Herman Miller, Inc. Aktie

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.

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 fourth quarter fiscal 2025 conference call. On with me are Andy Owen, Chief Executive Officer; and Jeff Stutz, 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 May 31, 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 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 that 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 so much for joining us tonight. We are very pleased with our strong finish to fiscal 2025, with our Q4 results significantly exceeding our expectations. Jeff will share the details of our financial performance with you, but I want to briefly recap a few highlights from the past year that underscore our design leadership, speak to our opportunities ahead and then discuss what we are currently seeing in our markets.

First, I want to thank our teams across MillerKnoll for our accomplishments over the past year. In our contract businesses, we made incredible progress, and we have multiple opportunities to grow our market share both in North America and internationally. We opened new flagship locations in London and New York that include both contract showrooms and retail stores and have meaningfully elevated how we present the collective strength of our brands and products to customers. With these new locations, we've improved the quality of our customer interactions and have seen a significant increase in customer visits, positioning us to capitalize on our product and brand leadership as trends improve in our markets.

We've spent the past year reimagining what our newest flagship in Chicago's Fulton market could be. We debuted this new comprehensive design center earlier this month at Design Days 2025, a marquee event for the contract furniture industry. With 2 buildings at 1100 and 1144 West Fulton, we brought our collective closer together, making it easier for customers to see what's possible in spaces that reflect the ways people work, gather, heal and create. Our new space highlights the unique strengths of the Herman Miller and Knoll brands, while also featuring our Herman Miller floor and MillerKnoll floor designed to showcase the power of our combined portfolio and real-world solutions through planned and purposeful design.

The space also features an expanded health care showroom, HAY's first North American showroom, new NaughtOne and Muuto spaces as well as enhanced Herman Miller, Knoll, Geiger, DatesWeiser and Maharam showrooms. Like our London and New York locations, our Chicago showrooms include DWR and Herman Miller retail stores.

Design Days highlighted the accomplishments of our design, creative and product teams over the past year. At this year's event, we introduced over 30 new products across our brands. It was an incredibly successful event for MillerKnoll with booked appointments of 11% year-over-year. As a pioneering tenant of Fulton Market and the founder of Design Days, we are thrilled that more and more customers, dealers and A&D partners are coming to this event.

In our contract product portfolio, we are investing in targeted R&D and innovation. Four years into the culmination of Herman Miller and Knoll, we've had time to strategically review our unmatched product portfolio, understand where there is differentiation and identify where we have opportunities to add innovative new products or enhanced product lines.

One of our latest innovations is Knoll Dividends Skyline, which we just introduced at Design Days. It offers a refined, flexible and holistically integrated system that reimagines the open design workplace for today's dynamic and compact office environments. It features a new planning typologies and a contemporized material pallet, empowering architects and designers to deliver a total interior.

There are also recession-resilient verticals that we will continue to go after with targeted R&D and product investment. For example, backed by research and real-world insights, Herman Miller's new Gemma Healthcare Seating Family is thoughtfully designed to support the diverse needs of patients, families and caregivers. With a range of options, including a recliner, a sleep chair and a sleep sofa, Gemma combines intuitive functionality with a warm, modern esthetic that enhances any care environment. Each piece is easy to use, requiring simple movements to adjust, allowing users to focus on care rather than furniture.

Scalable across various room sizes and available in multiple sizes, a Gemma Recliner and its counterparts create a cohesive and comforting visual language throughout health care spaces. Ultimately, Gemma helps patients, families and caregivers feel supported and at ease, making it a smart human-centered choice for today's health care environment.

In higher education, Muuto and HAY's extensive assortment of ancillary and hospitality solutions can assist colleges and universities as they build out lounge areas, meeting spaces and cafeterias for their growing populations. We also see exciting opportunities with Herman Miller Gaming in the higher education space. For example, we recently collaborated with the university on a state-of-the-art esports arena.

Turning now to our accomplishments and growth opportunities in our global retail business. In fiscal 2025, we opened 4 beautiful new stores, including the DWR studio in Palm Springs that opened in concert with Modernism Week, a DWR in Paramus, New Jersey, and a Herman Miller store in Fairfax, Virginia, and one also in Coral Gables, Florida. In fiscal 2026, we expect to open an additional 10 to 15 new stores in the U.S., as we continue our journey to more than double our DWR and Herman Miller store footprint over the next several years.

Earlier this month, as I mentioned, we opened an expanded DWR store and a new Herman Miller store and our Chicago Fulton Market flagship. In the next few months, we plan to open DWR stores in Sarasota, Florida, and Las Vegas, and a Herman Miller store in Philadelphia. We will follow this in the second quarter with a DWR store opening in Salt Lake City and Herman Miller store openings in Nashville and El Segundo, California.

In addition to growing our store footprint, we have several growth levers we can pull in the business over the next several years, including continuing to invest in product assortment expansion, increasing our e-commerce penetration and expanding our brand awareness. These levers will allow us to drive revenue growth and also expand our brand awareness through targeted marketing and investments for new product launches and activities and events designed to introduce our brand to new customers.

Additionally, each time we open a new store, we see a compelling halo effect of e-commerce growth and increased brand awareness in these new geographies. During fiscal 2025, we meaningfully expanded our retail product assortment with new product launches increasing over 50% compared to the prior year. Going forward, we have opportunities to grow the breadth and depth of our product assortment in several key areas of the home.

And finally, an accomplishment in the past year that is very personal to me is our new MillerKnoll archive space at our Michigan headquarters, showcasing over 100 years of design history. The new space has been well received by dealers, customers and design partners. It's grounded in the belief that we must celebrate our iconic design heritage and learn from our legacy as we continue to innovate for the future. We were excited to have the archive's opening featured in the CBS Saturday Morning segment on June 7.

Now I'll turn to what we're seeing in our markets. In both our North America and International Contract markets, we are cautiously optimistic, while navigating what continues to be a very dynamic macroeconomic environment. Prior to tariffs being reimposed in January, we had seen 3 consecutive quarters of order growth in the North American Contract segment. While the onset of tariffs interrupted this trend in the third quarter, we were pleased to see a return to order growth in the fourth quarter, which Jeff will detail shortly.

In our international markets, we were especially pleased to see strength and increased activity in Europe and the U.K. We are well positioned with our flagship showrooms in the heart of London's Clerkenwell Design District. Thousands of customers, A&D partners, dealers, commercial real estate professionals and project influencers came to our showroom over the 3 days of Clerkenwell Design Week in May. There's also a tremendous opportunity to grow Knoll internationally through their private office and elevated conference room solutions.

Beyond our internal growth opportunities, we are also encouraged by several external factors that we expect to work in our favor in our contract businesses. More companies are now working in the office and focused on how to attract associates through upgraded spaces and elevated experiences that support being together. A recent study among Fortune 100 companies showed that days in the office have increased 68% since 2022. Office leasing activity is rising and rent has fully recovered for Class A space. Since December 2024, BIFMA industry orders have consistently trended up on a year-over-year basis. Our internal indicators also gave us reason to be optimistic.

We are seeing the ingredients for a return to growth in contract, and we are well tuned to take advantage of the industry recovers. We have compelling competitive advantages, including an unmatched suite of products and a formidable distribution channel with world-class dealers who are well versed in the entire MillerKnoll product collective.

In our retail business, while we are similarly cautiously optimistic about the macroeconomic environment, as I have described, we have several levers we are willing to pull growth now and that will put us in a position of strength when the housing market begins to recover. At the same time, we're investing for both across our businesses, we will continue to balance our approach for the long term. We are well positioned with cash flow and balance sheet strength to capitalize on opportunities. We will focus on our customers, we will prudently manage our costs, and we will consistently deliver innovation, and we will invest for profitable growth.

To close, I'm so proud of our entire team for all their hard work and dedication in fiscal year 2025 and for the strong finish to the year. We are excited to see what we can accomplish together in fiscal 2026.

I'll now hand it over to Jeff to discuss our results in more detail and share our perspective on fiscal 2026.

Thanks, Andy, and good evening, everyone. I'll start with an overview of our performance in the fourth quarter and some full year highlights, followed by our outlook and targets for the first quarter, including our most up-to-date view on tariffs.

In the fourth quarter, we generated adjusted earnings of $0.60 per share, significantly outperforming the midpoint of our guidance, driven by better-than-expected sales and strong gross margin performance that benefited from leverage on our sales growth.

Consolidated net sales in the fourth quarter were $962 million, well above the midpoint of our guidance. Relative to the same quarter last year, net sales were up 8.2% on a reported basis and up 7.8% organically, driven by relative strength in all segments of the business.

In North America Contract, we saw both strong orders and sales, which was partially enhanced by pull-forward activity ahead of our recently announced tariff surcharge and list price increase. New orders at the consolidated level in the fourth quarter were $1.04 billion, up 11.1% as reported and 10.7% higher on an organic basis. Our consolidated backlog increased by $78 million to $761 million from improved demand in the quarter.

We were very pleased with our consolidated gross margin of 39.2% in the fourth quarter. While down slightly to last year, gross margin was up 130 basis points sequentially. Gross margin included a drag of approximately $7 million from tariff-related impacts to cost of goods sold, an amount right in line with the estimate we provided in our fourth quarter earnings guidance back in March. Given the volume of orders pulled forward ahead of our price surcharge and the normal time it takes to begin benefiting from list price changes in our contract businesses, we expect margins to be negatively impacted in the near term by tariffs currently in place, but remain confident, our pricing actions will offset these later in the fiscal 2026.

Turning to cash flow and the balance sheet. We generated $71 million in cash flow from operations in the fourth quarter, driven by our strong sales and earnings performance, and we reduced our long-term debt by $5 million. We ended the quarter with $576 million of liquidity. And in April, we amended our revolving credit facility and Term Loan A to extend their maturities to 2030. We finished the quarter with a net debt-to-EBITDA ratio of 2.88 turns, an amount comfortably under the maximum limit defined in our lending agreements.

With that, I'll now move to our performance by segment in the fourth quarter. Within our North America Contract segment, net sales for the quarter were $496 million, up just under 13% from the same quarter a year ago. New orders in the period were $568 million, reflecting growth of almost 16% over last year.

We estimate new orders in the fourth quarter benefited from between $55 million and $60 million in demand pull forward in advance of implementing our tariff-related surcharge on April 21 and our price increase on June 2. Importantly, we believe these price actions have created a sense of urgency in the customers of our North America Contract business and our internal demand indicators in the quarter reflected this customer activity.

Fourth quarter operating margin in the North America Contract segment was 7.7% compared to breakeven performance in the prior year. Adjusted operating margin improved 90 basis points in the quarter to 10%, primarily due to benefit of fixed expense leverage from higher net sales and favorable product mix, partially offset by the tariff-related cost increases.

In the International Contract segment, net sales for the quarter improved to $186 million, up 6.9% on a reported basis and up 5.5% on an organic basis year-over-year. New orders during the quarter were $190 million, an increase of 3.6% on a reported basis and a 2.1% organic increase compared to the prior year.

We were very pleased with the widespread sales and order growth in the quarter with particular strength in our European markets. Our Latin America region also delivered strong sales growth in the quarter. In contrast to the North American segment, we do not believe our International Contract business experienced any meaningful order pull-ahead activity related to our previously announced list price increase.

Reported operating margin for the International segment in the fourth quarter was 11.7% compared to 10.9% in the prior year. On an adjusted basis, segment operating margin was 12.9%, down 230 basis points, primarily from regional and product mix of sales and higher variable incentive compensation in the quarter versus last year.

Turning to our Global Retail segment. Net sales in the fourth quarter were $280 million, up 2.2% on a reported basis and up 1.4% organically. New orders in the quarter improved to $280 million, up 7.5% to last year on a reported basis and up 6.7% on an organic basis compared to the prior year.

Operating margin in the retail segment was 5.3% in the quarter compared to 6% last year. On an adjusted basis, the operating margin was 6.5% this quarter, 210 basis points lower than in the prior year, primarily from new store opening costs, lower sales in the international regions, unfavorable product mix and higher variable incentive compensation.

We opened 2 new stores in the fourth quarter, at DWR in Paramus, New Jersey, and the new Herman Miller store in Coral Gables, Florida. And as Andy highlighted in her prepared comments, we have exciting plans to grow this segment further in the coming quarters through additional new store openings and expansion of our product assortment.

For the full fiscal year, on a consolidated basis, net sales were $3.67 billion, and adjusted earnings per share were $1.95. During fiscal 2025, we paid approximately $52 million in dividends, returned approximately $85 million to our shareholders in the form of share repurchases, and reduced our total outstanding debt by $10.8 million. Capital expenditures for the full year were $107.6 million. In fiscal 2026, we expect capital expenditures to range between $120 million and $130 million. And as I mentioned, we closed fiscal 2025 with a strong balance sheet, including $576 million of available liquidity.

Against the dynamic macroeconomic conditions we faced in 2025, I'm really proud of the efforts of our teams across MillerKnoll to continue to deliver the best products and experiences in our industry, allowing us to finish the year with strength.

Now let's turn to fiscal 2026 and our Q1 guidance and outlook, which is informed by our most up-to-date information on tariffs and related mitigation efforts. Our outlook reflects the normal seasonality we experienced in the Global Retail segment as consumers shift spending to experiences and travel in the summer months. Even what remains a rather volatile environment with respect to tariff policies and geopolitical issues around the world, we are limiting our guidance this quarter to the first quarter only. We do, however, remain committed to being transparent and resuming our full year outlook for sales and earnings as visibility improves.

Taking this into consideration, in the first quarter of fiscal 2026, we expect net sales to range between $899 million and $939 million, up 6.7% versus the prior year at the midpoint of $919 million. Gross margin is expected to range from 37.1% to 38.1%. Adjusted operating expenses is expected to range from $290 million to $300 million, and adjusted diluted earnings per share are expected to range between $0.32 and $0.38.

The gross margin and EPS outlook includes our estimate of net tariffs currently in place. In total, we expect tariff-related costs to reduce Q1 earnings by between $9 million and $11 million before tax or between $0.09 and $0.11 per share after tax. To give some further context, currently, approximately 17% to 19% of our consolidated cost of goods sold is imported into the U.S. from other countries. We expect the impact from the tariff-related cost to decrease over time as our pricing actions layer into the results. Further, we believe our collective mitigation actions to fully offset these costs as we move into the second half of the fiscal year.

Another factor to keep in mind that is included in our expectations for operating expense and EPS are the costs associated with planned new store openings in our Global Retail segment. Given the time it takes to prepare a new store for daily operation, we normally begin to incur occupancy and other preopening expenses 1 to 2 quarters before the first products are sold in the store. As Andy mentioned, we're opening 3 new stores this quarter. We estimate approximately $4 million to $7 million in operating expenses tied to these new locations in the first quarter. Further, we would expect to incur similar expenses in each quarter this year, consistent with our planned new store openings. For all other details related to our outlook, please refer to our press release.

And with that overview of the performance and outlook, I'll now turn the call over to the operator, and we'll take your questions.

[Operator Instructions] And our first question comes from the line of Greg Burns with Sidoti & Company.

So I just want to kind of dig into the pull-forward effect from the pricing actions you've taken, obviously, strong order growth this quarter. Can you just give us maybe a little bit of insight into what you've seen in the early part of the current quarter? Has that slowed down? And are orders going to -- do you expect orders, I guess, to be down year-over-year because of the pull forward? How has that dynamic played out since the quarter ended?

Yes, Greg, this is Jeff. So we're 3 weeks -- we've got 3 weeks of data. And as we would fully expect, we're down mid-single digits in order entry in total at the consolidated level year-over-year during that period of time, which is in no way a surprise given the level of pull forward that we saw in the fourth quarter. So it's -- it lines right up with our expectations. Time will tell. As we progress through the quarter, our expectation is that we're going to resume growth, but we'll see where it goes.

Okay. And then in terms of the retail store openings, can you just talk about your confidence level in such, I guess, aggressive expansion this year or accelerating the expansion of the retail footprint this year given kind of the softer demand environment that we're currently in? And then could you just talk about how long it takes a store to fully mature and start to absorb some of those incremental upfront costs? And then lastly, I guess, just what are your expectations for the margin profile of the retail business in the near term, given all the store openings that you project?

You may have to repeat that 3-part question, maybe, as we lean into it. So first, let me talk a little bit about the confidence in the retail business. It takes time to land real estate and open stores. So as we pace these 10 to 15 stores over the next 12 to 18 months, we anticipate that we will start to see a little bit better housing market, and we'll start to see things calm down a little bit. So we have great confidence in that. But more importantly, we believe that our retail prospect in our stores, both the DWR brand and the Herman Miller brand lean into white space in the market that we do not see.

So right now, we are very under-stored compared to our competitors. We are under-assorted. And if you compare us to many of the folks out there in the residential home furnishings market, we're filling a need. So that gives us great confidence to open and expand. And I would say we are not moving any more quickly than we think is prudent, and we're certainly getting the best real estate as we do this. So we feel confident in how we're expanding.

Debbie, what would you add? I think there was a question on margin profile.

Yes, we've shared that our long-term goal is to be in the mid-teens from an operating income performance for the segment and our growth strategy models us towards that over the next few years. And I think if you look at where some of our competitors were when they were at the fleet size that we have today, our operating income today is in line with where they were when they were at the fleet size that we have now. So we're confident in modeling much because we're conservative and the expectation to have from these stores on the basis of current market conditions. So if market conditions improve, then we have instant upside to that strategy.

And I would also add that the assortment growth is an important lever, too, alongside store growth because our entire fleet will become more productive as we grow our assortment, and our expectations around store performance in the new markets will also improve as our assortment grows.

And I think he also mentioned about store, time to maturity.

So the time to mature -- in our current FY '26 planning, the new store possessions become less of a drag in the back half of this year. So right now, we're carrying -- in Q1, we'll carry 7 possessions that we don't have open yet. So the time to maturity on -- well, the time from possession to opening on a Herman Miller is only about 2 to 4 months, and it's about 3 to 6 months on a DWR. And then the stores become profitable within the first year, faster for Herman Miller just because it's a smaller footprint.

Okay. Great. And then just to clarify, I appreciate kind of the long-term model on where you see the operating margins heading. But should we just expect kind of margins to be around that 5% level, I guess, in the near term until these stores mature and then you start to see leverage like for the next couple of quarters? Should our expectation be that, that models -- that margins stay at these current levels?

Yes. I would hold there as you look at the shares and investment, Greg. And just from a cautious standpoint, I think, certainly in year 2 and 3, we'll see that start to pump up. But right now, that feels like a safe place to bet.

Our next question comes from the line of Reuben Garner with Benchmark Company.

Jeff, can you clarify, did you say that you guys estimated that North American pull forward was in the range of $55 million to $60 million in the quarter. Is that right?

Yes, that's accurate. Well, and Reuben, just to clarify, that's North America, but that's our estimate for the consolidated enterprise as well because we just -- there was no meaningful pull ahead at all that we estimate in the international side of the business. So yes.

Okay. And is there any way to gauge like what period that was actually pulled forward from? In other words, like was that all pulled out of the month of June? Was it pulled from things that were in the pipeline for the rest of the year? And then in the past, you guys have kind of given us some of your internal metrics like the 12-month funnel and otherwise, how have those trended? I know last quarter was a little bit more mixed, but are those still tracking positively?

Yes. Go ahead, John.

Sure. Reuben, it's John. From a -- in terms of where the orders are going to fall when they start to ship, significant amount in Q1 and Q2 and obviously, a lesser amount in the back half of the year. You might recall in the last couple of quarterly calls, we pointed at a funnel called awarded, not ordered yet. And so those were things where customers were just hesitating for whatever reason. And I think the pricing actions sort of provided some motivation to sort of get off the fence and get the orders placed.

From a leading indicators perspective, looking at the funnel, I think if you look at funnel additions, still very strong. Pricing requests were up over 35% year-over-year. Contract activations were actually up over 50% year-over-year, that's from the time we let pricing to the time we actually see an order. Mark-up activity was still very robust. So I think, overall, all the leading indicators still continue to point in the right direction.

And does anything jump out whether it's geographically or in terms of end markets within the North American Contract channel that stand out in the quarter or size of customers, size of projects, or anything like that?

Yes, we're still seeing a lot of strength in the key verticals that we're focused on, those being public sector and health care. In terms of order or project size, we've seen growth in the $1 million to $5 million category. And really across all the different vertical segments, pretty strong growth. The only one that's down slightly is banking, but that's off of a very significant comp from -- against last year.

Yes, Reuben, this is Jeff. If I can just -- sorry, I just want to jump in and add one more bit of color on the pull ahead. We still have -- if you normalize for that pull ahead, there was still mid-single-digit order growth in the Americas Contract segment for the quarter. So I wouldn't want you to walk away and assume that all the pull ahead, if you normalize for it, creates a negative story. We still felt really good about the underlying demand indicators.

Great. And then next question is on the profitability. So what you're suggesting is because of the pull forward, you're facing the tariffs, but you don't have the surcharge to offset it. How long? Is that just a 1 quarter dynamic? Or does that kind of lead into Q2 and Q3 as well when these orders are ultimately shipped?

Reuben, that's typically a 2-quarter dynamic for us. So we imagine it will be the biggest impact in Q1. It'll lessen a bit in Q2, and then we should see pretty healthy coverage in Q3 and Q4.

Jeff, would you add to that?

Yes, I think that's right. And I think it's important to note that the issue with pull ahead, the nature of pulled is that customers are trying to get their order in, in front of the effectivity of these price changes, be it a surcharge or a list price increase. So what you have is we grew backlog $78 million in the quarter. A large portion of that backlog, the large majority of that backlog was pre-pricing. So that's part of the reason why as we go through Q1 and Q2, we're going to see the sales book not have the full benefit of pricing because of that pull ahead. And that's not an unusual dynamic in this business.

Okay. And then if I could sneak one more in on the balance sheet and cash flow, starting a new fiscal year, Jeff, any thoughts on the puts and takes of what might impact free cash flow this year and/or kind of targeted leverage levels by the end of the year?

Yes. I think what I'll say is, in my prepared comments, I highlighted the fact that we were -- we leaned into share buybacks in fiscal 2025. We have -- we've made a real conscious effort to turn our attention to 2 primary areas, and part of which is informing a higher CapEx estimate, and that is the build-out of these stores that we've talked about, but also a focus on paying down debt. We were opportunistic with the share buybacks, but we also acknowledge the need to manage that debt level down, particularly in an environment like this where you have geopolitical uncertainty and so forth. So we think that, that's the prudent approach. And so those are going to be the fundamental areas we're going to focus on.

Next question comes from the line of Brian Gordon with Water Tower Research.

First, I just kind of wanted to dig in a little bit on what you saw in the sales and order growth for North American Contract. I'm trying to get a handle on how much of that pretty robust growth was kind of more transactional or shovel-ready projects and how much of it was genuine pull forward of larger projects?

Brian, this is John. I would say that most of it -- much of it obviously had been in the funnel for a period of time. So you would consider that more project-oriented business. Did we pick up some day-to-day business as a result of the pricing actions? I'm sure we did. But the vast majority of it came from project opportunities.

Okay. And my next question maybe is best for Debbie. I was kind of wondering, did you see any indications of like significant demand pull forward on the retail side? And then kind of maybe as a quick follow-up to that, has the environment been getting more promotional from your standpoint?

Thanks for the question. So maybe I'll just start by saying we're really happy with the quarter because across all of our retail brands, channels and regions, we saw growth versus last year with pricing increasing offsetting incremental discounting where that did exist. And no real pull forward to speak of outside of a small amount in our Holly Hunt business, where we do have a surcharge that was implemented in the quarter.

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

Great. Thank you all so much for your support at MillerKnoll, and we look forward to updating you again next quarter. Have a good night.

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