Earnings Call: Q3 2021

Apr 17, 2021

Good morning, and welcome to the Herman Miller's Third Quarter Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Kevin Feltman, Vice President of Investor Relations and Treasurer. Good morning. Joining me today on our Q3 earnings call are Andy Owen, our President and Chief Executive Officer Jeff Stutz, our Chief Financial Officer John Michael, President of North America Contract Debbie Probst, President of Herman Miller Retail and Ben Groom, our Chief Digital Officer. We have posted yesterday's press release on our Investor Relations website athermanmiller.com. Wherever there are figures presented on a non GAAP basis, we have reconciled the GAAP and non GAAP amounts within that release. Before I turn it over to Andy for a brief overview of the quarter, I would like to remind everyone that this call will include forward looking statements. For information on factors that could cause actual results to differ materially from these forward looking statements, please refer to the earnings press release as well as our annual and quarterly SEC and the SEC filings. Any forward looking statements that we make today are based on assumptions as of this date, and we undertake no obligation to and update these statements as a result of new information or future events. At the conclusion of our prepared remarks, we will have a Q and A session. Today's call is scheduled for 60 minutes. With that, I'll turn the call over to Andi. Thanks, Kevin. Good morning, everyone, and thanks for joining us today. While our Q3 coincided with the 1 year mark for COVID-nineteen. We have a renewed sense of optimism today as we are beginning to see a light at the end of the tunnel. We believe the changes brought By the pandemic will lead to significant opportunities for us and we're confident for all of our shareholders. We believe that our differentiated segments are both our contracts and retail audiences in every way and everywhere they want to do business with us. For the quarter, we continue to see the benefit of our diversified by business model. While consolidated sales were down 11% and orders were down 13%, growth in our retail and international businesses Helps to offset the challenging near term conditions in our North American contract business. We also continue We have a strong profitability delivering another quarter of operating margin expansion over last year. Throughout the pandemic, we've benefited from the strength of our retail call business. While the rapid rise in demand for home offices certainly drove part of our retail growth this year, it's not the whole story. We've taken a series of very deliberate actions in this business over the last 2 years and are seeing the results with sales growth of 63%, order growth of 81%, and operating margins of 20% in the 3rd quarter. It's a new day for Herman Miller Retail and we expect to see double digit sales growth and operating margins in the low teens going forward. Momentum is building for our contract business as well, with more of our customers moving into the action phase of their Curt. With vaccines ramping up, the level of urgency has skyrocketed in recent weeks and late summer and early fall have quickly become the target for many companies to return to the office. With an industry leading group of brands and a series of growth investments that we've made in our contract business over the last year. We believe that we're well positioned to fully capitalize on the opportunity in front of It was almost 2 years ago that we shared our strategy to accelerate profitable growth through our unified family of brands, a customer centric and digital first approach to everything we do and a renewed focus on our people, our planet and our communities. And while COVID has certainly thrown us all a curveball, we haven't lost our way. In fact, the pandemic has validated what we've already been working and we've intentionally shifted resources throughout this crisis to move initiatives through the pipeline faster. Today, we're a more agile organization and we're poised to emerge from COVID in a position of strength. I'm so proud of the way all of our people So I'll close with a huge thank you to the Herman Miller team around the world. And I'll turn it over to the operator for your Thank Chitung Telephone. Your question has been stated. Our first question comes from the line of Reuben Garner with Benchmark. Your line is open. Please go ahead. Thank you. Good morning, everybody. Hey, Ruben. Good morning. Maybe We can start with the stock opened up off a little bit. It's recovered some, but the two pieces of pushback that I've gotten are, I think things that you guys could help clarify here. The North American order trend is down 38%. I think you guys report the home office a little bit differently than some of your peers and so your numbers are behind what the BIFMA data I think has been During that period, Jeff, is there any way to kind of quantify what that impact is and what's your maybe more apples to apples Numbers look like and then secondly, same kind of clarification. You mentioned some things like cost coming back on and commodity inflation. In the release, I think earnings estimates already have you guys declining next year. Can you just talk about what That all means from a contribution margin standpoint as we move into your fiscal 2022? Sure, Ruben. Good morning. Let me try to take these in order. So I'm glad you asked the question on the North American contract order patterns, because I do believe Particularly through the COVID period that the BIFMA data, it's good data, don't hear this the wrong way, but certainly there is there are differences across the public company group in our space for how companies capture and report the work from home component Of the industry. And for us, because we have a separate retail segment, that volume runs through the retail segment. It does not run through the orders that we report for North America. So to your point, North American orders were down 38% For the full quarter in Q3, if you adjust for the component of kind of the work from home volume That runs through the retail piece that accounts for about 6 points of the decline In North American Contract. So it said differently, if you adjust for that, it's down closer on a pro form a basis to 32%. So let me pause there. Is that helpful? Perfect. Thank you. To your second question, and Kevin, I might ask you to lean in with a contribution margin comment here. Part of this gets difficult because order patterns are off so much and we've had such a kind of So many moving parts on the P and L with cost savings and so forth and cost coming back in, which is the nature of your question. But let me just start with some Clarification for what we expect near term cost impact to be. Now I'm talking Q4, Not fully FY 2022 in this comment, just to be clear. But certainly with the rise in steel prices, our expectation is that our 4th quarter Is going to feel pressure from higher costs to the tune of between $3,000,000 $4,000,000 So that will be pressure at the gross margin level. In addition to that, we have made the decision to begin bringing back some of those temporary costs pullback or those temporary cost reductions that we implemented earlier during the Erica are going to improve and we're going to we're seeing it. We're not seeing the order rates yet, but and John can speak to this, I'm sure, at some point about some of the green shoots that we are seeing. But all that being said, we are bringing back some of the employee benefit The cost that we had temporarily turned off, expectations are that that will drive about $6,000,000 of incremental cost sequentially in the 4th quarter compared to our run rate in Q3. And then Reuben, can you restate your question? I just want to make sure I understand what you're asking for on An FY 2022 contribution margin. Yes. So just I mean I think You've obviously your retail business, you gave some color on what margin more sustainable margin level might look like going forward in the low Teens. And so I know that, that business will on a year over year basis will be under pressure. But what do these costs look like? How does it impact your ability to expand margins at the ink levels or hold margins at the ink levels in 2022 for the business? How do we think about what that might look like with all these moving pieces. Yes. Reuben, this is Kevin. So as you know, revenue is an important variable Contribution margin as to the rate of growth. And given we don't have an FY 2022 guide out there, just consider that in the background of this answer. But the way I would think about it is over the longer run, we've tended to be a business that has 20% or so contribution margins In a normal scenario, next year as we bring those temporary costs that we've avoided this year back into the business, That's a variable that's not present typically in our year over year comparison. So without giving you an exact contribution margin assumption Because revenue does come into the equation a little bit there. We do have those costs that will feed back into the business that should be part of the math you're thinking about. We'd expect those costs to kind of weave in over the course of next year fairly ratably as well. Okay. Helpful. And maybe a question for Debbie. Obviously, Retail business has been unbelievably strong and the outlook for low teens margins, I think is going Surprise a lot of folks. Can you just maybe go into detail at what your confidence how confident you are that you're going to be able to grow that business Double digits and sustain those low teens margins as we move into 2022. I know you guys made a lot of moves. I think people looked at 2020 and Thought that the benefits there are temporary, but clearly you guys see something else. Can you just maybe elaborate on What gives you the confidence that you're going to continue to grow and sustain those margins? Thanks, Ruben. I'd love to. So obviously, I Certainly want to indicate that we believe that there is a build in our business this year due to the work from home needs and the increased spending in home. There are also indicators that those trends have some longevity to them based on the real estate data that we're seeing and other data we're triangulating from the market. Additionally, we have as you know been strategically changing the way that we run this business over the course of the last year And we're really seeing some of those changes come to fruition. And I'm also pleased to note that we're just at the beginning of those journeys. So I think there's momentum that will continue to build with some of the strategic drivers. The predominant drivers are marketing, Assortment and Web Enhancements and then you'll see us layer in some of the physical retail strategies as well, which we kicked off at the end of Q2 and throughout Q3. So from a marketing perspective, we've been moving to seasonally seasonal campaign management of over marketing and our consumer engagements. We've brought in new talent into the organization and are running our for marketing mix in a much different way. So, just as a point of reference, marketing as a percent of sales in Q3 was 4.8%. That's down from 5.3% in Q2 and down from 6.4% last year. Meanwhile, we obviously I drove $80,000,000 in increased orders in the quarter. And of that $80,000,000 in increased orders, only 10 point $6,000,000 came from organic traffic. So that really speaks to the effectiveness of our marketing demand tactics. And specifically within Q3, we had a benefit from our holiday campaign. This is a Susan, the design within Reach brand in particular, but all three of the brands have never really leaned into it aggressively. So you really see the benefits of The campaign tactics coming to fruition in a big way in Q3, but we will continue to execute our marketing tactics In a much more effective and efficient way. And what we've seen is our acquisition cost really drive down. Our acquisition cost is now down under $50 is less than half of what it was this time last year. I think any retail brand would be proud of those acquisition costs. From an assortment perspective, $47,000,000 of sales in Q3 were driven by non comp SKUs. So you're seeing our newness, our assortment newness really start to build And our assortment expansion is driving growth and we're only just at the beginning of that journey. In Q4, you really see us Begin to dive into the art category. Q1, you'll see us start to layer on a bigger effort in rugs And then we're continuing to build out our furnishings assortment across a broader range of modern style And also testing alluring in of cash and carry in some stores as we grow our accessories offering as well with the goal from an assortment perspective of being a destination for decorating the whole room, not just a source for the furniture PC. From a physical retail perspective, As you probably know, we've been testing some new concepts in physical retail. At the very end of Q2 and into Q3, Q3. We opened small format Herman Miller stores, which I came into my role pre COVID very excited about based on The trends we were already seeing in a distributed workplace, where more and more people were using their homes as places to work out of and therefore need effective Stacy to do that. And also the trends that have been emerging over the last 5 or 3 years in particular around an increased Desire for products that help improve your health, wellness and cognitive and physical performance and our products do all of those things. So We've opened several small format Herman Miller stores really focused on showcasing that value proposition of our ergonomic seating and they are more than exceeding our expectations and we're going to continue to ramp additional stores like that. In additionally, we just launched a small format design within reach both in Southampton, in the Hamptons in New York and Also a similar version of that in our new Fulton market location. That design within reach model is a model that showcases a localized assortment offering Varsysa generic offering, which was typically done in the past offered one offering across their entire fleet. So So this is a curated and localized offering that also includes the cash and carry accessories I referenced. And this type of store Costs about a 5th of what the previous DWRs cost in terms of capital and inventory investments for opening. And we're seeing some very initial, but positive performance from those locations. So we're really looking at how we optimize our physical retail as a key component of the customer journey. Certainly, what we've learned over the last year is how important that in person engagement with our product and our brands are especially in the ergonomic seeking category where most customers are purchasing that type of product themselves for the first time. Until now a procurement specialist or an ergonomic specialist at a corporate office has made that decision for the customer. And now I'm going to pass it over to Ben to talk about the web enhancements that we've seen prove very successful thus far With huge growth in over 3 13% in the quarter in our e com channels and we're just at the beginning of that with more of those enhancements coming across our portfolio of retail brands and continued enhancements within DWR where we've already launched Kazaam. So Ben do you want ask some color there. Yes, I will. Thanks, Debbie, and thanks for the question, Ruben. I want to start by just reminding everyone that we Commenced an end to end, e commerce transformation for our entire group in September 2019, Which is obviously very timely heading into the COVID period. Now as we mentioned on the last call, the first site site that we relaunched as part of that transformation with dwi.com. It is performing extremely well, ahead of our expectations. We're really seeing a step change performance improvement relative to pre launch and even when you look at the COVID period relative to pre which really gives us a lot of confidence in this strategy and our ability to continue to see step change Improvement as we roll out additional sites onto this platform. I mentioned last quarter that we're seeing a significant increase in our conversion on the site. But we're also seeing significant increases across really all of our key metrics on dwi.com, including add to cart rates, sessions with product views, site speed, which we believe is really important for our customer. And we're seeing a significant decrease in our bounce rate. So just to kind of reiterate Debbie's comment, we're really at the beginning of this journey. And certainly site launches and relaunches are a critical part of this strategy going forward. I'm excited to let you know that we are well underway in getting the new Herman Miller store ready for relaunch, and that is on track currently for Q4. And we are continually evolving our platforms and ecosystem, And particularly the technology providers that we work with, to really create a richer and more frictionless experience for our customers. So we're very excited about that. Personalization is another key component that is that we relaunched during this quarter and we're seeing great early success on that. And then Just finally, Debbie touched on assortment growth and the newness metrics. And I just really want to highlight that is so important for our e commerce business, because It's really creating a flywheel where people are finding a reason to come back and check the site more often. So all of these things are contributing and we have a lot of Confidence in the quarter is ahead. Hey, thanks Fin and Debbie. I just want to add one thing. What I hope you guys are hearing from us is that we have made some pretty dramatic changes in business. We've taken our lumps in the last two and a half years for this business to begin with and we had a significant amount of things we had to get better and change. But these are not things that were in response to COVID. These are long term investments. This is The fact that we saw distributed work coming for a while, we have been working for this and these are things that will pay off in the long run as well. So I hope you're hearing a little bit about this, but understand this is not just a flash in the pan. This is a long term change in the trajectory of this business. Great. Thank you guys for all that. I'm going to sneak one more in, if that's all right. The North American contract, you mentioned Or alluded to, I think, kind of green shoots or some optimism that things are inflecting here. Any You mentioned, I think, new orders up or the pipeline for orders up substantially, sequentially. Can you just Maybe give us a little more color on what you're seeing and when this actually might inflect and turn into business for you guys. I think that this is Probably the most concrete sign we've seen that things are turning, but any more color you could give would be great. Sure, Ruben. This is John Michael. Thanks for the question. Yes, there are a number of green shoots that we've seen emerge over the last 60 or so days. Just to give you a few data points, our Sales pipeline in terms of new opportunities Q2 to Q3 of this fiscal year is up over 28% in both number of opportunities and in volume. Mock up activity, which is where clients want to see product Before they buy it in sort of a sample or demonstration usually as part of the competitive evaluation process, We're up significantly January year over year and doubled in February in terms of year over year improvement and those are obviously Pre COVID comps, contract activations, which is when we let pricing for a project And then when orders start to come in against those contracts, change direction significantly over the course of Q3 and are headed in a positive direction. I think the anecdotally the conversations with clients as Andy mentioned in her opening comments They're concrete. They're here and now. And clients understand that They've been waiting. They've been kicking the can down the road a little bit to see what emerges, but now they know that they need to take action. And I think we'll see from the last part of your question from an order perspective, I think we'll see that begin to build through Q4, But really feel the impact in the first half of our fiscal 2022. Does that answer your question? It does. Thank you very much. Appreciate it guys and congrats on the quarter. Thanks, Ruben. Thank you. Thank you. And our next question comes from the line of Greg Burns with Sidoti. Your line is open. Please go ahead. Good morning. Relative to some of the inflationary pressures you're feeling, what are the actions that you take To close the call, have you raised price? Do you have any other offsetting cost cutting And how should we think about the timing of you closing the narrowing that price cost gap over the next couple Thank you. Hey, Greg, you're breaking up just a little bit, but I think your question is about price cost and actions we're taking. We are taking a price increase, but I'm going to hand it over to Jeff to give you details on that. Yes, yes. Good. Thanks, Greg. With respect to near term actions, look, as we have in the past, when we see major inflationary pressures like we're seeing with steel, We've had success implementing price increases to help offset that. That is in fact what we're doing. We've announced a Price increase now is not effective until the beginning of the fiscal year upcoming fiscal year. But nonetheless, we've Try to size it accordingly to the kind of pressure we're seeing. I will remind and I know you realize this, but just for others listening, It's always important to remember in the contract business that when you put a price increase in place, it's not as though you hit a light switch And immediately start to realize the benefit of that price increase that has to phase in over a period of time. We We've taken that into account obviously in sizing the price increase. So I would say we're reacting to this very much like we have in the past and we The confidence that it will be effective. And then more broadly, Look, we as a company have always and I credit our operations teams tremendously with the work that they do and our supply chain folks, They're always working toward a goal of cost reductions. That won't change for us. We're continuing to Prep for improvements and efficiency improvements and so forth. So that's kind of part and parcel with how we do business and is Expected as we move through the Q4 and into next year. Now I think as Kevin pointed out, we have these temporary Costs that are coming back into the business and to completely offset those next year with efficiency improvement that's probably a bridge too far and I wouldn't want to set that expectation. But we continue to be focused on cost reductions like we always have been and leaning out the operation. Okay. Thanks. And in the prepared remarks, you mentioned some of your, I guess, incubator projects and one you talked about was Herman Miller Professional. Can you just talk about that. It sounds like you're going after the smaller end of the market with this initiative. Can Can you just tell us a little bit more about what the go to market is for that strategy and how that might increase your total Mark. Yes. I'm going to hand it off to the agreement in a second, but I just want to touch on the innovation incubator, Greg, because I think it's a really important business model that we've set up. As you know, when you put a new idea in the middle of a big business, it doesn't necessarily get what it needs To flourish and thrive. And we've seen by setting up this sort of slot team and putting our new ideas Intuit and running them effectively a little bit separate from rest of our business. We've seen great traction. So we did that with gaming. We haven't really On the gaming business, the gaming business is incredibly successful and we're excited about our partnership with Logitech G, one of The most amazing innovative and design thinking companies when it comes to gaming peripherals. So we think there's a lot of runway there. And then Herman Mills Professional is one of the other ideas that came out of that group. So Ben you've been pretty instrumental in this, so maybe I can turn it over to you to give some color. Yes. Thanks, Andy, and thanks for the question, Greg. So in essence, HomeBuilder Professional is the E commerce business for our contract business, right? So I just want everyone to be very clear on that. And we're really committed to creating the best e commerce experience we can for the contract market. So what we're working on will provide Tailored B2B pricing, a contract focused catalog, design tools, professional grade files and specifications, So we're really trying to create a custom e commerce experience for B2B buyers in general, but Particularly as you mentioned Greg focused on our smallmedium business segment, which we believe has been underserved by our business historically and we're very focused on targeting that segment through this initiative. And really in essence what we're trying to do here is turn hermamiller.com, which as we all know is our most visited contract showroom into more of a revenue generating asset. So we are on track to launch in this quarter, so Q4. We're going to take a very agile approach to this business. Starting with an MVP launch and really beginning to build out more and more functionality over time as we learn more from how our customers behave on this platform. But I really want to emphasize too one of the unique aspects of what we're trying to do here is bring the best of Herman Miller Customer Service and the best of Herman Miller Dealer Customer Service to an e commerce experience, because we believe the future of e commerce for our business, for our customers at our price point, customer service is a huge component of that. And we feel like when we look at the marketplace right now, there are companies that are doing well in terms of technical innovation and there are traditional companies that are great from a customer service standpoint and we really want to be both. So this is a really big focus here. And as As a result of that, we've really partnered very closely with our dealer community on this initiative. They will be very much part of this. Obviously, this site will be designed to allow customers to buy now. But if we gather information during the purchasing process That these customers would be better served offline, particularly by a dealer, then we expect that this will create great data and great leads generation for our dealer community as well. So we're really excited about what this could mean for our contract business, not just in North America, which is where we're going to start, but internationally as well. Okay. Thank you. Thank you. Our next Question comes from the line of Stephen Ramsey with Thompson Research. Your line is open. Please go ahead. Hey, good morning. Maybe to start with on the long term retail growth outlook, Clearly, strong market backdrop, but then many internal improvements going on. I guess, thinking about the long term, Maybe the three factors I'd like to get some color on is contributing to the long term growth is How much of that is same store sales growth? How much of that is new store openings? And maybe how much of that is digital growth Platforms as well. Hi, Stephen. This is Debbie. Good morning. So maybe just start with a reference around our same store physical retail performance in the quarter. Our comp stores grew 18% in sales and 37% in orders despite traffic in stores being down 35%. So first of all, We're really pleased with the performance of our current comp fleet of stores. And we've certainly driven a lot of Changes in the way that we're managing those stores, compensating our sales associates, how we're thinking about selling the broader ecosystem of our digital expanded assortment offerings through those stores and we're starting to see traction in those tactics drive improved comps in our current fleet. From a long term growth perspective, as Ben indicated across our portfolio of retail brands, we've done a relaunch of the DWR site by Herman Miller and Hayre to call and that certainly drives a good element of the growth that we're projecting over the course of the next year. And then from a new store perspective, We're like I said very happy with the initial results we've seen of the smaller format testing we've been doing in Herman Miller as well as the new results we have from for our recent DWR openings. We are planning additional openings in the upcoming year, but we're obviously being Cedric. I'd say that the additional color I'd provide is that in order to continue to build Double Digit Growth. We do need some investment in these in the retail infrastructure and we need some investment in our go to market channels, digital and and physical stores obviously being those key channels. So we're very excited about the strategies that have Quite so far and the traction we've gotten and looking forward to continue to push in those areas. Okay, great. And then thinking about costs Coming back maybe for retail solely, is the retail segment running full on costs. If not, maybe where are costs not at what you may call full run rate? And what are the factors that would determine bringing those costs back to full run rate? Hey, Steven. This is Jeff. Go ahead. Yes. Let me jump in here, Debbie, real quick. I would maybe as a general characterization, I would say that the large component of Costs that are yet to return are not in the retail business. There certainly it touches the retail business, but They largely center around the North American Contract Business and to a little lesser degree International. The components that do touch retail and you You can think of this as probably pro rata by size across the whole enterprise is travel and entertainment, right? That's an area That we are including in our own calculus for what is yet to come back. And of course, Through COVID, travel has been significantly reduced, in some cases to almost nil. Now that won't stay that way forever, but I can also tell you that Andy and I are pushing the organization to think differently about I think we've all learned some new ways to do work. And so with that, we don't expect to return to necessarily But you can't run a global business without some people moving around and we expect that that's going to We expect that that's going to pick up. So that is one area where certainly the retail team will see some impact. And then there's some other employee benefits like retirement, employer paid retirement contributions and things that will affect Debbie, please. I didn't mean to cut you off, but join in. The only thing I'd add is just most of the incremental cost That we're planning going forward is variable costs associated with sales. So as sales grow, our marketing please. Got you. Helpful color. And shifting to maybe DWR contract, how that relates to the improving North America pipeline and sentiment. Is DWR contract benefiting at all from this sentiment? Or overall, do you expect as there's a shift from people going back to offices, maybe some incremental less focus on home spending. Is there maybe a reverse The fact where it softens some retail demand, but increases North America contract. Well, Stephen, so DWR contract is obviously captured in our retail segment. And DWR contract ran down 30 in the quarter. Sure. That's an improvement from where it's been trending and it's obviously an improvement from where North America contract is trending. What I will say is In recent weeks, we've seen a similar flurry of activity that John spoke to in North America in DWRC. And I think we are seeing DWRC improve slightly ahead of the rest of North America because of the large penetration of ancillary products in Catharine. And as companies are thinking about what return to work looks like, they're rethinking about a different floor plate format and one that includes much more Community and Ancillary Space. So I think we're seeing a leading indicator in the BWRC business around what we might continue to see longer Perm. Just to touch on the other audience segments of the retail business, we have what we call our residential consumer, so that's us selling at a DTC version to the end user. And that actually grew 142% in the quarter. And then our trade consumer also really revamping this past quarter growing 30% over last year. So I think between what we're seeing in DWRC and trade, we're really seeing momentum and build in the way that people are engaging with the lifestyle ancillary Sabri. Yes. And I think Debbie is touching on a really important point that I'm sure you all are hearing from some of our competitors as well, which is The need to get back to the office and the reality of getting back to the office is dawning on every CEO and every facilities planner and everyone is engaging in this conversation with urgency now, but also taking a look at their environments and realizing how they need to be different with how we'll all be working in the future. And there's certainly a spectrum of that, but A huge opportunity for us in that, especially with some of our ancillary businesses and our brands that we own like CWR and Not One L. Those. So we're excited about that opportunity going forward for contract business. Excellent. And maybe something to add on there, which I was planning to ask is What you were just talking about Andy is the North America discussions right now, how much of that is looking at large Office changes and bigger projects, how much of that would you characterize as more ancillary products and smaller floorplan changes and any leading thoughts there on the product mix being better, which may kind of help cushion pressured contribution margins with expenses coming in. John, you want to take that one? Sure. I think the certainly as companies are figuring out what their workspace needs to look like Going forward, the focus is around connection and collaboration, opportunities or spaces for deep concentration as as well as connection and community. And so when you think about those key areas, ancillary product plays a big part in outfitting those types of spaces. So we're certainly seeing momentum in the ancillary product lines. I think To your question about size of offices and those types of things, that's been an interesting conversation with clients. I think To be honest with you, it's a little bit all over the board, but early the conversation was, oh, we're not going to need nearly as much space. As we actually get into the Planning process and you begin to bring more collaborative space into the office, you find out that you may accommodate less people, but you actually need more a similar sized space because of the different type of spaces that you're creating. So I think it's very fluid and it's evolving. But definitely ancillary will play a significant Pardon the conversation. And if I could just tag on to Andy's comment about CEOs, I think one of the things we're seeing is A real sense of urgency or knowing that it's important to get this right, as right as they possibly can the first time. And I think it's a real plus for the contract industry in general as well as our company that This is an issue that's top of mind in the C suite. And space is not always in the top of mind The C suite, but I think it's going to play a critical role going forward. And I think company's leadership understands that. Yes. And Stephen, I would say we're seeing projects coming from large companies, small companies, it's really across the board. Everyone is thinking about it. So It's not just segmented in one area or another. It really is across the board. And I'd just add as companies are starting Kate, what their long term policies are around where their employees work from. And we believe that's also an indicator that there's longer term momentum and this work from home trend that we've been seeing. So we actually expect to see 2nd wave of purchasing Orenza category as policies start to get defined. Very helpful. Thank you. Thank you. And our next question comes from the line of Bud Koch with Water Tower Research. Your line is open. Please go ahead. Good morning. I hope you can hear me. Congratulations on the quarter. It's been a long time. How are you? I'm fine. Thank you, Andy. I hope you are as well. And Jeff, I hope you are as well. Congratulations on navigating a difficult period. I want to go back a little bit in history because as I remember Herman Miller for the last decade Really talked about the living office, which I think John talked about is collaboration, which was The whole office contract community was talking about that. And COVID obviously makes that a much more challenging Ishu. And I think you talked about space. And as I saw over the last several decades, the amount of space was Top of mind of at least the real estate people of most corporations. So I really am interested to get a little more color for you on those conversations, Particularly with the C suite, which I think is important because how will the office look in the future? What's it going to be? Are we going to have more architecture and go back to private office other than benching and those kinds of close quarters or what do you see as the future and how does your mix go into I do have some other questions based upon the financials that I'm looking at. Sure, Budd. This is John Michael. I think there's clearly a couple of principles emerging in terms of how the new workplace is going to be planned. One of them is that of what we would call de densification. And this is a term that we're hearing a lot from the commercial real estate community as well. And that is To your point, historically, the focus has been how do we get more people in the space, how do we drive down square footage per person, etcetera. I think it's become clear to everyone that for both health and safety reasons as well as for the purpose of the space, That we got to reverse that trend to some degree. The other thing we're hearing a lot about is amenity rich and that is as the office becomes not a place that I have to go to 5 days a week, but a place that I want to go to To support the type of work that I need to do, it has to be a destination. It has to be an attractive place for employees to want to go. So I think those are our 2 key themes that we hear and that obviously Translates into what the new workplace will look like. I think every company's got a slightly different interpretation What that might be, but I think those two themes are prevalent in all the things that we're hearing. Sure. John Michael, how does that translate Product, what kind of products do you have to accommodate those? Actually, I think they're very new principles as I think you identified. Yes. So the good news is many of the investments we've made over the last several years in terms of Rounding out the brands in the Herman Miller Group, fit very nicely into the types of spaces that we are designing And seeing design by independent designers, obviously collaborative space is more prevalent. So brands like 1 and HAY and Geiger ancillary products fit perfectly into those types of Certainly amenity type spaces be that coffee bars, lounge areas that types of things, the brands we have in the Herman Miller Group As well as part of the DWR contract offering are significantly helpful there. And the other thing we're seeing is The company is really trying to figure out how to leverage and take advantage of outdoor space. And the products we have added through the in the portfolio there are significant And as that space becomes not just a place where people want to go and get a breath of fresh air, but actually where they may want to go and work when The weather is just right. Yes. And Doug, it's interesting. We've been through one of the most tragic and difficult social experiments probably of our time. I think one of the things we're also seeing is that there is a real focus, as Debbie mentioned, on health and wellness and how Things like ergonomic seating when you are sitting and when you are focusing on work in a heads down way become really, really important. And so if you look at these workplaces with collaborative spaces and amenity rich environments, we also need to include almost library like settings for heads down work They're really focused on how you can do that work in a healthy way. Because many, many folks that have been working from home, for some people it's been easy and for some people it's been And what suffered for many people is the heads down work, especially millennials, kids with young kids, things like that. So I think it's really Spectrum of product ranges and I think as John said, we're happy with what we've done to innovate around all of these categories over the Corey, over the last several years. This is all potentially very exciting because but I'm curious, you have Always evidence the ability to think forward and I think it changes the nature of the Herman Miller organization. I mean you separated retail from contract when you made the bold decision to go heavily into DWR. But now with all of this, it seems to me that there has to be emerging. Am I correct? Is there Change in the structure of the organization, can you talk a little bit about that? Not that I anticipate, Budd. Okay. Not that you you won't talk about it or there isn't a change? I didn't anticipate changes. Okay. If you could give us a little bit of a color on the international flavor of where that where the results were better and not so good? Yes. Yes. Hey, Budd, this is Jeff. I'll take this one. Well, maybe I want to start with just a shout out to the team in international. They continue to perform quite well. And certainly in relation to what we've seen in North America, I think in a lot of ways they've Made some of their own luck through much of their focus and investment in the past, I don't know, 18 months or so, Particularly in places like Continental Europe, Western Europe, where not only do we have do we tend to sell a strong mix of seating products, which is a good thing from a margin perspective, but also the team there has done a really nice job trying to find new dealer touch points. And really I would say maybe just focusing on deeper penetration in that particular market. So this may come to some Surprise to folks, but Western Europe has actually been an area of strength for us for the past several quarters. The other thing I would Parts of Asia Pacific, not the whole of Asia Pacific, obviously, that's a big geography, but Greater China, Japan, Australia. Those have been strong markets for us. We certainly have seen some laggards as well. Maybe I should kind of flip the other parts of Latin America, India, the last quarter or so that tends to be a very project driven part of the world. And certainly, this past quarter, it was down. But that gives you a flavor kind of as you walk around the globe is where we're seeing strength and where we're seeing some weakness. Okay. And just a couple of specific questions. You typically spend somewhere in the $70,000,000 to $75,000,000 a year in R and D, if I remember right. Is that about where you're spending this year? Or is it going to come in lower Yes. I think a little lower than that, but I don't have the A number to give you here, but It feels like that's a little high. I thought you were going with CapEx with the question by the way. Well, that's next Jeff, that's exactly where I'm going. The investing cash flow differential was eye popping. So What's happened to CapEx? Because we don't have the I don't think we have a detailed cash flow right now. Yes. Kevin, Kevin, I don't know if you want to add any comments here. Certainly from just a pure CapEx standpoint, dollars 55,000,000 to $65,000,000 would be the kind of full year expectation. But go Yes. And we've had a little back half activity, but related to particularly an exciting opening, we opened up a new space in Fulton Market That's both commercial showroom as well as all three of our retail brands in the Chicago area. And so The investments related to that were part of the numbers that you saw this quarter as well. I got you. And Jeff, I think you owed or at least you got short term debt of about $50,000,000 You paid down a lot of debt this year, but the $50,000,000 was kind of on the balance sheet at the end of the year. I take it the $200,000,000 or some that you might have already paid off Was voluntary or was not necessarily due. Is that $50,000,000 going to be paid in the Q4 or? Yes. We had some notes that were Due beginning of March or sometime in the month of March, those were paid, Budd. And then as you said, the big pay down that we saw Earlier in the fiscal year and that came as a result of us drawing heavy on our line at the early part of COVID like so many companies did as we were concerned about liquidity. And once we got a degree of comfort, we've paid that down. So that's And once we got a degree of comfort, we've paid that down. So that's what you're seeing. And you still have cash, you have A repurchase authorization, but I don't think you bought any at least as of the 3rd quarter as of the second quarter, you hadn't bought any stock. What's the plan on that for the rest of the year? Yes, Budd. This is Kevin. So definitely the goal is To not build a trove of cash, but as we navigate towards the end of the pandemic and look to gaining confidence In North America, we'll continue to look for opportunities to deploy that cash, whether it be M and A opportunities. We have a team that Continues to screen for those types of things or cash returns to investors either through dividend or share repurchases. Okay. Thank you very much. Good luck and congratulations on navigating a pretty challenging environment. I think that's an understatement. Thank you, Budd. Thanks, Beth. Nice to hear from you. Thank you. Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to Andi Owens for any further remarks. Well, thank you all for joining us on the call today. We appreciate your questions and your continued interest in Herman Miller. And we're looking forward to updating you again next quarter. Hope Today's conference does conclude the program and you may all disconnect. Everyone have a great