MillerKnoll, Inc. (NASDAQ:MLKN) Q1 2024 Earnings Call Transcript

MillerKnoll, Inc. (NASDAQ:MLKN) Q1 2024 Earnings Call Transcript September 26, 2023

MillerKnoll, Inc. beats earnings expectations. Reported EPS is $0.37, expectations were $0.21.

Operator: Good evening and welcome to MillerKnoll’s Quarterly Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Vice President of Investor Relations, Carola Mengolini.

Carola Mengolini: Good evening and welcome to MillerKnoll’s first quarter fiscal 2024 conference call. I am joined by Andi Owen, Chief Executive Officer; and Jeff Stutz, Chief Financial Officer. Also available during the Q&A session are John Michael, President of Americas Contract; and Debbie Propst, President of Global Retail. Before I turn the call over to Andi, 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 from those expressed or implied. Please evaluate the forward-looking information in the context of these factors which are detailed in today’s press release.

The forward-looking statements are 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 posted on our Investor Relations website at millerknoll.com. With that, I will turn the call over to Andi. Andi?

Andi Owen: Thanks, Carola. Good evening, everyone, and thank you for joining our call. I’m very excited to share that our team delivered a strong first quarter, as evidenced by our top-line results and margin expansion. Across our enterprise, we have set ourselves up to seize opportunity as market conditions improve, and we believe we are at an inflection point. Now regarding our continuing strategy, I’d like to highlight some of the efforts we’re making to become more resilient and future-proof our business, including diversifying our business both in North America and globally, streamlining our global operations, moving production and capacity efficiently and investing in e-commerce. We believe that the work we’re doing is paying off with much to look forward to on the horizon.

At the same time, we remain pragmatic about the next few months. We’re still in the early period of recovery, and our business segments reflect a varied economic conditions around the globe. Right now, we have cause for both enthusiasm and vigilance. We’ve seen companies begin to take the leap back into physical space and announced return to office policies. Office leasing in the US began to rebound in the second quarter of 2023, and we’re seeing this amongst our clients as companies continue to announce return to office policies. Moreover, the American Institute of Architects’ Billing Index, or ABI, has been flat for the last six months, suggesting a slow, but stable construction outlook. Having said that, we’re still seeing mortgage rates at 20-year highs and uncertainty remains about future rate hikes, which dampens the housing market and impacts the near term in our Retail segment.

Overall, we remain focused on economic and industry activity worldwide so that we can continue to deliver with our customers and clients value most. Our research and insights team is best-in-class, bringing the latest data and learning to our customers. This fall, we’ll be sharing our latest point of view on the workplace and defining ideal spaces based on quality and actionable data. This fresh, thoughtful perspective emphasizes what we believe are the key factors to designing the best basis to support thriving and engaged teams. Internationally, we’re seeing some pockets of softness, mainly centered in Europe and China. Similar to North America and the rest of world were further pursuing resilient sectors and global accounts. We’ve seen that our scalability and ability to deliver a wider range of products as a unique market advantage, and we’ll continue to seek out these wins.

In addition, over the next 12 months, we plan to transition 60 more international Herman Miller dealers into MillerKnoll dealers, expanding our offering to clients and our share of wallet with our dealers. Regarding Retail, the deceleration in the North American housing market and the upswing in interest rates across Europe have continued to influence demand in this segment when compared to the previous year. Nevertheless, during the quarter, the order trajectory in the North American market surpassed that of other regions, primarily attributed to enhancements in our direct-to-consumer channel. We’re strategically allocating resources to improve our digital platforms and technological infrastructure, aiming to enhance the overall customer experience and satisfaction levels, all while intensifying their efforts to fortify brand awareness.

Furthermore, in the first quarter, we opened a new design within REIT store in Ardmore, Pennsylvania, which has delivered very promising early results, including robust foot traffic and order placement. Now I’d like to talk a little bit about our gross margins. It expanded year-over-year sequentially and across all of our business segments. In the past, I’ve talked about focusing on what we can control, and this performance is proof of that. We’re seeing efficiency improvements derived from our synergy capture. We have pricing power. We’re laser focused on inventory management and product mix, and we continue to seek cost reductions. All of these key elements that are enabling us to improve the profitability of our core operations. I’m extremely proud of all the work our teams have done and continue to do every day to seek and seize opportunities.

Finally, this quarter was not short on activity, so I’ll walk you through a few of the highlights. We started out strong with a successful phase, the largest North American presentation of our MillerKnoll collective of contract products and services. Throughout the quarter, we debuted new products and textiles across our collective, including NaughtOne ‘s Morse Table System, which was awarded Gold by Best of NeoCon, Herman Miller’s first collaboration with Gabriel Tan launching the Luva Modular Sofa and Cyclade Tables as well as the beautiful array of textiles from our textiles group, many with sustainable fabrics at the forefront. The HAY team launched a collection of lamps and other ancillary items. Holly Hunt celebrated their 40th anniversary with a collection of beautiful pieces.

At Knoll, we celebrated the 75th anniversary of the Iconic Womb Chair, while also introducing the Saarinen Table at a modern Lounge height. We re-launched Herman Miller archival classics, all with fresh interpretation, and we made significant progress towards our sustainability goals, bringing solar power to our UK operations facility. All-in-all, I’m pleased with the strong quarter we delivered. Our team is connecting and moving the business forward in exciting creative ways and we’re capturing market share and growth opportunities as they arrive. While I believe the rest of fiscal year 2024 will remain a transitional year, economic indicators trending more positively pockets of weakness remaining. I’m confident in our ability to deliver shareholder value as we are operating efficiently and making decisions to further improve our margins and profitability.

I’m looking forward to progressing towards our goals, positively impacting our industry and advancing our strategy to remain resilient and ready for the future. With that, I want to thank you for your continued partnership with us. I’ll now turn the call over to Jeff for a deeper look at our financials.

Jeff Stutz: Thank you, Andi, and good evening, everyone. As Andi just said, we are proud that our teams delivered a very strong quarter. The results reflect some of the themes that we’ve been communicating over the past several quarters. First, our focus on diversification, both across geographies, business sectors and customer segments; and second, our focus on margins, taking action across several fronts. For the first quarter, we generated adjusted earnings of $0.37 per share, which were $0.16 above the midpoint of our guidance. Overall, strong net sales and gross margin expansion across all of our business segments drove the over-performance. Net sales in the first quarter were $918 million, above the midpoint of our guidance, driven by strong performance in the Americas Contract segment.

Our consolidated gross margin was 39%, which was 450 basis points higher than the same quarter a year ago and also improved on a sequential period basis. Moreover, this marks the third consecutive quarter of consolidated year-over-year adjusted gross margin expansion. As Andi mentioned, several factors contributed to this, including the realization of price increases, ongoing benefits from integration-related synergies and positive shifts in product and channel mix. Our consolidated adjusted operating margin was 6% for the period. Turning to cash flows in the balance sheet. This quarter, we generated approximately $131 million in cash flow from operations. This represents an increase of nearly $200 million compared to the same quarter last year, mostly driven by working capital improvements.

As a result of this, we were able to retire $66 million of debt and took the opportunity to repurchase approximately 1.7 million shares for a total cash outlay of $31.7 million. We finished the first quarter with a net debt-to-EBITDA ratio of 2.5 times, which puts us comfortably under the maximum limit defined in our lender agreements. New orders at the consolidated level totaled $914 million in the first quarter, reflecting an organic decrease of 1.3% from the same quarter last year. While this is lower from last year on an absolute basis, the rate of year-over-year decrease once again improved this quarter. Within our Americas Contract segment, net sales in the period were $490 million, representing an organic decrease of 1.7% from the same quarter last year.

New orders in the period totaled $487 million, which was up 2.1% over last year. This is particularly encouraging as it’s the first time in four quarters we’ve reported an increase in order levels in the Americas segment. I’d also like to highlight the fact that our Americas Contract team delivered another quarter of double-digit adjusted operating margin, which totaled 10.6% in the quarter. Turning to our International Contract and Specialty segment. Net sales for the quarter totaled $228 million, down 10.9% organically year-over-year, while new orders came in at $228 million, reflecting a year-over-year organic decrease of 3.6%. While we continue to be very optimistic about the medium to long-term growth potential in this segment, near-term macroeconomic headwinds, particularly in China and parts of Europe, are impacting demand.

Adjusted operating margin within this segment was 6.5% in the first quarter, down year-over-year, driven by lower sales volume. This was partially offset by improved gross margin performance, which continues to benefit from previous price increases and our cost synergy program. Moving to our Global Retail segment. Net sales in the first quarter of $199 million, were down 13.6% organically from the same quarter last year. New orders in this segment of $199 million were 6.4% lower than a year ago on an organic basis. While the slowdown in the North American housing market and the rise in interest rates globally continue to affect the demand for this segment compared to last year. We are optimistic about the progress our team is making in expanding our market share through our direct-to-consumer channels, given the relative order performance of some of our competitors.

And as such, we are further positioning our most mature retail brands as preferred choices for authentic design. Adjusted operating margin in the Retail segment was 1.6%, down year-over-year, mainly due to a combination of lower volume and product mix. Now turning to our near-term guidance and outlook. Given the improvements we are seeing in gross margins across each of our business segments and continued signs of demand stabilization in our North American Contract business, we are increasing our adjusted earnings guidance for the full fiscal year, which we now expect to range between $1.85 and $2.15 per share. As it relates to the second quarter of fiscal 2024, we expect net sales to range between $950 million and $990 million and adjusted diluted earnings to be between $0.52 and $0.58 per share.

And I’d point out that this guidance takes into consideration the relative seasonal increase in sales that we expect to experience in our Retail segment from the first quarter to the second quarter of our fiscal year. So with that overview of the numbers, I’ll now turn the call back over to the operator, and we’ll take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Budd Bugatch with Water Tower Research. Your line is open.

Budd Bugatch: Thank you and good evening, Andi, Jeff, Carola, John and Debbie. Hey, congratulations on the margin performance in the quarter. I would love to start, but just by punching into the order flow during the quarter, if you can make some commentary of how that went particularly in Americas Contract? I think if I caught your drift, you’re saying we’re seeing some improvement in that. And did that show up late in the quarter? And how has the second quarter started?

Jeff Stutz: Yeah, Budd. Good evening. This is Jeff. I’ll start and then John and Andi, if anyone please add as you see fit. So maybe just on the Americas segment in particular, so order activity in the first half of the quarter was positive, Budd, and showed some signs of slowing in August and the first couple of weeks of September. Now with that being said, the timing of last year’s price increase, which, as a reminder, was 8% at the start of October a year ago would certainly be expected to make September’s comparisons much more difficult in the current year. But when we zoom out from that week-to-week data, the general trends over the past three quarters have shown improved demand activity, and that gives us some confidence that more consistent growth is around the corner.

So it was a bit choppy in August and early September. I think we’re seeing some of that bump up against the tough comps from last year due to the sizable price increase we put in place at the beginning of October, but I’ll pause there. And John, anything you have?

John Michael: Thanks, Jeff. I’d just add, if we looked at additions to the funnel for the quarter, we had, I think, the second largest volume of additions to the funnel that we’ve had in the last 12 quarters. So from a project activity perspective, we’re still seeing a fair amount of activity. And we’ve seen the day-to-day business maintain a steady pace as well. So I think to your point, Jeff, a lot of opportunity. I think we’re seeing some regional differences, right, in terms of strength of markets, but overall, very positive.

Budd Bugatch: That’s interesting because we had heard and I’m sure you’re aware that maybe project activity had lessened in the quarter and day-to-day business had replaced that. Is that not what you’re seeing? Is that varying with what you’re seeing?

John Michael: We’re seeing the day-to-day activity maintain a steady solid pace. And in terms of new project adds to the funnel, it’s been very robust for the last 90 days.

Budd Bugatch: Got you. Okay. And in Retail, what are you seeing, Debbie? Are you seeing any indication that maybe we’re at the bottom and not getting any much worse or bouncing along the bottom?

Debbie Propst: So, Budd, just from an order pacing perspective throughout the quarter, we actually saw a very strong August. We attribute softness that we saw in June and July, obviously, to the macroeconomic conditions, but also the heightened travel spend during the summer months. And on an adjusted basis, our August order performance was actually flat to last year. So we feel like we have momentum. Additionally, we believe, as we look at benchmarks externally, we’re taking share, given the increased performance of our marketing tactics and all the other investments that we’re making to improve our efficiencies and how we engage with the customer.

Andi Owen: I think one of the really important point. Hi, Budd, it’s Andi, about the Retail business is also the relative strength that we’re seeing in the North America Retail segment where we are seeing momentum and demand pick up compared to the past few quarters, and that’s encouraging since it’s one of our largest segments.

Debbie Propst: And the segment that we have a direct-to-consumer more mature strategy, our business internationally is largely wholesale where we have limitations with open to buy of the wholesale partners that we sell into.