MLKN Q1 2027 Earnings Call Transcript

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DATE

Sept. 22, 2026

CALL PARTICIPANTS

• Vice President of Investor Relations - Wendy Watson
• Interim Chief Executive Officer - Jeffrey Stutz
• Chief Financial Officer - Kevin J. Veltman
• President of North America Contract - John Michael
• President of Global Retail - Debbie F. Propst

TAKEAWAYS

• Net Sales -- $923.4 million, representing a 3.4% decline year over year driven by demand headwinds in North America.
• Adjusted Diluted EPS -- $0.53, including a $0.11 net benefit from IEEPA tariff refunds.
• Consolidated Orders -- $913.9 million, growing 3.2% as reported and 3.5% on an organic basis.
• Adjusted Gross Margin -- 41.8%, an increase of 330 basis points primarily reflecting pricing realization and the benefit of tariff refunds.
• North America Contract Revenue -- $505.6 million, down 5.3% due to challenging prior-year comparisons and sector-specific demand softness.
• International Contract Orders -- $181.2 million, increasing 17.3% year over year following a significant project win in South Korea.
• Global Retail Revenue -- $261.0 million, rising 2.6% as new store performance offset inventory challenges.
• Operating Cash Flow -- $49.1 million, compared to $9.4 million in the prior year reflecting improved working capital.
• Liquidity -- $580.4 million, consisting of cash balances and available revolving credit facility capacity.
• Net Debt-to-EBITDA -- 2.75x, a reduction from 2.8x in the previous quarter.
• Q2 Revenue Guidance -- $972 million to $1.012 billion, representing approximately 4% growth at the midpoint.
• Full-Year Revenue Guidance -- $3.88 billion to $4.03 billion, representing a reduction from previous estimates to reflect first-quarter demand patterns.
• Full-Year Adjusted EPS Guidance -- $1.85 to $2.15, maintained by management through planned cost-containment measures.
• Canada Tariff Impact -- $0.07 per share, representing the estimated unfavorable cost impact for the remainder of the fiscal year.
• Full-Year Store Openings -- 14 to 18 new locations, including five to seven planned openings in the second quarter.
• North America Retail Orders -- 7.5% growth year over year, marking the eighth consecutive quarter of growth in this market.
• Adjusted Operating Expenses -- $320.1 million, an increase from $308.0 million due to higher incentive compensation and new store costs.
• Consolidated Backlog -- $669.2 million, representing a 3.1% decline from the prior year level.
• Capital Expenditures -- $33.0 million for the quarter, with full-year projections of $125 million to $135 million.
• Special Charges -- $13.4 million, including $6.0 million for restructuring actions such as workforce reductions and facility consolidations.
• Quarterly Dividend -- $0.1875 per share, providing an indicated annual yield of 3.7%.

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RISKS

• Stutz stated that management estimates "an approximate $0.07 per share impact from costs related to these new tariffs" following recent trade developments between the U.S. and Canada.
• Propst noted that the company is missing inventory in the outdoor category "due to the PFAS regulations," which negatively impacted sales in June and July.
• Michael indicated that "customers seem to be taking a little bit longer to convert from awarded project to orders," contributing to demand softness in the North America Contract segment.

SUMMARY

MillerKnoll, Inc. (NASDAQ:MLKN) reported first-quarter results that reflected softer than anticipated demand in specific sectors, including health care and federal government, while maintaining full-year earnings guidance through disciplined cost management. Management reported that consolidated orders returned to growth during the period, led by strength in the international and retail segments. The company is prioritizing operational discipline and capital allocation strategies focused on reducing debt while continuing its physical retail expansion. Management stated that order trends showed improvement in August and that growth across all primary segments has continued through the early weeks of September.

• Interim Chief Executive Officer Stutz stated, "We are concentrating our selling resources on winning global and national account opportunities" within the North America Contract segment to drive top-line growth.
• President of Global Retail Propst stated, "We are very focused on making sure that we meet our customer where they are" as the company adapts its digital marketing strategies to rising AI search costs.
• Management reported that the recently introduced Concert line by Knoll is gaining traction in Europe, specifically within the private office category.
• The company is in the process of closing its third manufacturing facility in West Michigan to further align production capacity with current demand levels.
• Management noted that Class A office leasing in the U.S. continues to show strength, with net absorption reaching its highest total since mid-2020.
• The Holly Hunt brand returned to order growth in the first quarter following four consecutive quarters of decline.
• Management reported that August consolidated orders grew year over year, with momentum continuing at a 9% growth rate through the first three weeks of September.

INDUSTRY GLOSSARY

• IEEPA: International Emergency Economic Powers Act, the federal law under which certain tariff refunds were processed.
• PFAS: Per- and polyfluoroalkyl substances, a group of chemicals subject to increasing environmental regulations impacting consumer product materials.
• Class A Buildings: The highest quality category of commercial real estate, typically characterized by modern infrastructure and premium locations.
• Ancillary products: Furniture categories beyond standard workstations and task seating, including lounge seating, textiles, and lighting.
• A and D: The Architecture and Design community, which serves as a primary specification channel for commercial furniture.

Full Conference Call Transcript

Operator: Good morning, and 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.

Wendy Watson: Good morning. And welcome to our first quarter fiscal 27 conference call. With me are Jeffrey Stutz, Miller Knowles' Interim Chief Executive Officer and Kevin J. Veltman, Chief Financial Officer. Joining them for the Q and A session are John Michael, President of North America Contract and Debbie F. 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 millernoll.com. A replay of this call will be available on our website within 24 hours. Before I turn the call over to Jeffrey, 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 will turn it over to Jeffrey.

Jeffrey Stutz: Thanks, Wendy. Good morning, and welcome, everyone. Before Kevin reviews our financial results and outlook, I would 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% 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 a $0.11 per share net benefit from IEPA tariff refunds, adjusted earnings per share were $0.42 above our guidance range, 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 remain quite constructive. We are 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 3 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 stakeholders.

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 and D 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 are 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 are maintaining rigorous cost discipline in aligning expenses with revenue levels.

In the near term, we are 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 are sharpening our focus on capital allocation. Cash flow and balance sheet strength to support debt reduction during FY 2027 while preserving our capacity to invest in growth, By bringing greater discipline to capital deployment, we are building upon our businesses proven cash generation capabilities. Next, I will 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 2025 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. Conversely, order patterns were soft in relation to last year, within the health care sector and with federal, state, and 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, our supply chain touches both countries.

We are 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 US Canada tariff actions And 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 promising 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 have spent considerable time with the North America contract team meeting with dealers and customers, and 1 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 2 things from us. First, we need to continue to simplify the process of doing business with us. And second, we need to maintain and expand our leadership in product innovation. We are 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 4-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. Activity was particularly strong in Asia, the Middle East, and portions of Europe, Latin America. We saw healthy demand from financial services and private office customers along with strength in health care 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 and an event in Jakarta, Indonesia. Key leaders from across Munoz 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%, 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 Saint Louis, Missouri; and San Antonio, Texas. And 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 fiscal 2027. 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 glasshouse, and increased storytelling on social media with design partners.

So with those brief opening comments, I will now hand the call over to Kevin who will provide additional details on segment financial performance and our outlook for FY 2027.

Kevin J. Veltman: Thanks, Jess, and good morning, everyone. I will start with an overview of our first quarter results and segment 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% on a reported basis and 3.3% lower. Consolidated orders for the quarter were $914 million, up 3.2% as reported and 3.5% on an organic basis. Our consolidated backlog was $669 million at quarter end. Down 3.1% from a year ago. First quarter reported gross margin increased 23 basis points to 41.7 and adjusted gross margin was 41.8%.

The recognition of $16.5 million in refunds from the US government related to previously expensed IEPA tariffs contributed 180 basis points to the year over year increase. 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 2.75x 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, 2026.

At an annual indicated dividend of $0.75 per share the yield is 3.7% 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% on a reported basis and 5.2% lower organic primarily due to a challenging prior year sales comparison associated with the order pull forward in the fourth quarter of fiscal 2025 that we have discussed in prior quarters. Orders were $484 million, down 1.7% as reported and down 1.6% organically from the prior year despite a favorable orders comparison.

As a reminder, we estimate that $55 million to $60 million of orders were pulled forward from Q1 FY 2026 to Q4 FY 25 related to tariff pricing actions. Reported operating margin was 9.4% and adjusted operating margin was 10.7%, down 70 basis points year over year. The decline primarily related to deleverage on 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% on a reported basis and down 6.2% organically year over year. Orders were $181 million, up 17.3% versus prior year on a reported basis and up 17.9% organically, which included a notable project win in South Korea.

First quarter reported operating margin was 2.4% and adjusted operating margin was 4.6%, down 390 basis points compared to prior year. The decline primarily reflected deleverage 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% on a reported basis and up 2.8% organically. Segment comparable sales were flat and comp sales in North America grew 1.9%. Orders in the quarter improved to $249 million, up 4.3% year over year on a reported basis and up 4.7% organically. In North America, orders grew 7.5%, reflecting continued market share growth.

Reported operating margin was 6.1% in the quarter, and adjusted operating margin was 7%, up 580 basis points year over year. The improvement included a 410 basis point net benefit from tariff refunds. The 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.

For the second quarter of fiscal 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%. We expect gross margin of 38.3% to 39.3%. And adjusted operating expenses of $321 million to $331 million Adjusted diluted earnings per share are expected to be $0.43 to $0.49 This outlook includes estimates for the most recent U. S. And Canada tariffs. 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% 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 US and Canada tariff actions. I mentioned last quarter, in fiscal 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, refer to our first quarter results press release. With that, I will turn the call back over to Jeffrey.

Jeffrey Stutz: 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 will now open the call for your questions.

Operator: Thank you. We will now begin the question and answer session. To withdraw your question, press 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the QA roster. Your first question comes from Gregory Burns with Sidoti and Company. Please go ahead.

Greg Burns: Good morning. So in the North American contract segment, you mentioned that you are kind of the internal funnel metrics remain positive. Some of the market dynamics also, I think, still constructive for demand. Why just maybe give us a little bit more color on why that did not maybe translate to a stronger quarter this in the first quarter?

Jeffrey Stutz: Hey, Gregory. Good morning. I will turn things over to John, and he can cover kind of his take on this. Maybe just would reiterate that you 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. You know, CEO confidence has been relatively resilient. And so those are 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 have seen strength in. Just had a down quarter, and that happens in a project driven business But I will let John unpack that further.

John Michael: Thanks, Jeffrey. Hi, Gregory. Yeah, to tag on what Jeffrey said, I think overall when we look at the indicators, they are positive. I mean, I am looking at 6 the 6 that we look at on a regular basis are all pointing in the right direction. I will say the reports from the 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 is a couple things driving that Certainly, there is at the 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 and whatnot over the last 12 to 18 months have been a little slower to return. Than normal. And in our health care sector, a very positive outlook, but a little bit of a pause during the quarter. Really based on the timing of projects.

Greg Burns: Okay. So the outlook for the year, I mean, you still expect growth from North American contract this year even with the soft first quarter?

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

Greg Burns: Okay. And then in terms of the global retail store expansion, efforts, 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 are getting from maybe some of the more mature stores that have been in market for a little while?

Debbie F. Propst: Hi, Gregory. Thanks for the question. This is Debbie. So the great news is that the cohort of stores that we opened in the back half of FY 26 through f y 20 let's say or through the back half of f FY 25 and all of FY 26 are really showing progress and getting to a point where we will have profitability out of those stores in FY 27.

Greg Burns: Okay. And they are performing to, like, where you expected them to be from, you know, maybe a rev revenue and margin contribution at this point?

Debbie F. Propst: Yep. We are seeing the second, the first comp year. Ramp actually a little bit more than we expected. So what we have 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 showed more progress. So we are we remain committed to our store growth strategy. And we like the economics and the progress that we are seeing.

Greg Burns: All right. Great. Thank you.

Operator: Your next question comes from Reuben Garner with Stifel. Please go ahead.

Reuben Garner: Thanks. Good morning, everybody.

Jeffrey Stutz: Thanks.

Reuben Garner: A follow-up on the North American contract piece. Can you give us some insight on the cadence in the quarter? Did it did it slow as the quarter moved on? Was there kind of a moment where there was a pause and we have since had a recovery? I mean, what is what is September kinda look like so far? And just kind of thoughts on the progression in order patterns?

Kevin J. Veltman: Yeah. Ruben, 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 3 weeks of September, we are up 9% in orders year over year and that is growth across each of our 3 segments as well right now.

Reuben Garner: Okay. Greg. Very encouraging. And then on the in your outlook, can you talk about what you have 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 is what is the latest price increase, or surcharges or any other kind metrics, you look at to offset these factors and what is kind of embedded for the full year from a price cost standpoint?

Kevin J. Veltman: Yeah, Ruben. In the first quarter, maybe to set the stage, as you may recall, 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 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 is still very real. And so we had, price cost as we look at it 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, call it 20 percent 30 basis points year over year in the second quarter. And it is the things you talked about, oil continuing to remain close to $100 and the derivative effects of that. Okay. Great. Or a follow-up. Maybe the other point I would make is we are following the playbook we have done, whether it is tariffs or other inflation. We are following the playbooks we have used in the past to work our way through.

Jeffrey Stutz: Yeah. Ruben, this is Jeffrey. I have you had asked about what, what kind of pricing actions Kevin agreed with. I think Kevin said I might add to that, you know, 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 and, average of about 4%. So that should layer into our results going forward.

And then Kevin said, we are we are following what had what has become a relatively familiar playbook for the business, but as specifically as it relates to Canada, tariff, we are we are well, we are pulling out as many stops as we can, including you know, pulling component inventory, in the inventory ahead of the implementation date. Customer order timing, trying to trying to get in front of that wherever possible. We are working really hand in hand with our key suppliers on some sharing arrangements and leveraging dual supply wherever we see the opportunity. Know, supplying component parts or, in some cases, finished goods. From, you know, outside of the tariff regime. Regions around the world.

So we are we are again, these are all actions that we are familiar with from past experience, but these are things we are we are we are pursuing with vigor.

Reuben Garner: Got it. And that is a good lead in to my last question. Margin performance and the outlook is really strong, even excluding the tariffs this quarter. Can you discuss the cost actions that you have 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, how much visibility do you have if revenue does not accelerate, Is there a dollar amount or any kind of quantification that you can give us on the moves you have you have been making that can drive kind of performance to meet or even exceed your outlook without kind of help from the top line?

Jeffrey Stutz: Yeah, Ruben. This is Jeffrey. I will give you some high level perspective on, kind of under the heading of our, focus on cost discipline. And Kevin, you can fill in any additional color you see fit. You know, this is really I mentioned this last quarter. This is really an enterprise wide effort to and it is 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 have heard us talk about, the idea that, you know, recognizing we do all kinds of things incredibly well at Miller Knoll, but we cannot 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 the focus on expense on all expense lines. So we are really we have tasked our teams to, really make that evaluation.

We are also include that is 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 finding opportunities to reduce the water level on cost of goods sold. We are evaluating manufacturing capacity. We have already made moves in that in that category, which we have outlined for you in past calls. But just to remind you, we have closed 2 plants. We are in the process of closing, our third here in West Michigan. And there are longer term opportunities to consider other actions.

Down the line, and we are we are certainly evaluating all of those things. So that is just a little kind of context to it. We are this is a ground up review on the part of the organization. And, you know, as we move forward, we will certainly unpack more details on that for you. I will I will say and maybe Debbie, you can feel free to talk about this. 1 of the actions we took this quarter that is reflected in the 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.

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

Debbie F. Propst: Yeah, we are 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 4 consecutive quarters of decline. Some of the restructuring elements that we have been working on we talked in the last call about some of the leadership adjustments that we had made. And obviously, we will have the wrap end effect of some of those cost savings throughout the course of the year. We are 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 rest rationalization.

This quarter, we will be closing our Minneapolis showroom and moving to an outside sales rep structure in that market. So those are a few of examples of work that has happened thus far.

Reuben Garner: Great. Thanks for the detail, guys. 1 quick follow-up. That $3 million to $5 million, Kevin, was that what you saw in the first quarter on a year over year basis? And was that specific to Holly Hunt?

Kevin J. Veltman: Or was that broadly That was across the business, which would have been included in Holly Hunt, Reuben.

Reuben Garner: Got it. Alright. Thank you, guys, and good luck going forward.

Jeffrey Stutz: Thank you.

John Michael: Thanks, Ruben.

Operator: Your next question comes from Philip Lee from William Blair. Please go ahead.

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

Jeffrey Stutz: John, why do not you start us off and, Debbie, you can chime in.

John Michael: Yeah. I think in terms of the pipelines, from a contract perspective, it is encouraging. I think we have seen what is 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 would say in the immediate past we have seen a lot of activity in smaller projects. So it requires, right, a similar amount of effort from dealer processing perspective, but the size of the projects have been a bit smaller. So we are really seeing customers in kind of 2 groups.

Those 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 6 to 12 months to make sure the workplace is ready for the future of work. As you have seen in the headlines, a lot of the larger organizations are bringing their workforces back to workforce 4 or 5 days a week. And I think in the over time, that bodes well in terms of the project activity that we will see.

Debbie F. Propst: 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, largely driven by web and in particular, our outdoor category. Where we are 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 American comp. Where we outpaced the prior 5 or so months in terms of comp trends.

And quarter to date, we are also seeing strength And the back half of our year is forecast based more or less in line with what we are seeing right now.

Philip Lee: Okay. Very helpful. And just maybe doubling down then on the global retail side. If 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 are seeing from an underlying fundamentals perspective, 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?

Debbie F. Propst: All right. there is a lot in that question. So let me make sure I capture So from a shifting digital landscape I think that is the first thing you mentioned. Philip, what you are referring to is obviously the rapid increase in AI search and I think some of the shift in the price of digital as a result of Google shift to AI mode. We are definitely seeing increased digital advertising costs. As such, in August, we leaned more heavily into our direct mail distribution, and we will 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 are very focused on making sure that we meet our customer where they are. And moving very quickly to evolve our digital product road map 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 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 are, you know, excited that we are gonna be getting OI in the global retail segment in FY 27 from the new stores that opened in 2025 and 2026. And in light of the changing digital customer journey, I think our store growth strategy becomes more important than ever. And our store comp performance in North America in Q1 was in line with Q4, but continues to be a real driver of our overall success as well.

Philip Lee: Again, thank you.

Debbie F. Propst: Yeah. No. You got it all.

Philip Lee: I appreciate it. And then just 1 quick last 1. Just as you kind of see improving profitability in the business, through cost savings and the retail ramp. And then you have spoken about focusing on expansion for the Herman Miller store base, which requires less upfront capital. Assuming that free cash flow should really improve here. How are you thinking about capital allocation? Any kind of changes to your thoughts going forward, especially just around debt pay down?

Kevin J. Veltman: Yes, Philip, this is Kevin. I will cover that. So cap allocation, our priorities remain the same. Invest in those growth opportunities to the point we are continuing to look at where are the opportunities that we believe generate the strongest returns so that 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 EBITDA. From a covenant perspective this quarter, we were at 2.8 last quarter. And then maintaining the dividend and being opportunistic on share repurchase would round out the priorities.

Philip Lee: Excellent. Thank you all. Best of luck.

Kevin J. Veltman: Thanks, Philip.

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

Analyst: Yes. Thank you. Hi. So I was just curious about a little more explanation on the international contract profitability. You talked about all the things you are doing to improve profitability, and it is evident in the North American contract segment. But international seems to be going the wrong way on a longer term. In the last few years, you have had modest revenue growth there, and yet the operating margin seems to be declining. So can you just explain a little bit more what impacted 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.

Jeffrey Stutz: that is a great question. This is Jeffrey. I will I will start, and, Kevin, welcome. Any additional comments you have? Yeah. The we have been really working hard to try to try to bring more balance to the overall product mix that is sold through our international contract segment. Know, historically, that business has really indexed very heavily into task seating. Which is really good because in an as an individual product category, it is, it is high profit, which is really good for us. And we wanna continue to do that, and we are doing that. We are focusing very heavily on that.

But we are also recognizing the importance of, of finding ways to pull through other categories of furnishings because that is how you have access to larger project opportunities. That will then bring excuse me, carry with it profitable, you know, seating and ancillary products. And so part of the answer is we have seen a bit of a pivot toward some other relatively lower gross margin product categories, but with the 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 will also be remiss if I did not highlight the fact that we are we are we are 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 international contract markets. And so that is played a role as well. And, the last thing would be, again, we have regional shifts and mix that, well, on 1 hand, you may pick up production volume in 1 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 is particularly been true, across our factories in Europe. So those are some initial thoughts. I do not know, Kevin, if you would add anything.

Kevin J. Veltman: I think I would just add the comment that international is definitely project based and moves around from quarter to quarter, whether it is the mix of the product, in the projects or which regions we are 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% for the quarter, and the kind of volume that will flow through. it is in a it is in a Asia Pacific is a good region for us as well. And so you will 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 are opening up in Mexico City, so you have some initial cost to get that ramped up. We had the timing of some sales and marketing events. 1 of the significant opportunities we see internationally is our share of wallet is lower than it is in North America contract as we expanded to some of the new product categories that Jeffrey 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.

Analyst: Okay. Thank you. that is all for me today. Thank you very much.

Jeffrey Stutz: Thank you.

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

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

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

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