MillerKnoll, Inc. (MLKN) Earnings Call Transcript & Summary

Good morning and welcome to today's conference call and webcast to discuss the combination of Herman Miller and Knoll. As a reminder, this call is being recorded. [Operator Instructions] I would now like to turn the call over to Kevin Veltman, Herman Miller's Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining our conference call to discuss the combination of Herman Miller and Knoll, which we announced earlier this morning. Joining me today are Andi Owen, President and CEO of Herman Miller; Andrew Cogan, Chairman and CEO of Knoll; and Jeff Stutz, Executive Vice President and CFO of Herman Miller. Also joining for the Q&A portion of the call is John Michael, Herman Miller's President of North America; and Megan Lyon, Herman Miller's Chief Strategy Officer. You'll find a supporting slide presentation in the Investors section of our website under Events and Presentations, and we'll walk through that deck this morning. You can also find information regarding the transaction on NewLeaderInModernDesign.com, which can also be accessed from Herman Miller and Knoll's Investor Relations websites. After the prepared remarks, we'll open it up for Q&A. I would like to remind everyone that this call will include forward-looking statements. Any forward-looking statements that we make today are based on assumptions as of this date, and we undertake no obligation to update these statements as a result of new information or future events. I would refer you to our SEC filings for a full review of all of those risks. With that said, I am pleased to turn the presentation over to our President and CEO, Andi Owen.

Thanks, Kevin. Good morning, everyone. Thank you so much for joining us for this very historic moment as we share some truly exciting news, the combination of Herman Miller and Knoll. We're so proud to bring together 2 global design companies with rich legacies, creating a preeminent leader in modern design. We believe this union will shape the future of our industry as a whole, and we're excited to explore all the ways in which Herman Miller, together with Knoll, will be well positioned to drive long-term growth and excellence across the business. I'm so pleased to be joined by Andrew and Jeff as we share why Herman Miller and Knoll are such a great fit and why this combination will create value for our customers, our dealers, our shareholders and our employees. Not only is it the right fit, it's also the right time. The changes we faced over the past year have set in motion powerful trends that are shaping our world and our lives, the rise of distributed work model, a greater focus on the home, digital acceleration, the rise of direct-to-consumer business models and a focus on sustainability and social good. By bringing Herman Miller and Knoll together, we will catalyze the transformation of the home and office sectors at a time of unprecedented disruption. So let me begin by taking a look back. Almost 3 years ago, Herman Miller began a journey. We saw an opportunity to modernize our business. And to do this, we put into action a customer-centric and digital-first approach to everything that we do and sharpened our focus on doing well by doing good. This transaction with Knoll is a logical next step of that journey, and we believe it will enable us to get the most of both companies' families of brands, bringing together 2 pioneering icons of design with strong businesses, exceptional portfolios and long histories of innovation. So first, in context. Herman Miller produces the world's best-selling office chair. Knoll manufactures the world's most recognizable table. Between us, we've innovated furniture made with molded plywood, tubular steel metal wire, injected foam and pellicle. These singular achievements are emblematic of tectonic shifts in global design, all courtesy of our 2 pioneering companies. Design has been an integral part of Herman Miller's business for more than a century, and we believe that our role as the leader in the field is to be a good custodian of design. Everything we produce is a result of material experimentation, deep research and innovation and a philosophy that interiors only matter as much as the people who live and work in them. So in line with that approach, Knoll is the ideal partner. While Herman Miller and Knoll's shared history of design excellence is important, what's equally important is that we're both running strong, high-performing businesses. And as a combined company, our individual strengths will be multiplied to enhance our industry leadership and further accelerate profitable growth. Part of that means being able to offer a broader product portfolio. Herman Miller's and Knoll's customer bases seek out products that deliver beauty, efficiency, joy and utility, all of which we'll be able to provide. Furthermore, a scaled U.S. and international footprint with well-established distribution channels will help drive growth and expand the reach of our combined contract, residential trade and retail portfolios. Together, we will amplify our collective engagement with the architect and interior designers who influence decision-making for both contract and residential clients. One core element of our strategy has been building robust digital capabilities in infrastructure from e-commerce to advanced manufacturing. With our strong foundation in place, the combined company will be well positioned to scale recent existing investments, all to better serve our customers. Importantly, culture is critical whenever you bring 2 organizations together. And here again, we have much in common with Knoll. Our companies have a shared history of delivering well-designed products and a knowledge of how to plan and implement complete spaces and environment, all based on modern design principles and a human-centered approach, with a focus on sustainability and social good in everything that we do. So as you can tell, we have a lot to be excited about. But before I get too far, let's turn to Slide 6 to take a closer look at the transaction detail. This is a $1.8 billion cash and stock transaction with Knoll shareholders receiving $11 in cash and 0.32 shares of Herman Miller common stock for each share of Knoll common shares that they own. Following close, Herman Miller shareholders will own approximately 78% of the combined company, and Knoll shareholders will own approximately 22%. This is an accretive transaction and one that not only drives cost synergies, but also drives significant revenue synergies to enhance scale, cross-selling and digital and e-commerce opportunities. Jeff will review the financial benefits in greater detail in a little bit. In terms of next steps, the transaction is subject to approval by Herman Miller and Knoll shareholders as well as regulatory approvals and other conditions, and we expect to close by the end of the third quarter of calendar year 2020 -- 2021 [indiscernible] With that, I'll invite Andrew to provide a bit more background on Knoll and share his perspective on this combination before we tell you more about the great benefits it will bring.

Thank you, Andi, and this is indeed an exciting day both for Knoll and Herman Miller. Let me start with how we got here. As Andi outlined, the pandemic has without question unleashed changes and trends that have profoundly and permanently altered how we work and live. The predominance of the 5-day a week, 9-to-5 office routine is already being replaced with a hybrid model with a more flexible balance of in office and work from home. The office will become a place where we come together to gather for collaboration and community, and the home has become of elevated importance not only as a place to work, but as a place that is central to our lives and our families. Throughout our history, Knoll has always anticipated and responded to emerging trends, and this combination will enhance our ability to do so. To tell you more about Knoll, we are a constellation of design-driven brands and leaders working together with our clients to create inspired modern interiors. Like Herman Miller, we focus on designing everything from high-performance workspaces to inspired residences, and our brands are well positioned to benefit from future work styles. Over the past several years, we've been focused on diversifying our portfolio to add high-design and high-margin products while investing in markets, products and distribution. The transaction will now allow Knoll to build on the strong momentum as well as our decades-long dedication to continually uncovering and supporting visionary design talents. Simply put, we're a great natural fit. Together, we can build a more profitable and growing comprehensive global workplace enterprise while accelerating the impact of our investments in digital and residential furnishings. To this day, we have ongoing partnerships with the world's brightest designing minds. Like Herman Miller, we have also been globally recognized for our design leadership by the Cooper Hewitt, Smithsonian and also have permanent collections around the world, including at The Metropolitan and the Museum of Modern Art. As Andi mentioned, our cultures are both rooted in design and building more sustainable, diverse and inclusive enterprises. By joining forces, we will increase the benefit we both will receive as clients expedite their return-to-work plans as well as expand our exposure to residential and e-commerce opportunities. For our shareholders, this transaction offers immediate and significant value as well as potential future upside through ownership in the combined company. For our clients and dealers, we will have the scale and reach to truly transform the industry and better serve both contract and retail clients. And importantly, for our people, we expect to create new and exciting opportunities for associates over time. We recognize that seamlessly bringing together our talented people and exceptional portfolios will be the key to the company's combined success. And Herman Miller's values are very much aligned with our commitment to using modern design to connect people to their work, their lives and their world. We're truly excited about the tremendous opportunities this combination will create. And with that, I'll turn it back over to Andi. Thank you.

Thanks, Andrew. So turning to Slide 8. You'll see why we're such a great fit from a brand perspective. We both have a wide range of brands from commercial to residential across the value spectrum. Together, we'll have 19 powerful brands, each with its own design legacy that places them at the epicenter of modern furnishings and, more broadly, modern design. This portfolio means that we'll be positioned to truly lead the industry in redefining design for the home and the office. In addition to a broader portfolio, joining forces with Knoll means that we will have significant benefits of scale as we outlined on Slide 9. We're both global today, with collective presence in over 100 countries. But with enhanced scale and reach, we can facilitate growth of our combined portfolio through both companies' well-established distribution channels. To give you a sense of scale, together, we will have 64 showrooms globally, more than 50 physical retail locations today and a global dealer network as well as global multichannel e-commerce capabilities. And while the scale and presence matters, what matters just as much is relationships with those who influence design decisions. Both Herman Miller and Knoll have outstanding relationships with both architects and interior designers, who support the decision-making for both contract and residential work. We'll broaden and deepen those relationships to drive the growth of the combined portfolio through our scaled operations and network. We also see great opportunities for our companies as one to better serve customers and enhance efficiency overall through technology, as you'll see on Slide 10. Since Herman Miller launched our new digital strategy in mid-2019, we've developed critical brand-agnostic capabilities that position our brands for major digital growth. This transformation has already driven tremendous success as evidenced by e-commerce revenue growth of over 300% in our third quarter. As one company, we can build on this e-commerce strategy and apply it to more brands across geographies. We'll combine the best of both of our digital capabilities to bring an expanded assortment, greater customer insights and efficient marketing to drive growth. We'll also bring together the best in technology when it comes to advanced manufacturing to ensure we're innovating with efficiency in every step of our production. When you think of bringing 2 organizations together, it's so much more than asset, footprint and technology. The real key in bringing together the best people is to figure out the how and not just the what. As you'll see on Slide 11, Herman Miller and Knoll each have a deep legacy of design innovation. It's not furniture for furniture's sake. From Florence Knoll's signature sofas to Eames' experiment in molded plywood, from Saarinen's iconic table to George Nelson's 360-degree approach to design interiors, all these Herman Miller and Knoll form the very foundation of modernism. The integrity of our respective approach is to design and scale up to every environment our customers inhabit. As Gilbert Rohde, author of Herman Miller's Turn To Modernism, in the early 1930s once wrote, "You're not making furniture anymore. You're making a way of living." Our shared values are also rooted in doing well by doing good. As you'll see on Slide 12, Knoll shares our belief that our businesses exist for reasons greater than our products. They also exist to serve our people, our planet and our communities. Together, we'll build on our mutual leadership in these areas to deliver the best products to customers while building more sustainable, diverse and inclusive enterprises. And with that, let me turn it over to Jeff to discuss the compelling financial attributes of the combination.

Thank you, Andi. Good morning, everyone. I want to start by echoing Andi and Andrew's excitement about this transaction and the significant benefits it will create. Turning to Slide 13. The meaningful scale Andi discussed will really drive financial strength not only through significant cost synergies, but also through the additive power of our incredibly talented teams. The result will be enhanced value for both companies' shareholders. Together, we will have consolidated revenue of approximately $3.6 billion and pro forma adjusted EBITDA of approximately $552 million. This is based on each company's respective last reported 12 months and includes the anticipated $100 million of cost synergies, and it implies adjusted EBITDA margins of approximately 16%. Bringing together Herman Miller and Knoll is also expected to generate significant revenue synergies across the combined business through enhanced scale, cross-selling and digital and e-commerce opportunities. The transaction is expected to be accretive to Herman Miller's adjusted cash earnings per share in the first 12 months following the close of the transaction. And importantly, the transaction will allow us to maintain our strong balance sheet and provide ample liquidity and flexibility to invest in growth and innovation in an evolving marketplace. To finance the transaction, we have a commitment for $1.75 billion of senior secured revolving and term loan credit facilities, including $1.25 billion of term loan facilities and a $500 million revolving credit facility expected to be undrawn at close. Following the transaction, the expected net debt-to-EBITDA ratio will be approximately 2.3x before synergies and 2.1x after including a 50% synergy credit. We expect the cash flows of the combined business to allow us to delever meaningfully within the first year. And we also expect returns on invested capital to be in excess of our weighted average cost of capital within 3 years. To dive deeper into synergies on Slide 14. We expect $100 million of run rate cost synergies within 2 years of closing. About 60% of these synergies are driven by SG&A, with cost of goods sold synergies through supply chain, procurement and logistics totaling the other 40%. We have a synergy capture plan based on phases. Of the $100 million run rate cost synergies, we expect to achieve 50% after the first 12 months following the transaction and expect we will be at our full run rate after 24 months. In addition to the cost synergies, we expect to deliver significant revenue synergies through our highly complementary products, channels and geographic profiles, driving growth, scale and resilience in the U.S. and abroad. Working together, we will benefit from better alignment against retail opportunities, which will drive top line growth and margin expansion. And as Andi highlighted earlier, together, we'll have great opportunities in digital and e-commerce that will drive enhanced growth as well. To determine how to best combine our 2 businesses, we'll plan to deploy a dedicated post-merger integration team that will wake up every day to ensure we achieve the expected synergies and ensure a smooth transition. So in conclusion, this is a financially compelling transaction from a synergy and growth perspective, and we're excited about bringing our companies together to seamlessly integrate and capture the tremendous value we see ahead. And with that, I'll turn the call back to Andi.

Thanks, Jeff. So to conclude, in Knoll, we believe we found a tremendous partner. Together, we'll meet our customers everywhere they live and work with problem-solving designs that are beautiful as they are useful. As the preeminent leader in modern design, we'll pioneer a new chapter together, both for our companies and for our industry, creating significant value for our shareholders, our customers and our team members. I look forward to welcoming Knoll employees to Herman Miller as we embark on this journey together. So thank you again for joining us, and we're happy to take your questions. Operator, can you please open the line for questions?

[Operator Instructions] Our first question today is coming from Greg Burns from Sidoti & Company.

Congrats on the deal. So I just wanted to maybe talk a little bit about potential channel conflict, I think -- as when this type of consolidation was brought up. I guess managing the dealers was always maybe -- I guess, combining the dealers, all the brands across and you might -- maybe -- there might be dissynergies in combining some of the larger companies in the space. And obviously, that doesn't seem to be necessarily a concern here. But how do you manage that as you integrate the 2 companies?

Greg, great question. Listen, we believe that the Herman Miller dealer network has been and continues to be one of our strongest strengths. We also believe the Knoll dealer network is an incredible one. So one of the really appealing aspects of this combination to us is the possibility of combining these 2 amazing dealer networks and an expanded product portfolio. So when you look at this, we think that combination will be a thoughtful and collaborative process, and we'll include the dealers in it, and we'll map out the details of our combined go-to-market strategy on a case-by-case basis.

Okay. Are there any brands that are sold across maybe some other dealer networks in the space where maybe now there might be a dissynergy where those are not -- you might lose channels of distribution by combining?

Sure. I'll take that one. This is John Michael. A number of the brands in both portfolios are open-line brands, meaning they are available to be sold by a large selection of dealers, both Herman Miller dealers, Knoll dealers and other. And they are set up that way for the reason that, based on the need that they fill in the market, that's the appropriate distribution strategy. So I think that would likely continue to be the case as we move forward.

Okay. And then can you just touch on maybe some of the revenue synergy opportunities? I just wanted to get a better feel for how the combined companies maybe benefit or augment each other's individual growth opportunities. Like where do you see the most kind of opportunity from a revenue synergy perspective?

[ Yes. As I was saying ]...

Greg, this is Jeff.

Oh, sorry. Go ahead, Jeff.

I'm sorry, Andi. No, please, you start if off...

No. No, go ahead. I'll add on. You go first.

Okay. Sorry. I was just going to say, Greg, I just wanted to level set with one point, just so that there's clarity. Our economics around the deal are -- have contemplated the cost synergies that I outlined in my prepared remarks and don't include the revenue synergies. But make no mistake, we believe there are real revenue synergy opportunities. And so with that as clarity, please, Andi and Megan, jump in with any thoughts you have.

Agreed. Thanks, Jeff. I think we'll have a better idea as we start to integration plan, Greg. But I think we all see a significant revenue synergies. I think if you look at our shared aspiration in digital and e-commerce and contract and retail, we believe we have a huge opportunity for revenue synergies. Megan, would you add anything to that? I think I talked over you. No? Okay.

Okay. So I mean, I guess, you mentioned cross-selling. So how do you see that -- like what's the strategy for either taking Herman Miller's products and putting them to Knoll's distribution or vice versa? I mean is that -- what's the opportunity there in terms of, I guess, leveraging your broader distribution now across, I guess, a broader portfolio of products?

We believe there's great opportunity there. But remember, it's day 1. We're starting integration planning now. So as I said, we look at this on a case-by-case basis. We have some time to put our heads together with our teammates at Knoll and plan this.

And Greg, it's Andrew. I would just add, we're very excited about the revenue synergies between the 2 businesses. We already do some cross-selling today, where we sell many of our products through DWR. DWR has been a great customer of ours, and we think there's an opportunity to do more. And frankly, I've always been dying to buy an Eames lounge chair. And so this is now -- you could -- the first cross-sell will be me buying an Eames lounge chair. So I think there's going to be great -- we're going to bring our combined dealer networks so much more capability. It will be unprecedented in terms of what anyone offers. And I would also add the geographic strengths of the business that aren't ordinarily complementary. We're quite strong in Europe. We're not -- we have very de minimis presence in Asia Pacific and Latin America. There's a humongous opportunity for Herman Miller to take Knoll products into those fast-growing parts of the world. So we -- as we've studied this and we've thought about the impact on our dealers and our clients and on our global network, we think the revenue synergies will significantly outweigh rather de minimis dissynergies, quite honestly, Greg.

Our next question today is coming from Budd Bugatch from Water Tower Research.

And I'm going to add my congratulations to all of your teams for orchestrating this transaction. I just wish you the best of luck on it. I do have a few questions. Greg touched on the major one, which is always the dealer integration and the dealer base, and that will be interesting to watch, how that proceeds going forward. I wanted to drill down a little bit more, Jeff, if you could, on the synergies. You talk about 60% with SG&A with corporate business units. Can you give us a little bit more on what -- how that would look? And maybe an example or 2 of some of the synergies you contemplate? I realize if it touches people, that might be a bit sensitive, but maybe just on a high level, how do we think about that?

Yes. Budd, this is Jeff. I'm going to turn that question to Megan, who can speak to it in some detail. But I do want to say, I hope you'll appreciate, while we've had a robust diligence process and we have studied this to a level that gives us comfort, we're going to be cautious on the level of detail that we talk about on this call with respect to the individual actions. There's a lot of decisions to be made between now and implementation. So with that, I'll turn it over to Megan and let her give some color.

Sure. Thanks, Jeff. I think Jeff mentioned earlier, the transaction is expected to generate $100 million of run rate cost synergies within 2 years of closing. And I think we mentioned that through a combination of SG&A, which is pretty straightforward. And as we think about COGS, there's opportunities from a supply chain perspective, a procurement perspective and certainly in logistics. Our goal is obviously to preserve the value that Knoll brings, and that includes their people. However, with any merger of this size, there will be certain overlaps, and we look forward to sitting down with the teams to develop the best path forward through the course of integration planning.

I'm still a little bit confused by that. If you get $60 million run rate from SG&A, how much of that is essentially payroll? You'd say corporate business units. I'm not quite sure I know what that means. So maybe it's just my inability to understand, but hopefully, maybe you can put it in a language that I can get.

Well, Budd, no, I don't think it's your inability to understand. We are -- out of respect for the process, we're going to be very cautious in leveling a lot of detail here. You can imagine that some of that SG&A certainly is people-related, but those are all decisions that are in front of us, and we're going to be thoughtful and respectful of the process. And as I mentioned in my prepared remarks, we're going to lean into this post-merger integration task force that is going to be dedicated to this project. And so through that team and through the focus that we're going to put to this, we have confidence we're going to get there, but we're going to be cautious on the level of detail that we share other than to say, as I mentioned, through the diligence process, we've gained a degree of confidence that this is very achievable.

Okay. Jeff, you talk a bit about cash EPS being accretive at the -- for the first year. Can you give me a feeling of what the amortization is? Or what do we add back to either GAAP EPS to get to cash EPS? How do we get there?

Yes. So what we're doing there, Budd, on the non-GAAP cash basis is we're simply stripping out the effect of purchase accounting amortization in total. So -- and the reason we're doing that is, as you can appreciate, I think, from your experience, the purchase accounting process is a heavy lift that's in front of us. And we can't possibly know today what that amortization profile looks like. We have an estimate, and we think it's a reasonable estimate. Don't hear me wrong on that, but that's why we wanted to highlight this on a cash basis. I would add that, on a GAAP basis, our belief is that we can -- we will be positive accretion in the second year.

So the amortization -- I mean, the goodwill is not amortized? That's fixed unless [indiscernible] cash.

That's correct, yes.

So you have an idea of what the intangibles, the amortizable intangibles will be other than the ones that are permitting, right?

Well, we certainly do. We have estimates for this, Budd. And as I think you know, there's a range of amortization periods depending on the nature of the intangible asset that gets put up on the balance sheet. And so that's all baked into the model and in our estimate for both net cash EPS as well as the GAAP earnings accretion.

And will you disclose it in the 8-K? [ That has to be called ], I would guess, either with the shareholder communications or sometime after this date.

I want to make sure I understand your question, Budd. So just -- when you -- ask it again. I'm not sure I understand completely. What time line are you...

Well, just [indiscernible] Jeff, I guess, I go back to the old way of just trying to get to a model and get to a number. Without some idea of -- we can get the hard assets, and therefore, we can know what the combination of goodwill and intangibles will be on the transaction, but we don't know the makeup of that. So we're trying to figure out -- you have an estimate of what the amortization is and then -- and what the intangibles will be, we don't. And so that's what I'm trying to get to is will you disclose what that is...

Understood, Budd, yes. Let us -- again, as Andi said, I think she said it well, this is day 1. Let us get a little into this. We completely appreciate the need for folks to do their modeling. We will -- when we're prepared to do that, we'll make sure we provide that as an estimate going forward.

Okay. That's all. Because I know you -- that illustration of yours has always been -- us -- our inability as analysts to model what you think we should model, so the extent that we can get that, it would be great. Last question for me is just on dividends. What's -- is there any capital in dividends with the additional leverage? And what's the dividend run rate to the Miller shareholders and, at least until the transaction, to the Knoll shareholders?

Sure. No. Good question, Budd. As you might imagine, our initial focus is going to be on deleveraging or delevering the business in the early years. Now having said that, we don't anticipate at this point any change in dividend policy post close.

Got you. Okay. Understood. Well, congratulations again. These are 2 great companies. It's an industry that needs more appreciation. So best of luck to everybody.

Our next question today is coming from Reuben Garner from The Benchmark Company.

Congrats on the deal and the announcement. Maybe I guess, just taking a step back here a little bit, the timing of the deal is -- can you just talk about how this sort of came together? Is this something that was in discussions prior to 2020? Or is it something that may be with the world we've lived in the last year that came about more recently? Can you just talk about the process and how we got here?

Yes. Great question. Listen, we have long been fans of Knoll and admirers of their products and their talent and their people. And I think with all of the trends, as I spoke about in our prepared remarks, that have been reshaping our lives, we've talked to you about them many times, distributed work, a greater focus on the home, digital disruption, this really seems like the perfect fit at the right time in a time when the world is changing so much. So we have always been fans of Knoll and always believed in the combination. And more details will come out in the SEC filings in due course.

Okay. And then I think each company, on a pro forma trailing basis, the EBITDA margin is around 16%. I think part -- a lot of moving parts there with what's going on over the last year. I'd imagine that those are probably more of a baseline. And each company had targets or previous highs that they were looking to get back to over time. Is there a way to think about what sort of the new target would be for the company? Jeff, I know retail, for instance, had a phenomenal year, but the office business was a bit depressed. And I know Knoll had moving pieces as well. Can you just try to help us what sort of the new target margins look like for the business?

Yes. Reuben, I sincerely appreciate your question. As we said, we are very excited about the profile even that we get on a trailing 12-month basis. We're not in a position right now to establish any kind of guided target for the business. So we're not providing guidance at this time. We will consider doing so as we get closer to or following closing.

Okay. On the revenue dissynergies question from earlier, is there a certain amount of business that you sort of anticipate potentially losing in the near term from this combination that you've contemplated in your deal? What you're willing to pay for the company, is that -- is there a right way to think about that? Or are you not anticipating that to be an issue at all and specifically talking about North American office?

Reuben, yes, I'm going to start it, and then I'm going to kick this over to Megan. We've done a significant amount of work on this, as you might imagine, both around the dealer question that we were asked earlier as well as revenue dissynergies. And I think we feel very confident in the deal metrics and the revenue synergies and also cost synergies. But Megan, do you want to just go into a little bit of detail on how we thought about revenue dissynergies for the model?

Sure. I think there's a handful of things that you want to think about when you're contemplating revenue dissynergies. It's the decisions that you make in terms of the portfolios that each of the dealers carry. It's the degree to which you're competing head to head with anybody in an RFP environment. And it's the degree to which you think your customers are going to want to invite additional bidders to the table when you have a company that was formerly competitors that may now be perceived as one. And we did quite a bit of work to evaluate all of those factors. And I think John said pretty clearly earlier, and I think Andi said this as well, part of the reason we have confidence here is this case-by-case approach that we're going to take to the decisions that we make in distribution and the portfolios that our dealers will represent. And then we take a step back, we really do think that through that case-by-case approach, we can mitigate what you would see as potential sources of downside and ultimately actually drive revenue upside even in the North American office sector.

Great. That's very helpful. And then just as a quick follow-up, and this is the last one for me. So is it fair to assume or say that given the, I guess, the design nature of the 2 companies that you were probably at the same table more often than not, bidding on projects, and that is another reason that gives you confidence in that sort of revenue synergy or revenue upside comment that you made, Megan?

It's a good question, Reuben. That's not -- it's obviously super sensitive data that we haven't had access to on one side or the other as part of the course of diligence. Unfortunately, I can't comment on that.

Understood. And congrats again...

Reuben, it's Andrew. I would just add in from a Knoll perspective, I think there's great complementarity here. We tend to be strong in certain markets, but we don't have coverage. And I think when you think about North America as the same everywhere, it's made up of wildly different markets. And each market has its own dynamic. And I think any generalization really doesn't make sense. And we've become as convinced as Andi and her team have that there's real revenue synergies that are significantly greater than the revenue dissynergies. I also, again, would reinforce the geographic opportunity here internationally on the Continental Europe is tremendous, as is the residential synergies and the avoidance of duplication of digital efforts, of targeting the home, of leveraging points of brands that are incredibly complementary. And when you look at the span here from HOLLY HUNT to Hay to Muuto to Knoll, I mean, it is a singular collection of brands here that we have every confidence marketed the way, we believe, Andi and the team will market it that this is an extraordinary opportunity to create something that no one has ever done before in this industry.

And Reuben, just to reinforce one of the points that Andrew made, which is investment. And if you think about how many companies right now, especially in our industry, are investing to scale and digitize and being able to have the scale that has eluded us for a while, as we bring ourselves together to compile those investments and compound them, I think, will be a huge advantage as well.

Congrats again, and good luck, everybody.

Our next question is coming from Steven Ramsey from Thompson Research Group.

Congrats on the deal. Very interesting. I guess maybe on the dealer base going on, I think you said, this case-by-case basis, how much of the dealer base is part of the synergy breakout? It seems like this will be a very time-consuming process to do it this way, so it would go beyond kind of the 2-year time line on synergies. So just curious to hear more about how much of the dealer base is factored into those synergies.

Yes. This is Jeff. Maybe just a point of clarification. Just -- so the $100 million cost run rate synergies that I alluded to and that are in the presentation, those do not contemplate anything related to dealer network costs or anything like that. So just to be clear on that point. Again, these are -- this is an independent dealer network, right? So I just -- I think that's an important point to clarify. I'm not sure if your question went to the revenue synergy side or if it was on cost, but I just want to make sure I start by clarifying that.

Okay. And then maybe another quick clarification, but taking out the preferred stock of Knoll, is that factored into the synergies at all?

It is completely factored into the deal economics, yes.

Okay, okay. And then, I guess, more kind of strategic questions on the merger. But the cross-selling opportunity, I would assume there's opportunity on both retail and office business, but does one channel benefit to a greater degree than the other?

I'm happy to take that one. I would...

Go ahead, Megan.

Sorry, Andi. I'm happy to take that one. I think we see opportunities on both sides of the portfolio. And I think it's really too soon to predict where the upside will be greater. Again, that's part of what we've got to work through as part of integration planning and building the strategy for the combined business. But we see upside on really in every segment of our business.

Okay, okay. Good. And then on thinking about the retail side or DWR specifically, I don't know which is a better way to think about it. But a long-term focus for you at DWR has been more directly sourced products being sold through DWR and the retail channel. Now that Knoll is a part of the company and sells through DWR, where does that shift maybe the direct-sourced products of DWR? And maybe where do you see that going as you integrate the companies over the next couple of years?

Megan, do you want to take that one?

Sure. So Knoll is an important partner for us today within Design Within Reach. And we see that relationship becoming even more important as we think about the future and as we think about even more tightly aligning the portfolios and thinking about how we leverage the power of the assortment in an even more compelling way. So I do think there is an important role that DWR plays in driving revenue synergies here.

I also think, Steven, one of the things that's really an advantage of 2 of our companies coming together is the fact that we span residential through to office. And if you look at the roots of Knoll, which were residential, the roots of Herman Miller, which were residential, and if you think about our retail business, there's so much opportunity for innovation, new design as well as capitalizing on the portfolios, the expanded portfolio that the combination will bring. So we're very excited about what that will mean for our retail business.

Maybe the hindsight that I'd add -- just one point to add, Andi, from a revenue synergy perspective is the role that digital and e-commerce should play here as well as we come together and leverage the collective strengths of the combined entity and think about leaning in more heavily in places where we might not have e-commerce presence today.

And Megan, this is Andrew. I would also add to that. We've got multiple e-commerce entrées to the market. I mean we've got Fully, which is focused on work from home. Fully is a channel that could be ripe for adding more Herman Miller products through the Fully channel. We've got Muuto. We've got our own KnollStudio or knoll.com e-commerce efforts. So we will have multiple targeted channels that can cross-sell products. And I quite honestly don't know anyone else with the breadth of products or the breadth of channels. And if behind the scenes, we can leverage those digital investments, this is an extraordinary opportunity to scale on the residential side. And it was one of the compelling parts of the deal for us. Because I think the -- looking at the cost of doing it on your own and the capital and the effort versus the shared benefit of doing it together, there is not another combination that would have enabled this kind of digital transformation. And it is way bigger than any potential dissynergies, we believe, we will see on the -- in a handful of markets.

Great. That's helpful color from everyone. My last question, which kind of tags on to what was just discussed in previous questions also, but you discussed the increased scale for investments for, I would assume, better revenue growth and operational strength. I mean can you maybe talk to if that is going to be seen more on the office and contract go-to-market or if that is on the retail side?

Steven, I think we'll see it across the business in general. I think as Andrew and Megan and I have mentioned, we'll definitely see it as we build digital infrastructure. We'll see it across our manufacturing footprint. We'll see it across our office business. I think we'll see it across all parts of our business.

We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. If there are no closing comments today, that does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. I'm so sorry...

Hold on.

Wait, wait, wait.

I am so sorry, please go ahead, sir.

No, sorry. I think maybe I was on mute. Thank you guys for joining this so much today. We really appreciate your interest, and we're excited to keep you informed as we head down the path of integration with these 2 companies. Have a great day.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.