MillerKnoll Q1 2025 Earnings Call Transcript

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September 19, 2024

There are 9 speakers on the call.

Operator

Ladies and gentlemen, good evening, and welcome to Miller Knolls Quarterly Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Chief Financial Officer, Jeff Spetz.

Speaker 1

Good evening and welcome to our Q1 fiscal 2025 conference call. I'm joined today by Andy Owen, our Chief Executive Officer. Also available during the Q and A session are John Michael, President of the Americas Contract segment and Debbie Probst, President of our Global Retail segment. Before I turn the call over to Andy, please remember our Safe Harbor regarding forward looking information. During the call, management may discuss information that is forward looking and involves known and unknown risks, uncertainties and other factors, which may cause the actual results to be different than those expressed or implied.

Speaker 1

Please evaluate the forward looking information in the context of these factors, which are detailed in today's earnings press release. The forward looking statements are as of today, and we assume no obligation to update or supplement these statements. We may also refer to certain non GAAP financial metrics, which are reconciled and described in our press release that is posted on our Investor Relations website at millernoll.com. With that, it is my pleasure to turn the call over to Andi.

Speaker 2

Thanks, Jeff, and good evening, everyone. Thank you so much for joining us tonight. Before we get into our Q1 results, I wanted to take a moment to remember Bud Bugatch. Bud served as a research analyst covering our company for many, many years. And while we will miss the deep knowledge and insight that he brought to the contract industry, We will also miss the energy and enthusiasm that he brought to everything he did.

Speaker 2

Bud was a great man. Our deepest condolences go out to his family. And with that being said, Bud would probably say, let's get back to earnings. Miller Knoll entered fiscal year 2025 with momentum. I'm happy to say that again orders are up year over year and demand is improving.

Speaker 2

1st quarter order growth was largely driven by the Americas contract segment where orders gained momentum throughout the quarter. Importantly, customers are placing large orders and the indicators that we discussed last quarter such as project tunnel additions, customer mock up requests and new contract activations continue to be up year over year, all of which underscore an improving demand picture. Orders also grew in our International and Specialty segment, largely driven by Asia where we saw large orders from both global accounts and local technology companies. While this is encouraging, customers have also increased the time between their order entry and requested shipment times. This has pushed revenue into subsequent quarters and we are carefully managing operating expenses to align with sales levels.

Speaker 2

Across the company, we are focused on growth. This quarter, we launched several initiatives to support our contract business, meet our clients' evolving needs and set us up for success as demand trends accelerate. Our Insights team launched new research behind the importance of relationship based work. It's part of our Design with Impact platform that helps customers redefine their workspace and create environments that support well-being, community and productivity. We also bring our research to life within our own space.

Speaker 2

This quarter, we introduced 2 new Miller Knoll flagship locations in London and New York that include both contract showrooms and retail stores as well as working space for our associates. Miller Knoll London is the 1st Miller Knoll destination outside of the United States and marks just one step we're taking to offer an enhanced experience to our customers across the United Kingdom and Europe. Miller Knoll New York is our largest flagship with 11 floors and 77,000 square feet. Located in the heart of the Gramercy Design District, it features dedicated space for Knoll, Herman Miller, Geiger D. Weiser, Meharam and Muuto.

Speaker 2

We also continue to deliver unique solutions for our customers through our product selection. In the Q1, we launched dozens of new products across the collective and introduced new sustainable materials, including a bamboo based leather alternative, eelgrass and bio pure foam, all reinforcing our commitment to design a better world. In addition, our work in healthcare design was recently recognized in Fast Company's Innovation by Design Awards. For our partnership on sensory seating with Jefferson Health, Honnichmann Center in Philadelphia. Turning to our Retail segment, we focused on capturing demand as summer is typically softer for the industry as consumers shift more of their spend to travel.

Speaker 2

By capitalizing on the strong operational foundation that the team has built, we delivered orders faster and held sales flat to last year in a difficult environment. At the same time, we continue to execute against our growth initiatives including product assortment expansion, design services and more targeted customer engagement throughout their purchase journey. In North America, we estimate that our retail business outperformed year on year retail industry comparisons by approximately 6 points during the quarter. We are confident in the strong growth potential for our retail segment and optimistic that in the near future, real estate and housing market rebounds will fuel demand. We've made designs and reach the destination to shop our brands in North America by offering a larger Knoll assortment as well as HAY and Muuto.

Speaker 2

This strategy is gaining traction. During the quarter, we drove higher sales for these brands in North America. The interplay between online and store experience is key. We know that many of our customers start online and then work with associates in stores utilizing their design services. Our retail growth plans include store expansion within North America.

Speaker 2

Work is underway now to begin opening several new stores in the second half of fiscal year twenty twenty five with plans for more stores in fiscal year 2026. Now that interest rates have dropped slightly, we anticipate that customers and trade partners will start placing the orders they've paused. We've invested marketing to capture their attention and to support the upcoming cyber and holiday season. We believe our Q1 financial results demonstrate the advantage provided by our collective as brands, diverse business channels and global footprint and have positioned us to seize opportunities as trends improve. Across the company, we focused on growth and positioning ourselves for the future.

Speaker 2

Our most important asset is our team and we continue to strengthen our associate experience. I'm pleased to share that Illinois has been certified as a 2024 U. S. Great Place to Work. In addition, we've added new talent to our Board of Directors.

Speaker 2

Following the retirement of 2 Board members last year, we recruited and recently announced 3 new directors. We're excited to welcome John Maeda, Tina Edmondson and Jeannie Gang, who bring expertise in technology, architecture, design and hospitality. Their dynamic perspectives will benefit our Board and our management team as we partner together to drive long term success. With that, I'll close by saying I'm optimistic about the year ahead. Our hard work and focus are building momentum in our business.

Speaker 2

I'll now turn it back to Jeff for a closer look at our financials.

Speaker 1

Thank you, Andy. I will start by providing an overview of our performance in the Q1 followed by a few insights into our outlook and targets for both the Q2 and full fiscal year. As Andy mentioned, we are encouraged to see a continued improvement in demand trends across the contract elements of our business. Consolidated orders of $936,000,000 in the Q1 were up 2.4% year over year on a reported basis and up 3.5% on an organic basis. This improved demand picture fueled an increase in our consolidated backlog, which ended the period of $758,000,000 up 9.2% from a year ago and positive 10.9% from the start of fiscal 2025.

Speaker 1

Consolidated net sales for the Q1 were $862,000,000 reflecting a decrease of 6.1% year over year on a reported basis and a decrease of 5.3% organically compared to the same period last year. It's important to point out that while order entry levels have improved, as Andy mentioned, the average time from order entry to customer requested ship date has increased. Relative to more normalized historic trends, this limited our ability to build and ship product within the quarter. Consequently, a higher percentage of orders remain in the backlog as of quarter end than we were expecting coming into the period. Our consolidated gross margin was 39%, which was essentially flat to the prior year.

Speaker 1

Incremental net pricing benefit, favorable product and channel mix and improved shipping and logistic efficiencies all contributed to margin expansion compared to last year, but were offset by a loss of manufacturing leverage from lower production and sales levels. Turning to cash flows in the balance sheet, this quarter we generated $21,000,000 in cash flow from operations. We repurchased approximately 1,500,000 shares for a total cash outlay of approximately $44,000,000 and we ended the Q1 with a net debt to EBITDA ratio as defined by our lending agreement of 2.84 turns. With that, I'll now take a moment to summarize our Q1 performance by segment. Within our Americas contract segment, net sales for the quarter were $455,000,000 representing an organic decrease of 7% from the same quarter a year ago.

Speaker 1

New orders in the period totaled just under $513,000,000 which was up 5.7% over last year organically and sequentially up 6.8% from the prior quarter. During the Q1 orders peaked in the month of August and funnel additions, special pricing requests and customer mock up activity all remained well ahead of the prior year giving us increased confidence as we move through the Q2. The operating margin for the Americas contract segment in the quarter was 3.8% compared to 8.4% in the prior year. On an adjusted basis, operating margin was 9.5% in the quarter, which is down 110 basis points compared to the same quarter last year as a result of the loss of volume leverage on fixed operating costs. Within the International Contract and Specialty segment, net sales in the Q1 of 214,000,000 were down 6.5% on a reported basis and down 6.3% organically year over year.

Speaker 1

Orders during the quarter totaled $234,000,000 resulting in a year over year increase of 2.7% on a reported basis and up 3.1% organically with Asia Pacific, the Middle East and parts of Continental Europe leading the segment in terms of growth. Segment operating margins in the quarter totaled 4.4% compared to 5% in the prior year. But on an adjusted basis, operating margin for the quarter was 7.9%, which is up 140 basis points year over year driven by benefits of past actions to reduce operating costs. Turning to our retail segment, we reported net sales in the quarter of $193,000,000 Relative to the same period last year, this represents a reported decrease of 2.8% and was essentially flat performance on an organic basis. New orders in the period of $189,000,000 were down 4.7% last year on a reported basis and down 1.6% organically compared to last year.

Speaker 1

As we outlined in the earnings release, the retail team is driving operational improvements that are having a real near term impact on margins and which set us up for growth and improved profitability as demand levels improve. However, our Q1 results reflect a tepid demand environment for the retail furnishing space, anchored by elevated interest rates and sluggish housing data. Still, we are enthusiastic that we have the right team in place making the right set of forward investments in anticipation of improved market conditions. And in the meantime, we're encouraged by what our relative over performance against the broader industry trends in North America suggest about our ability to gain more share in the future. The retail segment operating margin totaled 2.3% in the Q1 compared to 1.1% a year ago.

Speaker 1

And on an adjusted basis, operating margin for the quarter was 2.8%, which was 120 basis points higher than the prior year driven by operational efficiencies. Now let's turn to our outlook and guidance for the upcoming period. We're maintaining our full year adjusted earnings guidance of $2.20 per share, which equates to the midpoint of the range we provided in June. This is supported by the positive trends we're seeing in global contract demand, our increased backlog position and expected macroeconomic improvements in the back half of this fiscal year. As it relates to the Q2 of fiscal 2025, we expect net sales to range between $950,000,000 $990,000,000 Adjusted diluted earnings in the 2nd quarter are expected to range between $0.51 $0.57 per share.

Speaker 1

This guidance takes into consideration a shift in the holiday cyber promotional period for our retail business. Last year, the full promotional period fell in the 2nd quarter, while this year it will be split between the 2nd and third quarters. So relative to last year's revenue pacing, we estimate this shift in timing will move between $17,000,000 $23,000,000 of revenue from the Q2 into the Q3 of this fiscal year. This is an important factor to consider when comparing quarterly sales and earnings estimates to our performance in last fiscal year. Okay.

Speaker 1

With that overview of the numbers, I'll now turn the call over to the operator and we'll take your questions.

Operator

Thank you. And we'll now begin the question and answer session. And your first question comes from the line of Greg Burns with Sidoti. Your line is open.

Speaker 3

Good afternoon. Just a couple in terms of the guidance. So looking at the 2Q guidance, it looks like the implied here is that operating margins are going to be down from a year ago, but revenue, I think you're guiding to a little bit ahead of consensus. I think it's some of the lag here with the order pacing, shifting some revenue out. But I just want to get a little bit more color on your view on margins for the second half.

Speaker 3

What's driving maybe the softer than what I was looking for or maybe the Street was looking for in terms of margins in the Q2?

Speaker 1

Yes. Hi, Greg. Good to be with you tonight. This is Jeff. I'll start.

Speaker 1

A couple of thoughts for you. First of all, from a gross margin guidance perspective, we certainly expect given the ramp up in order activity in the contract elements of our business, we're expecting to see improvements in labor and overhead efficiency and leverage. So that's factored into our guide. The flip side though is that that's being offset by a shift in business and product mix in the business. So that's really keeping a lid on our gross margin performance as we move from Q1 into Q2.

Speaker 1

So that's one factor and that's just really the result of we're rotating a bit out of the higher margin, higher gross margin retail sales as we move into Q2 as well as some of the specialty brands. And then when you look from an OpEx perspective that shift in cyber timing, cyber promotional timing that I mentioned, we have this kind of strange deal this quarter where we're front end loading some of the marketing spend that is going to support that, but we're not going to get all the revenue associated with it in the quarter. So the combination of those two factors I think is what accounts for what you're pointing out.

Speaker 2

I think the bulk of that really sits in the cyber shift more than anything else.

Speaker 3

Okay, great. Thanks for that color. On the retail side, RH had, I guess, some incrementally maybe positive commentary in terms of demand momentum. Are you seeing anything in the retail market that would give you any kind of positive outlook in terms of coming quarters, maybe demand picking up?

Speaker 4

Thanks for the question, Greg. This is Debbie. We're feeling optimistic about the outlook for retail it pertains to our demand trend. We think that half point cut yesterday is really going to help stimulate a little bit more confidence in the consumer that we approach on a daily basis. We believe that the marketing economics that we saw in Q1 are evident in the fact that our order trend will improve.

Speaker 4

So our orders in Q1 from an organic perspective were down 1.6. Our marketing spend was down 11. And so we like the relationship between those 2 as we move into Q2 and a more seasonally suitable time for us to be spending in advertising, we'll be reintroducing more traditional awareness campaigns to take advantage of that cyber timing. So we're really pleased with our outlook in terms of where we think this business will trend. Now that the industry are there that the housing market will listen up and the consumer confidence should start to rebound.

Speaker 3

Okay, great. Thank you.

Operator

And your next question comes from the line of Alex Fuhrman with Craig Hallum Capital Group. Your line is open.

Speaker 5

Hey guys, thanks a lot for taking my question. I was curious why you're starting to see customers asking for delivery further away from the order date. Is that something you see as an ongoing trend that could potentially cause revenue to lag order growth over the next couple of quarters or years? Or is that really more of a one time thing that's impacting this year?

Speaker 2

John, do you want to take that?

Speaker 6

Sure. I'd be happy to take that. Thanks, Alex. This is John. I think there's a couple of factors.

Speaker 6

Number 1, we've seen a lot more or a significant increase in larger projects in the last quarter. I think if you look at projects we had over $5,000,000 it was up over 40% for the quarter. And those projects typically are a little more complex because of their size and just by the very nature have longer lead times and cycles. So I think that's part of it. The other thing I would say is, I think our clients are becoming accustomed to it just taking longer to get their construction projects done.

Speaker 6

So they're moving a little faster. They're trying to get orders in a bit earlier to make sure that their delivery times are met.

Speaker 1

Yes, Alex, this is Jeff. I might just tag on just to give a little perspective on trends over time. All of what John just described is certainly true for the Americas. The larger project sizes, I would say, is also being seen in the international contract part of our business and it's driving the same phenomenon. And this isn't necessarily new, it's just kind of ongoing and I think it's a little more extended this quarter than we have been seeing.

Speaker 1

But if you go back in time, we typically pre COVID our backlog tended to account for somewhere between 7 to 8 weeks of revenue. And since COVID during pre COVID or just after COVID spiked way up and then since then it's kind of settled down into the 10 to 12 week range and there it's been hovering. So it's certainly not a new trend. I suspect it's just changing customer behavior as John just described and we'll see where it goes from here.

Speaker 2

And I think just to add on to that one more data point, Alex. With this quarter, we saw our orders weighted heavily more in July August. And so as you saw that trend spike throughout the quarter, we just produced less in the quarter. So it was sort of a conglomeration of all of those things.

Speaker 5

Okay. That's really helpful. Thank you all for that detail. And then nice to see order growth for North America contract leading the order growth for you this quarter. I'm curious if there's any particular industry groups that have been driving that.

Speaker 5

It was nice to see a headline this week about Amazon having their employees back in the office 5 days a week next year. Curious if you're seeing more companies kind of going down that route and driving more large projects?

Speaker 6

I think certainly, most of the conversations we're having with clients, the majority are looking for ways to continue to get people back in the office. They understand the power of connection and culture and well-being and all that goes with being together in the space. I think we've seen a lot of really good activity in financial services, banking, pharma, public sector, healthcare excuse me, those segments you would expect to do well and have been doing well. We've actually seen some uptick in the technology sector. In fact, our Northern California region was one of the strongest performing regions in this past quarter.

Speaker 6

So pretty wide spread in terms of where the business is coming from.

Speaker 1

And Alex, this is Jeff. I might tag on to that and say we're super encouraged to see that activity pick up in the Americas, but I'd also point out we had order growth for the international specialty segment. And what's really encouraging about that is we're beginning to see larger projects break loose, which is encouraging. We're building client relationships with the Knoll brand, particularly in the legal and business services sector in Europe, which is great. We're growing our regional account.

Speaker 1

These are accounts that are headquartered in the APMEA region and seeing some large project opportunities break loose there and also some key technology sector wins in India as well as healthcare in the Middle East. So there's a number of sectors internationally that we're seeing some real positive momentum.

Speaker 5

Okay, that's really helpful. Thank you all very much.

Operator

And your next question comes from the line of Reuben Garner with The Benchmark Company. Your line is open.

Speaker 7

Thank you. Good morning, everybody or good evening, everybody, excuse me. I guess to start on the margin side, it seems that things have kind of leveled off here as your business is kind of stabilizing. I wanted to kind of look longer term at where you think things can go. I think you've been kind of in the 38.5% to 39.5% range the last 5 or 6 quarters now.

Speaker 7

Curious where you think that that can go longer term and how much volume is kind of or how much that is dependent on volume versus maybe things that you have within your control still?

Speaker 1

Yes, Ruben, this is Jeff. I'll share with a similar comment as I did last quarter, which is, I think you're right that we're at a point where we think we're seeing gross margins across the group somewhat stabilized, but for a given level of volume. I think the next leg up for us is as we see economic conditions improve, we have a real opportunity to leverage overhead costs across our manufacturing footprint globally, as well as in the retail business across the SG and A costs in that business. That's going to be what our next opportunity is. I mean, there's some price incremental pricing benefit, but we're kind of returned to what our more normalized annual price increases.

Speaker 1

So the next leg up is in leverage and we expect to see that as we move into the back half of the year. I won't quantify for you a gross margin estimate for the back half, but we do have expectations that will be up from current levels.

Speaker 2

And I would say long term too, Ruben, just to add everything Jeff said as well. As we are our long term growth plans for retail start to kick in, obviously, that business is at a higher margin, so we'll see that start to flow through and continue to stabilize. And offset is these larger projects that come in that tend to be at a little bit lower margins. I think that will be a helpful balance in the future.

Speaker 7

Got it. And then, Jeff, you mentioned that the full year guidance, I think you said it contemplated like an improving macro backdrop in the second half of the year. I was wondering if you could elaborate on that. Is that across all of your businesses? Is that kind of geared more towards maybe retail and the impact that rates can have there?

Speaker 7

Just any color would be helpful.

Speaker 2

I think it's geared towards all of our businesses, Dhruv, and I certainly think there's a level of certainty with what happened yesterday with the Fed in the U. S. I think the indicators that we've seen in the business are coming to fruition. I think we've been talking to you guys about these indicators for 2 or 3 quarters now, and we're starting to see consistent orders above last year. I certainly think as it comes to mortgage rates and the resale market starting to open up in the U.

Speaker 2

S, that will buoy the retail business. I think we've had some people sitting on the sidelines that we think will start to come and play and move. So I think it will benefit the entire business. But the indicators for us continue to be moving in a very consistent fashion forward.

Speaker 7

Great. Thank you. And good luck to them through the end of the year.

Speaker 2

Thank you, Ruben.

Operator

And your next question comes from the line of Brian Gordon with Water Tower Research. Your line is open.

Speaker 8

Hey, good afternoon, everyone. Last quarter, you guys noted that the work to integrate Knoll and some of the other brands into the international dealer network in particular was continuing. And I was just hoping you could give us an update on where you are with this process and maybe what is left to do there?

Speaker 1

Hey, Brian, good to talk to you. This is Jeff. Yes, quick update on that. As of the end of Q1, we have integrated the Miller Knoll combined dealer network across about 60% of the international network. And the intent and goal is to by end of this fiscal year be through the entire network.

Speaker 1

So, progress continues. They're making good strides. And as I in my earlier comment mentioned, we're starting to see some real opportunities with the Knoll brand through that combined network.

Speaker 8

That's great. That's good to hear. Second question, kind of maybe a bit of a bigger picture kind of question. Just kind of wondering what you guys have been hearing from your customers and your dealers about back to work and hybrid trends and maybe where the expectation is the market is going to settle on this? And then the follow-up to that would be how you guys are feeling about your product portfolio for hybrid and collaboration and those kinds of

Speaker 2

things? That's a great question. I think we're hearing a lot less about the return to office quandary and a lot more about people making decisions to be together versus apart and to support limited hybrid in many occasions. I think the Amazon announcement was great news to us, but I think it has become less of an issue and more of a push to being together more frequently. And John, I'm sure you would add something from that from the U.

Speaker 2

S. As far as what you're hearing from customers and dealers. It was

Speaker 6

very similar, Andy, in terms of everyone really realizing the benefit of being back, being back, being together in the office. And I think the second part of the question, we feel really good about the product portfolio and all the brands in the collective and our ability to meet the changing needs of the workplace, right, as this whole post COVID work environment continues to evolve.

Speaker 2

I think one of the rich things about the last few years was our research and insights team has been able to study some very complex problems. And I think we've been able to use many of those insights to really help innovation and develop our product assortment and feel really strongly about that.

Speaker 8

Great. Thank you very much for the additional detail.

Speaker 2

Thank you.

Operator

And there are no further questions. So I will now turn the floor back to President and CEO, Andy Owen, for any closing remarks.

Speaker 2

Thanks Thanks again everyone for joining us on the call and we appreciate your continued support at Miller Knoll and we're looking forward to updating you on our next quarterly call. Have a lovely evening.

Operator

And ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.

Speaker 2

Please wait. The conference will begin shortly.

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