Good morning, and welcome to the Herman Miller's First 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 Veltman, Vice President of Investor Relations and Treasurer.

Good morning, everyone. Joining me today on our first quarter earnings call are Andi Owen, our President and Chief Executive Officer; Jeff Stutz, our Chief Financial Officer; and John McPhee, President of our Retail business. We have posted yesterday's press release on our Investor Relations website. Some of the figures that we'll cover today are presented on a non-GAAP basis. We've reconciled the GAAP to non-GAAP amounts in a supplemental file that can also be accessed on the website. Before we begin our prepared remarks, I would 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 we issued last night as well as our annual and quarterly SEC filings. At the conclusion of our prepared remarks, we will have a Q&A session. Today's call is scheduled for 60 minutes and we ask that callers limit their questions to no more than three to allow time for all to participate. With that, I'll now turn the call over to Andi.

Good morning, and thanks for joining us today. I'll begin the call with highlights of our quarterly results, followed by sharing progress that we've made in our strategic priorities. In the first quarter, we built on our momentum from last quarter by starting the fiscal year with strong growth in sales and orders, led by our North America and Retail businesses. Consolidated sales grew 8% organically over last year, while orders were up 7%. We were especially pleased to continue generating positive results in the face of ongoing global trade tensions and a broader geopolitical environment. Looking ahead, we're also seeing healthy levels of project opportunities in the pipeline. We've been encouraged to have more discussions with our customers about how we can assist in their efforts around attracting and retaining talent and help them design flexible, high-performing workplaces. These discussions often highlight the power of the entire Herman Miller Group of brands to meet those needs. Complementing the growth in sales and orders, we posted improved gross margins this quarter, which were up 70 basis points over the same quarter last year. At the same time, our team continued to manage operating expenses very well. The combination of these factors helped drive another quarter of operating margin expansion with reported operating margins of 160 basis points above the same quarter last year, and adjusted operating margins that were higher by 90 basis points. We reported earnings per share on a GAAP basis of $0.81 during the quarter. On an adjusted basis, earnings per share of $0.84 reflected an increase of 22% over the same quarter last year. On the strategy front, we remain focused on the four strategic priorities that we shared at our May Investor Event. Let me summarize them briefly for you. First, we're being very intentional about unlocking the power of one Herman Miller to help leverage our amazing portfolio of brands and global capabilities to their fullest. Second, we're building a customer-oriented and digitally enabled business model aimed at reaching our aspirations in both the contracts and retail spaces. Third, we have clear opportunities to accelerate profitable growth in each of our business segments. And finally, we believe now is the right time to reinforce our commitment to our people, our planet, and to our communities in a more integrated and deliberate way than ever before. I'd like to share a few highlights of our progress over the last quarter. Our new digital platform to help our North American contract dealers to visualize our product offerings across all of our brands remains in an excellent adoption curve. Our dealer network users created over 50% more projects than last quarter with the new tool, creating over 3,500 projects since it was launched to support their selling efforts. As a next step in this rollout, we'll expand these capabilities in the EMEA region by the end of the fiscal year. This is just one of the ways that we are looking across our entire operation to ensure that we're easy to do business with for our customers, our dealers and our architect and design partners. Our profitability improvement initiative continues to gain traction as one of the key drivers in our aim to accelerate profitable growth. As we evaluate our progress to-date, we're seeing greater potential for savings and are increasing our savings target. Our original aim for $30 million to $40 million of growth savings has been revised to a target of $40 million to $45 million. We expect to achieve this run rate by the end of fiscal 2020 and finish the first quarter with an annual run rate savings of $36 million. As a reminder, in addition to supporting bottom-line improvement, these savings are also aimed at helping fund growth initiatives and offsetting inflationary pressures such as tariffs. We have a long history of seeking to create a positive and sizable impact for our people, planet, and the communities that we serve, while at the same time creating value for our customers and our shareholders. As a result, we were encouraged by the recent business roundtable statement on the purpose of corporations to lead their companies for the benefit of all stakeholders. We have a number of initiatives we are working on around those priorities. For example, we've been exploring the potential for a broader plan around reducing and ultimately eliminating our use of single-use plastics across our entire organization. As an initial step, we largely limited single-use water bottles across our corporate offices. I've got to mention, John McPhee has joined us today to share more about our growth trajectory for the Retail business. So let me turn the call over to John to provide some additional background.

Thank you, Andi. With sales growth of over 10% last year and 12% this quarter, the Retail business has been and continues to be a growth engine for Herman Miller. Importantly, there are a number of initiatives that we believe will help continue that momentum. First, our new state-of-the-art distribution center in Batavia, Ohio, was fully operational at the end of the first quarter. While this transition has required short-term investments over the past couple of quarters, it better positions our business to provide enhanced service and reliability to our customers over the long-term. At the same time, the license that we acquired last year for the rights to bring the HAY design brand to North America is gaining traction. After establishing a HAY e-commerce site last year and opening the first two HAY studios in North America, we will be opening our third HAY studio early this quarter, which will be located in the Lincoln Park area of Chicago. HAY's product line has been an important contributor to our growing Design Within Reach contract business, as its furniture designs are a great fit for the residential styles, but more offices are including them in their floor plans. In addition to our early efforts for the HAY brand, we opened three new Design Within Reach studios in the fourth quarter last year. While still in the early days, these studios represent promising locations for our brand and are off to a good start. One area where we've experienced pressure on our gross margins is related to net shipping costs. A major source of this pressure stems from growing consumer expectations that the products they purchase should come with free delivery. Compounding this issue is the fact that over the past several months we've experienced increasing costs from freight providers. To help address this, we are currently piloting a range of shipping models, where we expect to gain important knowledge over the coming months about how to better position product and delivery pricing for our space. On the cost front, we are in the midst of evaluating strategic sourcing strategies and optimizing our outlet store footprint to minimize shipping costs related to returns. Finally, we've been building new capabilities across our team with recent additions to our sales and marketing leadership team, bringing fresh perspectives compared to our existing knowledge of the market, while we are partnering closely with our Chief Digital Officer to build new digital capabilities, including initial work around optimizing our e-commerce platforms, and mapping customer journeys, with a goal of finding ways to make the buying process as seamless as possible for our customers. On the profitability side, our investments in our new distribution center, ramping up HAY and the initial drives on earnings from studios that have been opened for less than a year and related pre-opening costs were an estimated $5.5 million during the quarter. Even after considering these short-term investments, our operating performance is not where we want it to be, and we are laser-focused on driving operating margin improvement in this business. As we continue to lean into scaling the business, we see the opportunity over time for high-single-digit operating margins for our Retail business. At the same time, I'm energized by the passion that our Retail team brings each and every day to make authentic modern design accessible to our customers. With that Retail overview, I'll now turn the call over to Jeff for a further discussion of our financial results in the quarter.

Thank you, John. Good morning, everyone. Consolidated net sales in the first quarter of $671 million were 7% above the same quarter last year on a GAAP basis, and up 8% organically after adjusting for the impact of year-over-year changes in foreign currency rates. New orders in the period of $677 million were 7% above last year. Within our North America Contract segment, sales were $458 million in the first quarter, representing an increase of 9% from last year. New orders were $468 million in the quarter, up 10% over last year. Order growth in North America was broad-based across all project size categories, and from a sector standpoint, was led by business services, information technology, and the U.S. Federal Government, partially offset by lower demand in healthcare and financial sectors. Our International Contract segment reported sales of $114 million in the quarter, a decrease of 1% compared to last year on a reported basis and slightly above last year organically. New orders of $117 million were 7% below the same quarter last year on a reporting basis and 5% lower organically. I think it's important to note that the International business faced challenging growth comparisons for the quarter. To put this in perspective, in the first quarter of last year, the International business posted organic sales and order growth of 22% and 14%, respectively. We believe this is important context for you to consider as you evaluate the performance of our International business this quarter. To be clear, this business has been a key contributor to our growth in recent years, both on a top and bottom-line perspective. And tough comparisons aside, it factors heavily into our strategy for driving continued growth in the future. With that background, lower year-over-year demand levels were experienced in the EMEA region as well as India, while we’ve continued to see growth in the rest of Asia Pacific, Mexico, and Brazil. Our Retail business segment reported sales in the quarter of $99 million, an increase of 12% from the same quarter last year. New orders for the quarter of $92 million were 11% ahead of last year, and sales growth for the quarter was primarily driven by growth from Design Within Reach contract, the HAY brand, new studios, and outlet stores. As John mentioned earlier, the first quarter reflected investments in new studio growth, a new warehouse, and launching the HAY brand, all of which are initiatives that we expect will support continued sales growth and improved operating margins as we move forward. From a currency translation perspective, the general strengthening of the U.S. dollar relative to year-ago levels was a headwind to sales growth this quarter. We estimate the translation impact from the year-over-year changes in currency rates had an unfavorable impact on consolidated net sales of approximately $2 million in the period. Consolidated gross margins in the first quarter were 36.7%, reflecting an increase from 36% in the same quarter last year. This gross margin expansion was driven by manufacturing leverage on higher production volumes, favorable price realization, and lower steel costs, along with our ongoing profit improvement initiatives. These benefits helped mitigate gross margin pressures at the consolidated level from tariffs and within our Retail business from increased net freight expenses and transition costs related to the new distribution center. Operating expenses in the first quarter were $184 million compared to $178 million in the same quarter last year. The current quarter included $400,000 of special charges related to the vesting of key employee incentive expenses associated directly with our CEO transition. By comparison, we recorded special charges totaling $5 million in the first quarter last year. Exclusive of these items, the year-over-year increase in operating expenses of $11 million resulted mainly from higher variable selling expenses and costs in our Retail business related to occupancy, marketing, and stocking for new Retail studios, and the launch of the HAY brand in North America. Restructuring charges recorded in the first quarter of $1.8 million related to actions associated with our profit improvement initiatives, including an early retirement program initiated last quarter within North America and facility consolidation projects in the UK and China. On a GAAP basis, we reported operating earnings of $60 million in the quarter compared to operating earnings of $46 million in the year-ago period. Excluding restructuring and other special charges, adjusted operating earnings this quarter were $62 million, or 9.3% of sales. By comparison, we reported adjusted operating income of $52 million or 8.4% of sales in the first quarter last year. The effective tax rate for the quarter was 21%. Finally, net earnings in the first quarter totaled $48 million or $0.81 per share on a diluted basis, compared to $36 million or $0.60 per share in the same quarter a year ago. Excluding the impact of restructuring and other special charges, adjusted diluted earnings per share this quarter totaled $0.84 compared to adjusted earnings of $0.69 per share in the first quarter of last year. With that, I'll turn the call over to Kevin to give us an update on our cash flow and balance sheet.

Thanks, Jeff. Before I review our cash flow and balance sheet highlights, let me start with a brief overview of a recent refinancing transaction. Effective on August 28th, we refinanced our existing revolving credit facility. As part of this transaction, we upsized our revolver by $100 million from $400 million to $500 million and extended the maturity of the facility by 5 years to August of 2024. After this transaction, the available capacity on our facility stood at $265 million at the end of the quarter. With that background, let me move to commentary on the first quarter. We ended the quarter with total cash and cash equivalents of $160 million, which was slightly higher than the cash on hand last quarter. Cash flows from operations in the first quarter were $53 million, reflecting an increase of 60% over the same quarter of last year. Increased earnings were the primary driver of higher operating cash flows in the quarter. Capital expenditures were $90 million in the quarter. Cash dividends paid in the quarter were $12 million. As a reminder, last quarter, we announced an increase of 6% in our quarterly dividend rate that will be paid beginning in October. This increase brings our expected annual payout level to approximately $49 million. We also continued our share repurchase program with repurchases of $8 million during the quarter. We remain in compliance with all debt covenants. As of quarter-end, our gross debt to EBITDA ratio was approximately 0.9 to 1. Given our current cash balance, ongoing cash flow from operations, and total borrowing capacity, we remain well positioned to meet the financing needs of our business moving forward. With that, I'll turn the call back over to Jeff to cover our sales and earnings guidance for the second quarter of fiscal 2020.

Okay. Thank you, Kevin. We expect sales in the second quarter fiscal 2020 to range between $685 million and $705 million. The midpoint of this range implies an organic revenue increase of 7% compared to the same quarter last fiscal year. We expect consolidated gross margin in the second quarter to range between 36.6% and 37.6%. This midpoint gross margin forecast is 100 basis points higher than the second quarter of fiscal 2019 reflecting improved production leverage, lower steel prices, and net benefits from our ongoing profit improvement initiatives. Operating expenses in the second quarter are expected to range between $189 million and $193 million. We anticipate earnings per share to be between $0.85 and $0.89 per share in the period and our assumed effective tax rate is expected to be between 21% and 23%. With that, I'll turn the call over to the operator, and we'll take your questions.

Thank you. And our first question comes from Budd Bugatch with Raymond James. Your line is open.

Good morning, Andi. Good morning, Jeff. Good morning, Kevin. A couple of questions if I could. Let's talk a little bit about gross margin, it's most notable in terms of segments. In the Retail segment, you addressed it qualitatively and perhaps directionally. But can we get a little more clarity on maybe some data on the impact of commodities, tariffs, and what's the new distribution center transition costs would be. And what that looks like going forward for the next quarter and the next couple of quarters?

Hey, Budd, this is Jeff. I'll start. John is here, so feel free to add anything, John. Just to clarify, Budd, do you want information specifically about Retail, or are you looking for an overview of cost price pressures and benefits for the entire consolidated group?

Both, if I could. I mean, we have this segment model within the company, and we obviously like to carry that forward for consolidated results.

Yes. Let me begin with the consolidated numbers, and then we can discuss the Retail segment. For the quarter, comparing year-over-year, I'll provide an overview of the key contributors to the gross margins. Overall, we saw an increase of about 70 basis points. Tariffs applied about 90 basis points of pressure year-on-year before any of our actions, which I will discuss further in other categories. In the Retail business, we noted that net freight pressures contributed approximately 50 basis points of pressure at the consolidated level. The relocation of the distribution center itself likely added another negative 40 basis points year-on-year to the gross margin. On the positive side, a combination of profit improvement initiatives and specific pricing actions taken in the business resulted in about 210 basis points of benefit year-on-year. Additionally, steel and commodity prices provided about 40 basis points of support to our gross margins. So, if I did my calculations correctly, that should bring you close to the right figures.

We have 250 positive factors and 130 negative ones, which gives us a difference of 120. What am I overlooking? Also, don't forget about the negative impact of tariffs, which accounts for another negative 40.

Let me just walk you through it one more time here quick, just so that we're all on the same page. Tariffs of 90, pressure; freight related expenses in the Retail business, pressure year-on-year of about 50 basis points; the DC moves within the Retail business about 40 basis points; pricing and profit improvement initiatives collectively, benefit year-on-year of about 210; and steel and commodities account for another about 40 basis points of benefit.

Got you. Okay, that's right. I missed the 50 as separate item. Okay. That's very helpful. And going forward, Jeff, how do you think they play out? What happens as you look forward?

Yes, certainly. Our guidance for the second quarter indicates several key assumptions. We believe tariffs will continue to exert year-on-year pressure, estimated at around 60 basis points. The freight pressures within the Retail business are expected to be similar, likely causing a year-on-year impact of approximately 50 to 60 basis points. Pricing and profit initiatives are also anticipated to yield benefits year-on-year, estimated at about 190 to 200 basis points. Additionally, we expect to see some improvement from steel and commodity prices, primarily driven by steel. The steel index has been trending down, suggesting we could experience around 70 basis points of advantage next quarter. However, we also anticipate other factors, including changes in mix, could contribute approximately 30 basis points of pressure. Overall, our guidance projects an improvement of about 110 basis points year-over-year.

And then DC move, the quarterly, that goes away.

Correct, the DC move is largely done at this point. And then John, I don't know if you’d add anything to that at all? Any additional color on that?

It was a huge undertaking in the quarter. But we moved about 700 containers worth of merchandise, besides the regular ongoing receipts of new goods coming in from the old facility into the new state-of-the-art facility in Batavia, Ohio. I was down there last week. It's up running and really will be a positive going forward, while it was a drain during the quarter.

The transition costs were mainly due to the freight involved in moving goods, which are not recurring. That is the essence of the costs.

That would be one of the elements. We also of course, on a GAAP basis, were paying double rent. So we're paying rent on the old facility and the new facility. And just with the cost of getting everything put away and into the new locations. So all the subs molded with that move. But we are completely out of the old facility at this point and fully operational. We'd love to have you see at some point out of the new facility.

And is there a delta in depreciation now that the new facility is up and operational? How does that work?

Yes, Budd. There is going to be some additional depreciation drag. It's included in the guide. I don't have that number off the top of my head. It's going to be incremental, a bit higher than the old as you would imagine.

Okay. Just a couple of other questions. I know, I'm going to limit myself to three I think. The digital efforts which is obviously of interest to many investors. How is that working in the Retail side? Can you give us some color of the mix of e-commerce business, what are you seeing on that mix? And since DWR is both a retail business and ultimately, maybe some contracts, can you give us some flavor as to how those revenues and profitability are working? Because obviously, the profitability is a major issue.

Yes. Let me begin with some insights on our digital transformation initiatives before passing it to John. We don't provide segment breakdowns for this business, but I can share that we've initiated a significant effort to enhance our e-commerce experience. This includes improving customer journeys and functionalities such as new visualization and configuration capabilities, as well as expanding our e-commerce presence across various brands and regions. It's a substantial undertaking that is currently in progress. On the contract side, we are focused on the ongoing adoption of this MRL and, as mentioned in our prepared remarks, we will continue to expand internationally. We are also planning to introduce two senior data analytics positions and enhance our data analysis capabilities. This will complement the upgraded e-commerce platform by bolstering our data analytics team. Additionally, we are conducting A/B testing to optimize our retail shipping models and evaluating shipping freight and revenue. We’re exploring various options to inform our next steps in this area and are also working on a new pricing and products platform to consolidate all products in one database for easier access across brands, enabling us to price more efficiently. These efforts are extensive and aimed at enhancing customer experience, increasing speed, and improving our understanding of customer needs. Furthermore, we are investing in the IT backbone to enhance our product management and dealer interactions on the contract side. E-commerce is expanding rapidly, as seen with other retailers, and we believe that HAY will continue to be a significant player in the e-commerce arena. We expect to see growth in both retail and e-commerce sectors. John, would you like to add anything?

Yes, I would just say that we're looking for both quick wins and long-term wins. And so, we're implementing at the end of this month a series of changes to the dwr.com site first. And then based upon success there, we'll be rolling that out across our other platforms hermanmiller.com and hay.com. And then there are other projects that will take a little bit longer. And as Andi mentioned, going to one Herman Miller and being able to share product information seamlessly across our businesses will be a huge advantage going forward.

Okay. I'm sure others will delve into more specifics on the e-commerce side. Just to ask one last thing, Kevin, you mentioned the new revolver. Are there any changes to the interest rate structure related to that debt commitment fee differential or the rate differential?

Yes, we increased the new deal by $100 million to enhance liquidity. Our interest grid has improved slightly in a few areas. We are currently at our position on the grid, and it will generally remain consistent moving forward in terms of interest expense.

And anything on the commitment fee since you've upsized it? Do you have more interest expense from that?

The amounts were somewhat similar to what we paid last time on a larger deal. So the basis points came down a bit. So that will flow through at a pretty similar run rate.

Thank you. And our next question comes from Steven Ramsay with Thompson Research. Your line is open.

I wanted to start with the specialty, the old specialty segment inclusion in North America, how the turnaround in those units is going. I mean, clearly, good to see a strong result from the whole segment when you include the old segment in. So just trying to get color on the headwind of those segments and the benefit if there was improvement?

Hey, Steven. This is Jeff. I'll start with a few comments and then Andi will chime in. I want to be clear that we're reporting the business based on the combined segment now, so I won't provide a lot of details on the individual businesses. However, I can say that on the contract side, all of these businesses are primarily contract-focused and are experiencing growth rates consistent with what we are discussing overall. There has been a positive uplift in most of these businesses. As you're aware, we have a subsidiary focused on healthcare that has seen solid top-line growth as we closed the last fiscal year, although we faced challenges in translating that into bottom-line profitability. We are actively working on that and have made some progress. I can't provide detailed insights on each business, but generally, they are reflecting the contract growth we've reported overall.

Yes, I would say, we see nice growth across all the segments. But to add to that, Steven, what we've also seen as we think about one Herman Miller and we bring all of these contract partners under one leader and one sales force, it’s how we're showing up to the customer, how we're showing up to the A&B community. We've really simplified our approach and we've made it easier for them to access many of these brands and, in some cases, I think built awareness that we are all part of one group. So, I think that piece of ease of operation and efficiency is definitely showing up across the board.

Excellent. I know this is a sensitive topic, but could you discuss any challenges related to pricing in recent months? It seems there is some resistance to pricing from various companies and channels as new tariffs are being implemented.

None that we've seen at this time.

Great. In International, was the top line performance solely a result of comparisons, or is there a fundamental slowdown in demand? Regarding the improvement in gross margin, with the slight decrease in sales, is that simply due to the product mix, or is it related to pricing adjustments you have implemented previously?

I would say primarily comps, Steven. If you look at the performance in International in Q1 of last year, the two-year comps are still in the 20s, which we're pretty happy with. We had some very large projects in our EMEA region last year. But one place where we have seen slowdown, which is no surprise, is the UK and that's been happening a while with Brexit uncertainty. But we still see strong growth in APAC and LatAm and we have overall a lot of confidence in our international businesses. From a gross margin perspective and Jeff, please add color to that, we've had a lot of efficiency that we've seen from our combination of our manufacturing facilities in Dongguan in Asia. And that's really helped us to capture some increased profitability across the international region as well. And I would just say to shout out to the international team and our teams in general, we've done an excellent job of managing operating expenses and profitability this quarter in the face of some really interesting challenges. So I think the team deserves some credit for their ability to turn that profit performance with declining sales.

Yes, this is Jeff. I think that's accurate. One additional point I would make regarding gross margin is that for a long time, this business was not generating enough volume through its various operations to show a similar leverage story as we typically see in our North American manufacturing. However, we are now seeing more volume in the factory. The operations teams have done an outstanding job, and I believe we are experiencing leverage benefits similar to what we historically achieved.

Thank you. And our next question comes from Matt McCall with Seaport Global. Your line is open.

I want to follow up on Steven's questions. Jeff, when you explained to Budd about the different factors affecting the situation, you mentioned 210 basis points from price and profit improvement. Can you tell me if the price alone was sufficient to cover your costs without considering inflation or the impact of tariffs? Did the pricing alone remain positive without the profit improvement efforts?

Yes. Yes.

Okay, I should have followed that up with, if so how much?

That’s no.

That's why I asked it. Sorry, yes, but what was the price cost benefit? And when you consider the price cost outlook, based on what you mentioned about steel, how does that affect the pricing side?

Yes. Probably 100 basis points of the number I gave you, also net of the tariff impact.

And was that the first quarter? What about the guidance?

Of the same order magnitude, Matt.

Yes, for sure.

Okay. And then last one. You increased your savings target. What led to that change? How has your outlook changed?

Yes, Matt. This is Jeff again. It kind of alludes to pricing. I think our pricing realization has been a bit better than we had earlier anticipated. And as a result of that, that really accounts for the majority of the difference.

Okay. So pricing is lumped down with the profit improvement efforts?

I grouped them together because there are certain pricing actions we've taken that fall outside the specific profit initiatives we've discussed. However, many of our profit improvement initiatives are closely linked to pricing actions, making it challenging to clearly separate the two. Internally, we've considered them together in how we've managed the business. Yes, there are some initiatives in both categories.

Thank you. And our next question comes from Greg Burns with Sidoti & Company. Your line is open.

I have a question about the trends in retail demand. It seems that the growth in comparable brand sales has slowed down a bit. I would like to hear your perspective on the growth outlook for the Retail segment. Do you believe you can maintain the current pace, considering that the comparable brand sales have been lower than the reported revenue growth? Thank you.

Greg, hi, this is John McPhee. So one of the things with the DC move was, it slowed our deliveries during the quarter, which impacts future sales going forward, right? We had to publish that due to the transition, our delivery times would be a little longer than historically they would have been. And so, we had some pressure there. But overall, I believe the trend is positive and certainly having the move behind us will allow our team to put 100% of their focus back on selling. So that should be positive going forward.

Okay. And then from a profitability perspective for that segment, I know that the DC move is behind you, so maybe some of the duplicate costs are rolling off. But what's your view on what your profit outlook for that segment of the business for the remainder of the year? Do you foresee that getting back to positive operating earnings sometime this year? Thank you.

Hey Greg, this is Jeff. We highlighted several factors in our prepared remarks that we believe are temporary pressures for the business. Among them are some near-term issues related to the DC move, which are now behind us. There are additional ongoing costs, but we will work towards improving profitability as we start to leverage those costs. We mentioned our investment in launching the HAY brand as an example. The presence of six stores today that weren't operational a year ago, along with well-documented data across our store portfolio, indicates that it takes time for those stores to mature. If we exclude those factors, we anticipate our guidance for Q2 to suggest something close to a breakeven operating margin for the quarter. As we move into the second half of the year, we expect to see an increase in profitability related to those investments, targeting margins between 3% and 5% by the time we reach Q4. Our goal is to keep improving beyond that, which we believe is achievable, although it will take some time.

And then, are your dealers currently selling HAY, do they have access to sell those products yet?

Yes. We localized several families of products throughout the first couple of quarters in a year and they have access to those products, as well as products that we can manufacture, outsource and we're ramping up sales and our dealer network in North America. And that, as we work towards expanding, HAY will continue to have that same presence in other countries in the world. But so far, HAY has been very strong.

You mentioned the digital initiatives on the Retail side. Could you tell us what percentage of your dealers have adopted the new digital tools on the contract side? Additionally, can you provide some insight into how these tools have influenced your orders? Have you noticed an increase in wallet share among the dealers who have embraced the new digital tools? Thank you.

I can't comment on an increase in wallet share at this time. However, I can mention that our dealers have adopted the new tools, and most of them continue to do so. It's a gradual rollout from dealer to dealer. Feedback from our dealers indicates that working with us can be complicated and requires significant time to visualize and specify our products. They have reported saving anywhere from 30% to 60% of their time on design and specification, which allows them to hire designers, utilize their existing designers more effectively, and spend more time with customers. Therefore, we expect to see an increase in wallet share and improved interactions with our dealers over time, along with greater savings for them. Kevin, do you have anything to add?

No, I think the point is that we have captured a good portion of the dealer base in North America through our certified dealer network. The 3,500 projects visualized using this new tool indicate its adoption. There has been a significant sequential increase from last quarter, but we are still only a couple of quarters into this. So, to Andi's point, the crucial aspect is to free up time for our designers and salespeople to concentrate on the customer and engage with them more.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back over to Andi Owens for any closing remarks.

Great. Thanks, Catherine. Thank you all for joining today's call. We will, of course, be back to you in December with a progress update and I hope that you all have a great day. Talk to you soon.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now all disconnect.