MILLERKNOLL, INC. Q1 FY2025 earnings call

Andi Owen started by remembering Budd Bugatch. MillerKnoll entered fiscal year 2025 with momentum, with orders up year-over-year and demand improving. The Americas Contract segment saw order growth driven by large orders and positive indicators like project funnel additions. Initiatives included the Design Within Impact platform, new flagship locations in London and New York, dozens of new products and sustainable materials launched, and healthcare design recognition. The Retail segment focused on capturing demand, outperformed retail industry comparisons in North America, and had growth initiatives like store expansion. MillerKnoll was certified as a 2024 US Great Place to Work, and new directors were added to the Board.

In the Americas Contract segment, net sales for the quarter were $455 million, representing an organic decrease of 7% from the same quarter a year ago. New orders in the period totaled just under $513 million, which was up 5.7% over last year organically and sequentially up 6.8% from the prior quarter. 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. Within the International Contract and Specialty segment, net sales in the first quarter of $214 million were down 6.5% on a reported basis and down 6.3% organically year-over-year. Orders during the quarter totaled $234 million, resulting in a year-over-year increase of 2.7% on a reported basis and up 3.1% organically. Segment operating margins in the quarter totaled 4.4% compared to 5% in the prior year. On an adjusted basis, operating margin for the quarter was 7.9%. Turning to our Retail segment, we reported net sales in the quarter of $193 million. 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 million were down 4.7% last year on a reported basis and down 1.6% organically compared to last year. The Retail segment operating margin totaled 2.3% in the first quarter compared to 1.1% a year ago. And on an adjusted basis, operating margin for the quarter was 2.8%.

Maintained full year adjusted earnings guidance of $2.20 per share, supported by global contract demand trends, increased backlog, and expected macroeconomic improvements in the second half. Expected second quarter fiscal 2025 net sales to range between $950 million and $990 million. Adjusted diluted earnings in the second quarter are expected to range between $0.51 and $0.57 per share, considering the shift in holiday/cyber promotional period moving revenue from the second to the third quarter.

Customers increasing the time between order entry and requested shipment times, pushing revenue to subsequent quarters. Shift in business and product mix keeping a lid on gross margin performance. Front-end loading of marketing spend for cyber promotions not fully reflected in the quarter's revenue.

Q: 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, 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 second quarter?

A: Yeah. Hey, Greg, good to be with you tonight. This is Jeff. I'll start. A couple 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'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. 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 -- the 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.

Q: Okay, great. Thanks for that color. Then, 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?

A: Thanks for the question, Greg. This is Debbie. We're feeling optimistic about the outlook for retail as it pertains to our demand trend. We think that 0.5 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. 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 two. 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 indicators are there that the housing market will listen up and the consumer confidence should start to rebound.

Q: Hi, 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?

A: Sure, I'd be happy to take that. Thanks. Alex, this is John. I think there's a couple of factors. Number one, 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 million. 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. 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.

Q: 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 five or six quarters now. 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.

A: Yeah. Reuben, 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'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 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&A cost 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 are more normalized annual price increases. 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 it'll be up from current levels.

Q: Hey, Brian, good to talk to you. Yeah, a quick update on that. As of the end of Q1, we have integrated the MillerKnoll 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. 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.

Q: Those are great questions. 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 US as far as what you're hearing from customers and dealers.

A: Very similar, Andi, in terms of everyone really realizing the benefit of 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.