your dedication is the foundation of our success. I am so proud of your unwavering commitment to delight our customers in every brand and our collective with products that define modern design around the globe.

With that, I'll turn it over to Kevin to discuss our financial results in more detail and share our outlook for the fiscal third quarter.

Thanks, Andi, and good evening, everyone. I'll begin with a summary of our second quarter results and then discuss our outlook. In the second quarter, adjusted earnings per share of $0.43 exceeded expectations, reflecting stronger-than-expected sales and gross margin. Consolidated net sales for the quarter were $955 million, down 1.6% year-over-year on a reported basis and 2.5% lower organically. As we have previously discussed, we expected lower year-over-year sales this quarter given the $55 million to $60 million in pull-ahead activity in North America contract that pulled forward sales into our first quarter. For the first half of the fiscal year, consolidated net sales reached $1.9 billion, up 4% year-over-year, with this normalized view demonstrating the strength of our business.

Orders for the quarter grew to $973 million, up 5.5% as reported and 4.5% higher on an organic basis. Our order momentum across all 3 segments reinforces our confidence in an improving demand environment and our ability to execute our growth strategy.

Second quarter consolidated gross margin was a strong 39%. This includes approximately $1 million in net tariff-related costs. We expect our proactive mitigation actions to fully offset tariff costs in the second half of our fiscal year, supporting both gross margin and earnings per share resilience.

Turning to cash flows in the balance sheet. We generated $65 million in operating cash flow and ended the second quarter with $548 million in liquidity. Our net debt-to-EBITDA ratio of 2.87x remains comfortably below our lending covenant limits, reflecting our disciplined approach to capital allocation and financial flexibility. We continue to balance investments in growth with maintaining a strong balance sheet. Our disciplined approach focuses on driving operational efficiency, leveraging scale and optimizing production capabilities across our facilities. As part of this approach, we recently announced the consolidation of our Mesquegan -- Michigan facility with production transitioning to other plants. This consolidation is expected to deliver $10 million in annual run rate savings by fiscal 2028.

With that, I will move to the second quarter performance by segment. Net sales in the North America Contract segment were $509 million, down 3.1% year-over-year following last quarter's 12.1% sales growth that was partially driven by the tariff-related pull forward. For the first half of the fiscal year, segment sales were up 4.1%. Orders increased to $507 million, up 4.8% from prior year. Operating margin was 8.7% and adjusted operating margin was 9.7%, down 50 basis points year-over-year, primarily from deleverage on lower sales.

International Contract segment net sales were $171 million, down 6.3% on a reported basis and down 9.2% on an organic basis year-over-year. Orders rose to $162 million, up 6.6% versus prior year on a reported basis and up 3.4% organically, driven by strength in Europe, the U.K., china and India, partially offset by lower orders in Korea and the Middle East.

Second quarter reported operating margin was 9.3%, with adjusted operating margin of 9.7%, down 280 basis points, primarily due to deleverage on lower sales and regional and product mix of sales in the quarter.

In the Global Retail segment, net sales were $276 million, up 4.7% on a reported basis and up 3.4% organically. Orders improved to $304 million, up 6% year-over-year on a reported basis and up 4.5% on an organic basis. Operating margin was 1.5% in the quarter. On an adjusted basis, operating margin was 2.1%, down 170 basis points year-over-year primarily due to costs related to the new stores, net tariff costs and foreign currency impact. As Andi mentioned, we opened 4 net new stores in the second quarter. We expect to open 2 to 3 additional stores in the third quarter and anticipate opening a total of 14 to 16 new stores in the full fiscal year.

Turning to our Q3 guidance. Our outlook incorporates the latest information on tariffs and new store investments as well as the typical seasonal softness in our contract businesses as the calendar year comes to a close, and the timing of the Chinese New Year holiday.

We expect net sales to range between $923 million and $963 million, up 7.6% versus prior year at the midpoint. Gross margin is projected between 37.9% and 38.9%, and adjusted expense is expected to range from $300 million to $310 million, higher year-over-year primarily due to increased variable selling and incentive expenses, along with new store costs.

Adjusted diluted earnings are expected to range between $0.42 and $0.48 per share. Based on current tariffs in place, we expect our proactive pricing and tariff mitigation actions to fully audit tariff impacts to gross margin and EPS in the second half of the fiscal year. Included in our expectations for operating expense and EPS are costs associated with new stores in Global Retail. We estimate approximately $5 million to $6 million in incremental operating expense year-over-year for the new locations in Q3 with a similar range expected in Q4. These investments are aligned with our strategy to expand our retail footprint and drive long-term growth. For further details related to our outlook, please refer to our press release.

With that overview, I'll turn the call over to the operator. As always, we welcome your questions and look forward to discussing our progress, outlook and strategic priorities.

[Operator Instructions] Your first question comes from the line of Reuben Garner with the benchmark.

Maybe just to start, Kevin, the second quarter that you just reported, gross margin came in above what was expected. Revenue came in at the high end and OpEx was a little higher. Was that mix of business? Or can you talk about what drove kind of the puts and takes relative to what you were expecting a few months ago?

Yes. So if you look at gross margin for the quarter coming in better than expected, it was a bit of channel mix and a bit of product mix. We also had some good pricing realization, particularly credit to our teams on working through the tariff mitigation as we work through both price increases and surcharges. And then operating expenses was variable selling costs from the sales over delivery as well as the timing of some expenses and FX was something else that played a factor.

Okay. And then in the press release, you talked about kind of the order rate, the 12-day holiday period, those growth rates are pretty strong and later in the quarter. On the contract side, specifically in the Americas, can you talk about kind of how that ebbed and flowed? Or orders through the quarter, were they a little softer during the shutdown period and just kind of more recent talking points in terms of pipeline or any other data points you have internally would be helpful.

Yes. So we had from an orders perspective, really across all the businesses with orders up organically 4.5% in the quarter. It was consistent across all 3 months of the quarter. So seeing a lot of consistency there. And then even in the first couple of weeks of the new quarter, we're in that mid-single-digit range. So it's been fairly consistent. The other thing I would call out is we look at a number of both external measures and internal measures is if you go back to the spring time, the world was at its highest point of tariff uncertainty. And so we're seeing a lot of sequential improvement in a lot of both external, whether it's leasing activity, but also some of our own internal measures that as we kind of get past that, we're seeing sequential improvements as well.

Sorry, I got stuck on mute. And then I'm going to sneak 1 more in on Americas contract. Any specific geographies or customer types, industries, I guess, that you're seeing particular strength or changes?

And then AI has been a question we've gotten a lot lately. Just wanted to kind of get your thoughts on how that may or may not be impacting demand going forward in the contract space?

Reuben, it's John. I would say from a geographic perspective, some of the markets that have been slower to come back are starting really percolate. So if you think about the Bay Area, Southern California, we're definitely seeing a pickup there. Really, the Northeast Coast has been strong for a number of months. I think in terms of industries, energy, professional services, legal, are all very active. Obviously, public sector or federal government is a little softer than normal given earlier in the year, the DOGE work and then the government shutdown that's had a bit of an impact. And pharma and banking are down slightly over prior year. But others than the public sector, pretty strong across the board. And as Andi mentioned in her opening comments, healthcare continues to be a growth driver.

And Reuben, can you clarify your question on AI? Are you asking about AI implementation in the company? Or are you asking about from customers. Just to be clear.

From customers, how that may impact employment, how that may impact how the office looks going forward? Are you seeing changes in floor price or anything else in the way that we work?

I think we'll see changes. It's a little early to tell kind of from our customer viewpoint. But as we kind of plan and innovate for the future, we imagine that there will be productivity gains and absolutely changes on how we work together. So we're thinking about that in a more future forward way. I think today, the impact on actual workspaces has been pretty minimal, but I do think the conversations are pretty broad and [ vast ] in how all of our customers are thinking about it and using it.

Your next question comes from the line of Phillip Blee with William Blair.

Can you maybe just talk about your expectations for the contract business in the third quarter a bit more? Maybe some color around key drivers between price versus volume, whether we're fully through the prior quarter pull forward or whether or not any of that sort of is still bleeding into the third quarter as well. And then obviously, it's a slow time year for contract seasonally, but anything to suggest volume trends should continue at current levels or potentially move up from here in the second half, assuming all macro remains the same.

Yes. Phillip, this is Kevin. I'll start. North America contract, our orders in the quarter were up about 5% on an organic basis. And similar to the comments earlier, we've been seeing some pretty good consistency. And so we think in that mid-single digits is kind of a nice spot that, that business was in during the quarter and seems to be running from an order level perspective as well. Year-to-date, the -- to your question on order pull ahead, we think our orders are clear of any of that activity. If you normalize our sales year-to-date in North America contract, those are up about 4%, so also kind of in that mid-single-digit range.

John, what would you add?

Yes. I would add that, in terms of external indicators for continuing demand, if I think about the conversations we're having of late with commercial real estate brokers. They seem to generally be very bullish across the board on 2026, and that obviously bodes well for our industry. Similarly, architectural and design firms, while the overall ABI is down a bit. The more premium-based firms seem to be very busy. And if you look at from an absorption perspective in commercial real estate, it's the Class A space and even the Class A+ space that is getting the most attention right now as companies are trying to elevate the office experience to get their employees back and our brands tend to play very well in that sector.

Okay. Excellent. That's very helpful. Oh, go ahead...

I was just going to add, you asked about price versus volume. And it tends to be in the contract businesses. you tend to be able to pass along inflation fairly well through the industry. And so over the long run, you're passing along that 2% to 3%. And we've been seeing a fairly even mix at those levels of growth rates of price and volume.

Okay. Excellent. Very helpful. And then our growth in retail is very exciting, particularly with the insight into how North America performed during the peak holiday week. So you can maybe -- you talk about a bit about the acceleration there? What drove that sort of response from the consumer, the competitive environment seems particularly promotional. So did you have to lean in there? Or how do you kind of think about the durability of that kind of growth, particular as we exit the holiday season?

Phillip, one thing I'll add and then I'm going to have Debbie give you some of her thoughts. I think the team has done a great job building brand awareness. And since this is such a nascent business for us. I think as we open new stores and as people become more familiar with the DWR and Herman Miller brands, that's really helping us. I think our promotions were at the same level as they were last year, which I think is pretty phenomenal considering the results we showed. Our marketing spend was also equivalent to last year. So I think building brand awareness, opening new stores, having people be more familiar with their proposition was a winning combination for us in the Cyber period. And Debbie then what would you add?

I would add the assortment acceleration that we've been pursuing with our collection count up 22% year-on-year is really helping to contribute to that growth as well.

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

Just to follow up on the retail momentum. Are you seeing with the assortment growth, are you seeing bigger order sizes, more net customers coming through your retail locations in e-commerce or more engagement with existing customers, higher order rates? Like what is the dynamic you're seeing within your customer segment?

Thanks for the question, Greg. I'd say there's 2 real highlights that we're seeing. Our average order value is up year-on-year beyond our pricing increases or net pricing increases are only about 2.5% year-on-year. Thanks to our sourcing strategy, which proves to have 70% of our COGS in North America from North America. So we've we been able to be more conservative in our pricing increases. But average order value up, that's really being driven by the assortment expansion that we're doing as well as design services as we continue to drive up the penetration of those in stores.

And I think through opening stores in new markets, we're obviously attracting new customers to the brands as well. Greg, So it's a combination of those things.

Absolutely. We're seeing greater demand of our new customers than we have historically as well.

Yes. Okay. And can you talk about the kind of the road map to doubling the store count. Is that -- are you going to stay on this kind of 14 to 15 stores a year? Is that your thought right now? And how should we think about maybe the margin profile of that business? Like are we -- are you going to operate it kind of at this low single-digit range for the foreseeable future? How should we think about maybe leverage on some of these investments starting to show through?

So yes, we are planning to open in the range of 14% to 16% a year. And as you can imagine, we have leases signed through middle to back half of next fiscal year already. We have seasonality in our operating income. So the back half of the year always looks better than the front half of our year based on largely where marketing spend falls in support of the cyber period. And we expect by the beginning of next fiscal year, we'll start to see accretive operating income dollars from these new store investments.

I think, Greg, as we've mentioned to you guys a few quarters now, we're sort of in a depth of investment right now to open new stores. And as we get into Q3 and Q4, you'll start to see that impact on our bottom line get smaller and smaller, and that's the new stores begin to add revenue to really offset that investment. So we're optimistic that, that will turn around in Q4 and Q1 of next year, and we'll start to leverage some of that overhead and expense.

Okay. So the -- like gross 5 to 6 a quarter net declining -- starting to decline as we move into next fiscal year. That [ net-net ] number will start to decline?

That's right.

Okay. Your next question comes from the line of Doug Lane with Water Tower Research.

Just looking at the top line here with the beat in the first quarter, the beat in the second quarter, in the third quarter is pretty meaningfully above consensus and your orders went from down mid-single digits to up mid-single digits sequentially. So something is getting better out there. And I don't know. What -- it sort of goes counter to what I'm reading anyway about the macro. So what are the 2 or 3 key macro trends that are really starting to work here? Is it back to office or really what's going on?

I think in the contract business globally, probably primarily in North America, but definitely globally, we are seeing return to office really taking off. I think the debate about whether to be together is kind of over. And so we are -- we're busy in our showrooms, we're busy in our corporate headquarters. We are seeing people make decisions faster. We're seeing orders that are coming through our funnel with more velocity and less people waiting as long as they were waiting during COVID. So I think the emphasis is there. I think some of the noise you see in the economy and from a macro standpoint is also driving senior leaders and organization to get more serious about their spaces and more serious about bringing people together, and it helps us a lot, especially in Class A space. So I think we're in the right place at the right time from a contract standpoint. And then International, we have a ton of growth potential just in general. We're adding in many markets as we could be. We can add dealers and still gain a lot of market share. That business tends to be a little lumpier with the size of orders, so you really have to look at a 6-month, 9-month, 12-month trend to understand the growth potential there, but at very enviable margins. And I think with retail, we're in a really good spot. We're attracting a consumer right now that is resilient and that is attracted to the proposition that we're offering. So I think we're in a really good place in both sides of our business and in all channels.

Yes, no question. Something is really coming together there. So what -- shifting gears a little bit with the consolidation going on in the industry, how have you thought about? Or what changes are you thinking about with in reaction to the consolidation now that you've had about 6 months or so to digest it?

Listen, I think we've been down that road. We know how hard consolidations are. We think the industry -- the contract industry has definitely shrunk. So consolidation in the end is good for everyone. We also know the consolidations and integrations can be distracting. So we plan to definitely be on the front foot now that we're on the other side of that.

That's true. You've been through a lot of consolidation yourself over the years. And just finally, on capital allocation, can -- what is the -- is there a target for a leverage ratio here? You seem to be hovering just under 3x. And is that sort of a target, a soft target of where you want to be? And then how do you think about capital expenditures and share repurchases in that context?

Yes. So the way we're thinking about capital allocation right now is, one, you've heard us talk about some of the growth investments that we're making sure we can fund. And so we feel well positioned with the balance sheet to fund those. Paying down debt is the second priority. We would see kind of a midterm target to get to that 2x to 2.5x turns range from the 2.87x. We are now, as we continue to pay that down. Those would be the first 2 priorities and then obviously continuing to maintain dividend at periodic share repurchase to offset dilution.

There are no further questions. We turn the floor back to CEO, Andi Owen for any closing remarks.

Thank you again, everyone, for joining us on the call tonight. With solid order momentum across every segment and encouraging signals in our markets, we were entering the third quarter with confidence. Our teams remain focused on delivering operational excellence, scaling innovation and executing against our strategic priorities. We appreciate your support, wish you all Happy Holidays and look forward to updating you next quarter. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.

Good evening, and welcome to MillerKnoll's quarterly earnings conference call. As a reminder, this call is being recorded.

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

Good evening, and welcome to our first quarter fiscal 2026 conference call. On with me are Andi Owen, Chief Executive Officer; and Kevin Veltman, Interim Chief Financial Officer. Joining them for the Q&A session are Jeff Stutz, Chief Operating Officer; John Michael, President of North America Contract; and Debbie Propst, President of Global Retail.

We issued our earnings press release for the quarter ended August 30, 2025, after market closed today, and it is available on our Investor Relations website at millerknoll.com. A replay of this call will be available on our website within 24 hours.

Before I turn the call over to Andi, please remember our safe harbor disclosure regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors, which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release. The forward-looking statements are made as of today's date, and except as may be required by law, we assume no obligation to update or supplement these statements. We also refer to certain non-GAAP financial metrics, and our press release includes the relevant non-GAAP reconciliations.

With that, I'll turn the call over to Andi.

Thanks, Wendy. Good evening, everyone, and thank you for joining us tonight. We are very pleased with our strong start to fiscal 2026. Our Q1 results significantly exceeded our expectations.

Before we get into the financial details, I'd like to recap a few highlights from the quarter, including leadership news, progress on our strategic initiatives and an update on what we're seeing in our markets.

First, I want to touch on our recently announced Board Chair succession plans and leadership changes. I'd like to thank Mike Volkema, our outgoing Board Chair, for his dedication and leadership for the past 25 years. And to congratulate John Hoke as he prepares to succeed Mike as Board Chair. John has served on our Board since 2005, and I'm looking forward to working closely with him in his new role.

We have a strong bench of talent at MillerKnoll, and I'm thrilled to congratulate Jeff Stutz on his well-deserved promotion to Chief Operating Officer. Jeff has impacted nearly every corner of our business during his 25 years with the company, including as Chief Financial Officer for the past 10 years. As Chief Operating Officer, Jeff is responsible now for our international contract business, our Europe-based brands and our global manufacturing and distribution operations.

And this evening, Kevin Veltman is joining us as Interim CFO. Many of you know Kevin from his prior roles with MillerKnoll over the past 10 years, serving in a variety of leadership positions, including Investor Relations and as the integration lead for the Knoll acquisition.

When we spoke last quarter, I set out our priorities for this fiscal year. We are focusing on accelerated product creation and innovation, consistent execution and prudent cost management while investing for profitable growth across our businesses. In the four years since we combined the strengths of Herman Miller and Knoll, we've had the time to perfect how we go to market with the full strength of our collective to integrate our world-class dealers who are now well versed in our unmatched product portfolio, and we are now capitalizing on our opportunities. Every day, we're presenting our customers with state-of-the-art solutions for what's possible in their spaces, implementing our geographic and channel expansion plans and developing innovative new products. We have a balanced long-term approach to our businesses with the cash flow and balance sheet strength to capitalize on our multiple opportunities.

Now on to the quarter. As I just mentioned, we outperformed our expectations and delivered strong revenue and profitability with consolidated net sales growing almost 11% and adjusted EPS increasing 25%. Our results underscore the strength of our business model, strong execution by our team, improving conditions in several key markets and continued progress on our strategic growth initiatives.

In our Contract businesses, we believe growth momentum is building. More and more companies are recognizing the benefit of bringing their employees together and looking to refresh their spaces. Office leasing activity for Class A space continues to be robust in many markets with Manhattan leasing activity in August well above the 10-year monthly leasing average. Orders in the industry and dealer optimism are up, and we are continuing to see strength in our own preorder metrics with our 12-month funnel up year-over-year in both North America and international contract.

On the product side, in addition to health care solutions from Herman Miller, private office solutions from Geiger, DatesWeiser and the new workspace solutions from Knoll that were all introduced at Design Days, we launched an electrostatic discharge version of one of our icons, the Aeron chair, allowing it to be used in data center clean room environments. We are excited to see such strong interest in and opportunity for this product globally.

Turning to our Global Retail business. First, a reminder that our growth strategy for this business is currently focused on the North America region and comprised of four levers: opening new stores, expanding our product assortment, growing e-commerce sales and increasing our brand awareness. Kevin will discuss the segment financials, but I want to share some North America retail-specific performance for the quarter, which includes all of our North American operations with the exception of Holly Hunt.

Net sales in the North America region were up 7% compared to last year, and North America orders were up over 5%. Web traffic in North America was up a strong 17% over last year.

We opened four stores during the quarter, two new DWR locations in Sarasota, Florida and Las Vegas and new Herman Miller stores in Chicago and Philadelphia. In the second quarter, we expect to open four additional stores, a DWR in Salt Lake City and Herman Miller stores in Nashville and in El Segundo and Walnut Creek, California. For the full fiscal year, we anticipate opening a total of 12 to 15 new stores in the U.S. as we execute on our strategy to more than double our DWR and Herman Miller store footprint over the next several years.

On to our retail assortment expansion initiatives. This year, we're launching 50% more product newness than we did in fiscal 2025. And new product is already positively impacting our performance with new product order growth of over 20% in the quarter. This bodes well for the future. First, as you might expect, we see a direct correlation between categories with the most newness and overall growth. Second, new products are driving outsized demand from customers who are brand new to MillerKnoll. So assortment expansion fosters new customer acquisition and provides a platform for building long-term customer lifetime value.

Before I turn it over to Kevin, I want to thank and recognize our associates around the world for their hard work and dedication to MillerKnoll. Our performance this quarter reflects their commitment to outstanding execution. Our people are the key to our success, and I'm proud that MillerKnoll was recognized by Fast Company as a Best Workplace for Innovators and also named overall as a Great Place to Work.

Kevin, welcome, and I'll hand it over to you.

Thanks, Andi, and good evening, everyone. I'll start with an overview of our first quarter performance, followed by our outlook for the second quarter.

In the first quarter, we generated adjusted earnings of $0.45 per share, significantly outperforming the midpoint of our guidance and 25% ahead of prior year, driven by better-than-expected sales and strong gross margin performance that benefited from leverage on our sales growth. Consolidated net sales in the first quarter were $956 million, well above the midpoint of our guide. Versus prior year, net sales were up 10.9% on a reported basis and up 10% organically, driven by strength in all segments of the business.

New orders at the consolidated level in the first quarter were $885 million, down 5.4% as reported and 6.2% lower on an organic basis. As a reminder, we expected lower orders in the first quarter due to the $55 million to $60 million in pull-forward activity we saw in the fourth quarter in our North America contract business related to our preannounced tariff surcharge and list price increase. I will touch more on this later in the call. In keeping with the same dynamic, our consolidated backlog decreased by $67 million to $691 million.

First quarter consolidated gross margin was 38.5%. Gross margin included approximately $8 million in net tariff-related impacts. As mentioned last quarter, we expect margins to be negatively impacted through the first half of our fiscal year by tariffs currently in place, but remain confident our pricing actions will offset these in the second half of the fiscal year.

Turning to cash flows and the balance sheet. We generated $9 million in cash flow from operations in the first quarter and ended the quarter with $481 million in liquidity. In August, we refinanced our Term Loan B to extend its maturity to 2032. In connection with this refinance, we incurred a noncash debt extinguishment charge of $7.8 million that is recognized in other expenses on the P&L. We finished the quarter with a net debt-to-EBITDA ratio as defined by our lending agreement of 2.92 turns, comfortably under the maximum limit defined in those agreements.

With that, I will move to our first quarter performance by segment. In the North America Contract segment, net sales for the quarter were $534 million, up 12% from the same quarter a year ago. New orders in the period were $492 million, down 8% from last year. Given the order pull forward dynamic in the fourth quarter of fiscal '25, in order to better normalize the order trend, order growth in the segment over the prior year for the combination of the fourth quarter of fiscal '25 and the first quarter of fiscal '26 was 3.3%.

Shifting to earnings in the North America Contract segment. First quarter operating margin was 10.7% compared to 3.4% in the prior year. Adjusted operating margin improved 200 basis points in the quarter to 11.4%, illustrating the benefit of fixed expense leverage we have in this business from higher sales volumes. This operating margin strength was partially offset by the net tariff impact.

In the International Contract segment, net sales in the first quarter improved to $168 million, up 14.4% on a reported basis and up 11.3% on an organic basis year-over-year. New orders during the quarter were $155 million, 6.5% lower than prior year on a reported basis and 9.2% lower organically, primarily from lower year-over-year orders in the APMEA and Latin America regions, partially offset by higher orders in Europe and the U.K.

First quarter reported operating margin for the International segment was 8.1% compared to 6.5% in the prior year. On an adjusted basis, segment operating margin was 8.5%, down 60 basis points, primarily from the regional and product mix of sales in the quarter.

Turning to our Global Retail segment. Net sales in the first quarter were $254 million, up 6.4% on a reported basis and up 4.9% organically. New orders in the quarter improved to $239 million, up 1.7% to last year on a reported basis and up 0.3% on an organic basis compared to last year. Operating margin in the Retail segment was 0.6% in the quarter compared to 2.2% last year. On an adjusted basis, operating margin was 1.2%, 190 basis points lower than the prior year, primarily from new store opening costs, increased freight expense and higher net tariff-related impact.

As Andi mentioned, we opened four new stores in the first quarter. We expect to open four additional stores in the second quarter and anticipate opening a total of 12 to 15 new stores in the full fiscal year.

Now let's turn to our Q2 guidance and outlook, which is informed by our most up-to-date information on tariffs and related mitigation efforts. In the second quarter of fiscal year '26, we expect net sales to range between $926 million to $966 million, down 2.5% versus prior year at the midpoint of $946 million. This implies our expectation that sales for the first half of fiscal '26 will be up approximately 3.8% at the midpoint, and this first half view normalizes the impact of the $55 million to $60 million of order pull ahead into our fiscal '25 fourth quarter. Gross margin is expected to range between 37.6% and 38.6%. Adjusted operating expense is expected to range from $300 million to $310 million, and adjusted diluted earnings are expected to range between $0.38 and $0.44 per share.

The gross margin and EPS outlook includes our estimate of the net impact of tariffs currently in place. In total, we expect net tariff-related impact to reduce gross margin in the second quarter between $2 million and $4 million before tax or between $0.02 and $0.04 per share after tax. We believe our collective mitigation actions will fully offset these costs as we move into the second half of this fiscal year.

Another factor included in our expectations for operating expense and earnings per share are the costs associated with planned new store openings in our Global Retail segment. As a reminder, due to the time it takes to prepare a new store for daily operation, we normally begin to incur occupancy and other preopening expenses one to two quarters before the first products are sold. In the first quarter, this expense was approximately $3 million. We estimate approximately $4 million to $5 million in incremental operating expense tied to these new locations in the second quarter. We expect to incur a similar range of incremental expense over the prior year in each quarter this year related to the planned new store openings. For all other details related to our outlook, please refer to our press release.

With that overview, I will now turn the call over to the operator, and we will take your questions.

[Operator Instructions] And our first question comes from the line of Reuben Garner with Benchmark Company.

Congrats to Jeff and Kevin. So, I guess, to start off in the Americas, I guess if I try to normalize for the pull forward, you've kind of been consistently growing in the low to mid-single digits the last, I think, three or four quarters for both revenue and orders. I guess, one, do I have that right? Okay.

And two, can you break down what that looks like from a volume and a pricing standpoint? Is that evolving, I guess, in the more recent quarters? Is it more volume driven than price? And then how do you feel about that trend in the last four quarters? And based on what you're seeing here of late, I don't know if things have strengthened or weakened throughout the quarter, but how do you feel on a go-forward basis about those numbers?

So, Reuben, I can't unpack your question. Maybe to start, you're thinking about it the right way, looking for NAC at the combination over the two quarters between Q4 and Q1. And if you normalize for NAC itself on a trailing two-quarter basis, it's averaged out to 3.3% growth over that period of time.

Your other question was related to price versus volume and volume was a key driver for us. We expected with the pull forward, we might see some lighter demand in the quarter and underlying demand was more positive during the quarter. We also had a surcharge adjustment during the quarter in July that customers also responded to by placing some orders. And so we had fairly strong orders in the first part of July. And given our lead times, we were able to ship some of that activity as well.

The last point I would make as we look at external demand indicators right now, as we mentioned in the prepared remarks, the funnel is looking positive year-over-year additions to the funnel, mockups were all looking positive. And then early in the quarter, we often comment that our orders are up about 6% on a consolidated basis in the first three weeks of the quarter as well.

Yes. And Reuben, you'll recall from the last call, thank you, Kevin. We talked a little bit about the makeup of the funnel and international contract as well as North America contract. And what we've seen is a consistent change from orders that are four and five quarters out to orders that are 1 to three quarters out. Those orders have more certainty. They drive more revenue close in. And so that is also a good sign that continues to bode well for consistent growth in North America contract.

And I would also add that as you look at kind of the pull ahead that we talked to you about in Q4 and what's happening in Q1 and what we expect for Q2, it is unfolding exactly as we thought it would. We feel good about the results. We feel good about what we're seeing in the trend, especially in North America.

Would you add anything, John?

No, I think that's spot on, Andi.

How about any discounting? I understand the surcharges and tariff pricing, but has there been any increased discounting necessary to win projects? Or has that been pretty stable?

That's been pretty stable for us, Reuben. We haven't seen increased discounting at this stage. So we feel good about that trend holding steady.

Okay. And then my last question is on retail profitability. In the press release, you listed a few sources of what appear to be near-term pressures. Can you break down the freight new store expenses and there was one other bucket, the tariff related, those three items, how much in either dollars or basis points did those drag the retail margins on a year-over-year basis? And then the new store expense, in particular, like how is that going to play out through the year? Is that something we should expect in each of the next three quarters and then next year, we'll get relief? Or how do we map that out?

Those are all great questions. And I'm going to let Kevin break down the details. But at a high level, Reuben, the bulk of what you'll see as margin degradation is really new store expenses. So we're being aggressive in opening more new stores than we have before. So you will see in Q1, Q2 and Q3, those expenses will hit our bottom line. But you will also see as we get further into the year, the revenue from those new store locations starting to minimize that impact. We imagine that by the end of Q4 and going into Q1 of next year, those stores will start to be accretive to the top line and the bottom line. But this year, these first 3 quarters, you will start to see -- you will see a margin impact.

And also from a tariff perspective, and Debbie can speak to this with a little bit more detail. We had a little bit of unplanned tariff expense this quarter based on mix and what customers bought and really trying to guess where our tariff expense would be based on how customers actually fill the revenue card. So that's one of the other factors.

What would you add, Kevin?

Yes. Just to break down and maybe a reminder, Reuben, that Q1 is always our lowest seasonal point in the retail segment. So from an absolute margin perspective, that would be a lower volume quarter for us, and then we build in the other quarters. But of that 190 basis points where the retail margins are lower than last year from an operating margin perspective, as Andi mentioned, the new stores would be more than half of that and then the impact of tariffs and the freight would kind of split the difference between the remainder.

Can I squeeze one more small follow-up in?

Yes.

Is that -- is the new store impact at both the gross margin and operating margin line? Or were there other factors impacting gross margin, whether it's product mix or store or some other driver?

The new store costs are in the operating expense, so they're impacting the operating margins. You'd have those other items up in gross margin.

The only other thing in gross margin was some unfavorable FX impact this quarter versus last year.

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

Just wanted to talk a little bit about the recent industry consolidation. Has -- does that in any way change the competitive outlook for you in terms of how you go to market? And do you feel like there needs to be maybe further consolidation? Or is M&A or acquisitions on the table for you in terms of maybe gaining greater scale in any areas of the business?

Listen, I think consolidation for the industry where we are right now is a good thing for all of us. I do think that the industry has shifted to growth mode. So I can't say whether I anticipate further consolidation, but I think it presents opportunity for all of us.

So from our perspective, we're excited. We think we're competitively differentiated. We know what integrations will be like. So we are looking forward to the opportunities that it presents for MillerKnoll. And as far as M&A and acquisitions, we are always opportunistic in that arena.

Okay. And I know you're focused in the retail business on North America. But can you just maybe talk about the rest of the world seems to be lagging kind of the performance that you're delivering in North America. Longer term, maybe what your view is for those markets, how you might be able to bolster them or have them catch up to what you're doing in North America?

Yes. I think it's a smaller part of our business. But I think just as a reminder, Greg, that the international markets are primarily wholesale, and they have been slower to recover from over-inventory in COVID, but we are seeing them start to rebound. I think it's a little bit of a slower trend.

I'll let Debbie elaborate, but I think it is an area that will grow for us and continue to grow slowly, but in the future, probably not this year.

What would you add, Debbie?

Well, I'll just start by saying where we do have DTC internationally, we're pleased with the growth performance we're seeing in those channels. And as Andi suggested, the more challenging area is our wholesale business, where we're still sort of beholden to the lack of open to buy with the dealer or retail network that we sell through.

However, we're seeing some green shoots, particularly with our HAY and Muuto brands, which hit a lower price point within our portfolio and seen progress this quarter already with our Knoll and Herman Miller brands.

And our next question comes from the line of Doug Lane with Water Tower Research.

I'm trying to understand how these tariffs have impacted your business because there's a lot of moving parts as a result of all this. So can we start with just in the first quarter, you had $8 million of net tariff-related impact. And does that mean there was some mitigation to the tariffs? You did get some pricing or some cost reductions? Or is that mostly just the cost of the tariffs at this point?

Go ahead, Kevin.

Yes, Doug, this is Kevin. Exactly right. The point of the net is to say we've been working on pricing. We put a surcharge in place. We had a price increase in June as well. And the way it works for us is those take a little while to flow through backlog and through our contracts with customers.

So the net impact in the short term is the $8 million that we called out from a pressure perspective. We expect that to be less in Q2, $2 million to $4 million of net impact. And then when we get into the back half of the year, we believe our pricing mitigation actions will be offsetting those costs based on the current tariff environment.

Okay. So well underway to the mitigation efforts and the disruption to order patterns because of the buy ahead for the tariff sounds like it's pretty much behind us. And the way to address that is to sort of look at the fourth quarter and first quarter in aggregate to capture the broader trends. And then beginning in the second quarter, we kind of -- I don't want to say back to normal, but back to more normal ordering and sales patterns.

Correct. And that's what we felt like in looking at the order rates in the first three weeks of the quarter, we feel like we're in a more normalized place related to that. And the other way we tried to cut through that noise in our prepared remarks was to say sales year-to-date through Q2, including the midpoint of our guide are up 3.8% on a consolidated basis. That takes out some of that noise for you.

Right, right. That's very helpful. And then at the adjusted operating profit line where margins were up in the quarter, I know you don't have a full year number out here, but should we be modeling improvements in the adjusted operating profit margin for this year despite all these cross currents?

Yes. On that front, we'll hold off on commenting with the uncertainty that's out there in the macro, we're guiding right now on a quarter-to-quarter basis as opposed to still watching visibility, feeling fairly limited out beyond that.

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

Thanks again, everyone, for joining us on the call. We really appreciate your continued support of MillerKnoll, and we look forward to updating you on our next quarterly call. Have a good day.

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