MILLERKNOLL, INC. Q1 FY2027 earnings call

Operational Discipline and Priorities:

• Management is focusing on three key areas: elevating operational discipline, maintaining rigorous cost discipline, and sharpening focus on capital allocation for debt reduction.
• Resources are being concentrated on high-priority initiatives leveraging brand strength with A&B and commercial real estate specifiers.

North America Contract Segment:

• Revenue declined due to order pull-forward into Q4 FY25; however, internal demand indicators remain constructive.
• Class A leasing in the U.S. shows strength with net absorption at its highest since mid-2020.
• Order softness is viewed as a timing issue rather than structural slowdown, supported by healthy project funnel metrics.
• Proactive supply chain management is underway regarding US-Canada trade developments.

International Contract Segment:

• Orders increased 17.3% YoY despite sales declines, driven by strong activity in Asia, Middle East, Europe, and Latin America.
• New products like the Knoll Concert line are gaining traction in private office categories in Europe.
• Dealer network expansion is prioritized, highlighted by a recent event in Jakarta, Indonesia, engaging dealers from over 20 countries.

Global Retail Segment:

• Delivered consecutive quarters of order growth in North America (+7.5% in Q1).
• Executing store growth strategy with openings of new DWR and Herman Miller stores; planning 14-18 new openings for FY27.
• Optimizing marketing investments and emphasizing smaller format Herman Miller stores.
• Innovative customer engagement initiatives include a furnished home on Shelter Island and social media storytelling.

Cost and Capital Allocation:

• Rigorous expense alignment with revenue levels; deliberate capital deployment decisions.
• Closing a third plant in West Michigan; restructuring Holly Hunt brand operations to improve outlook.
• Generating $49 million in cash from operations; ending quarter with $580 million liquidity.
• Maintaining dividend yield of 3.7%; prioritizing debt reduction while preserving investment capacity.

North America Contract: Net sales were $506 million, down 5.3% year-over-year (YoY). This segment contributed approximately 54.8% of total consolidated revenue ($923 million). Adjusted operating margin was 10.7%, a decline of 70 basis points YoY, driven by sales deleverage and inflationary costs partially offset by pricing realization and tariff refunds.

International Contract: Net sales were $157 million, down 6.4% YoY due to difficult prior-year comparisons. This segment contributed approximately 17.0% of total consolidated revenue. Adjusted operating margin was 4.6%, a significant decline of 390 basis points YoY, impacted by lower sales leverage, showroom investments, timing of sales events, and higher incentive compensation.

Global Retail: Net sales were $261 million, up 2.6% YoY. This segment contributed approximately 28.3% of total consolidated revenue. Comparable sales were flat in North America (up 1.9%). Adjusted operating margin improved to 7.0%, an increase of 580 basis points YoY, benefiting from tariff refunds, pricing realization, and cost savings, though partially offset by new store opening costs.

• Second Quarter FY27 Net Sales: Expected between $972 million and $1.012 billion, representing approx. 4% YoY growth at midpoint.
• Second Quarter FY27 Gross Margin: Expected between 38.3% and 39.3%.
• Second Quarter FY27 Adjusted Operating Expenses: Expected between $321 million and $331 million.
• Second Quarter FY27 Adjusted Diluted EPS: Expected between 43 cents and 49 cents.
• Full Year FY27 Net Sales: Reduced range to $3.88 billion to $4.03 billion, reflecting 3% YoY growth at midpoint (downward revision from previous expectations due to softer Q1 sales/orders).
• Full Year FY27 Adjusted Diluted EPS: Maintained range of $1.85 to $2.15.
• Tariff Impact: Guidance includes an estimated $0.07 per share unfavorable impact from recent US-Canada tariff actions.
• Store Expansion Costs: Guidance assumes approx. $6 million incremental new store expense per quarter YoY.

• Macroeconomic Uncertainty: Softness in North America Contract orders linked to hesitation in state/local government sectors potentially related to upcoming midterms and slower recovery in federal agencies post-downsizing.
• Healthcare Sector Timing: Pause in healthcare sector orders during Q1 due to project timing, though long-term outlook remains positive.
• Trade Policy and Tariffs: Exposure to US-Canada tariff actions impacting supply chain; estimated $0.07/share negative impact on full-year EPS. Mitigation efforts include inventory pulling, supplier sharing arrangements, and dual sourcing.
• Inflationary Pressures: Rising costs for steel, diesel, and energy prices affecting margins; expected 20-30 bps headwind in Q2 from price-cost dynamics.
• Inventory Constraints: Global Retail faced inventory shortages in outdoor categories due to PFAS regulations, impacting June/July sales, though August performance rebounded strongly.
• International Margin Volatility: Declining international contract margins due to product mix shifts toward lower-margin categories, energy cost inflation, and loss of overhead leverage in European manufacturing facilities.

Q: Greg Burns asked why positive internal funnel metrics and constructive market dynamics did not translate to stronger North America Contract sales in Q1, given the reported softness. / A: Jeff Stutz and John Michael explained that while macro indicators like Class A leasing and CEO confidence are bullish, the softness was primarily a timing issue. Customers, particularly in public sector and healthcare, took longer to convert awarded projects into orders due to political uncertainty around midterms and project timing pauses. However, the pipeline remains robust with larger projects taking longer to materialize, and the forecast for the remainder of the year still shows growth.

Q: Ruben Garner inquired about the cadence of North America Contract orders within the quarter, specifically if there was a pause or recovery, and what September looked like. / A: CFO Kevin Veltman noted that the quarter generally improved, with August showing YoY growth. Early September data showed orders up 9% YoY across all segments. Regarding pricing actions, Veltman stated that while April pricing actions flowed through favorably in Q1, rising inflation (oil, diesel) creates a slight headwind of 20-30 bps in Q2. CEO Jeff Stutz added that a 4% surcharge was recently implemented for International Contract, and the company is aggressively managing Canada tariffs through inventory pre-positioning and dual sourcing.

Q: Phillip Lee asked for color on the downward revision of the full-year sales guidance, questioning if it reflects temporary deferral or structural hits, and sought clarity on Global Retail trends amid digital marketing changes. / A: John Michael attributed NAC caution to larger projects taking longer to close rather than structural decline, noting strong dealer activity. Debbie Propst explained the Global Retail guidance cut was driven by soft June/July sales caused by PFAS-related inventory shortages in outdoor categories, which has since resolved with a strong August rebound. Regarding digital marketing, Propst highlighted rising AI-driven ad costs led to a shift toward direct mail, but web performance rebounded significantly in August as inventory issues cleared.

Q: Linda Bolton-Weiser questioned the declining profitability trend in International Contract despite modest revenue growth, asking for drivers of margin compression and future improvement factors. / A: Jeff Stutz explained the margin decline stems from a strategic pivot toward broader product categories (lower margin but higher total dollar volume) to access larger projects, alongside energy cost inflation and manufacturing overhead leverage losses in Europe. Kevin Veltman added that International results are project-based and volatile; the current quarter's low margins were tied to low backlog entering the quarter, but the 17% order growth suggests improvement. New showroom openings and dealer training investments also temporarily weighed on margins.