Q1 2021 Herman Miller Inc Earnings Call

Investor Relations and treasurer.

Good morning, everyone.

Joining me today on our first quarter earnings call or any owner President and Chief Executive Officer, Jeff, That's our Chief Financial Officer.

Michael President of North America contract and Debbie probes President of Herman Miller retail.

As you may have noticed in our press release that was posted yesterday, we have changed our approach to the quarterly press release to adopt a shareholder letter format that replaces our prepared remarks on the conference call we.

We believe this approach both provides more timely information for investors and allows more time for questions and dialogue on the call.

We have posted yesterday's press release on our Investor Relations website at Herman Miller Dot com.

Wherever any figures are presented on a non-GAAP basis, we have reconciled to GAAP and non-GAAP amounts within the press release as well.

Before we begin todays Q and a session I would like to remind everyone that this call will include forward looking statements.

For information on factors that could cause actual results to differ materially from these forward looking statements. Please refer to the earnings press release as well as our annual and quarterly FCC filings 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.

Todays call is scheduled for 60 minutes with that I will turn the call back over to the operator, and we'll begin to take your questions.

Ladies and gentlemen, if you have a question recombinant time. Please press Star then the one key on your Touchtone phone.

If your question has been answered your stupid yourself from the queue. Please press the pound cheap.

Our first question comes from Greg Burns from Sidoti <unk> Company.

Good morning, Thanks for taking the questions.

<unk>.

Just wanted to I guess start off on the strong margins hmm to get a sense of how sustainable they are.

How sustainable they are across the different segments of the business I know you have taken some temporary.

Cost actions at the beginning of the that the parent then Nick So I was just wondering.

Some of that starts to go online or come back into the TNL. Just just can you just give a sense of you know relative to where we were this quarter, maybe how we should think about margins and some of the temporary items that you were avoiding going forward. Thanks.

Yeah, Greg This is Jim I'll, Oh, I'll, maybe start off here, so you're right. We certainly did.

As reflected in our in our results for the quarter and last quarter for that matter take some fairly aggressive actions to pull back on costs. Some of those things are more structural some of them are intentionally temporary and in fact earlier in the quarter I'm sure. You saw we announced we did return some of the some of the cost reductions that were.

Put in place in the form of temporary wage reductions.

Reduction so those have been brought back if you think about kind of the <unk> in at a headline level that they kind of actions that we've taken to reduce cost. We had some workforce reduction actions that we took that equate to somewhere between 35 and $39 million annually.

We have some employee benefit programs that were that were temporarily reduce that's probably on the order of 24 $25 million annually. That's still in place by the way that would be exclusive of the wage rollbacks and then we pulled back in areas like travel and expenses and so forth which naturally.

Is occurring because of some of the restraints that we're feeling around covance. So you're looking at somewhere between $85 million to $90 million per year in current expense reductions.

As we roll forward, we have to make a determination when the right time is to bring.

Bring some of those benefit programs back that's under evaluation right now so we're not yet ready to make that call, but that's something that we're evaluating clearly good results for the first quarter, but yeah I'm sure we'll get into this further on the call, but you know Weve got some order pressures that we're feeling and so we're still expecting that there's going to be some pressure that we're up against.

So those cost reductions are under evaluation, we do have it you know in addition to those by the way, there's some discretionary and variable type expenses that occur naturally in the business with lower revenue levels I would say moving forward.

Somewhat offsetting those and it's certainly not offsetting all of those reductions are not even close but we are going to be making some incremental investments in some of the digital program. We mentioned in the shareholder letter or some of the progress. We've made there is more to do in that area and we're not going to pull back on that we think the time is right to make those investor.

And so we're going to see some ramp up in digital spending Uh huh.

Got Debbie on the call here, representing the retail business and I'm sure you'll have an opportunity to talk a little bit about some of the programs that are in place there and some of the marketing programs and so forth that we're going to be picking up some spend on as well. So I think I would frame. It as those are the structural cost reductions that we've made if you look at margin performer.

By segment clearly the headline for the quarter here was the retail business, which benefited tremendously from.

A variety of mix factors that were in our in our favor some of those we expect to be a durable here at least as we move forward into the upcoming quarter, probably offset a little bit by some of the spend initiatives that I mentioned, so a really good margin performance. There I think we expect elevated margin performance in that segment, perhaps not to the same exact.

Level as we move ahead, but nonetheless pretty strong and I'd say for the contract elements of our business.

You know those businesses, while in particularly in North America, and Jon Michael again is on the call and he can speak to that where we're feeling some real mark order pressure, but the teams across the board have done a great job pulling in the reins on spending, particularly in some of those discretionary areas to help offset in the in the segment delivered really strong operating performance as a result.

Part of it and I'd say the same thing for international So we feel pretty good certainly about the Q1 performance and expectations here as we move forward at least in the near term is that we're going to be able to.

At least hold on to some of the benefit, albeit perhaps at a a bit lower topline performance.

Yeah, I think Greg what I would add to that this is Andy right away and I think the last six months have been a testament to the strength of this team to adapt to changing circumstances and keep an eye on the bottom line and like every other company in the World. We've learned a lot about ways. We can operate differently and places where we can do things virtually so I think we expect to see.

A good portion of that carried through to Jeff's point with the investments that we have been making in digital we have an aging infrastructure continuing along the way.

Great I'm sorry, this is Jeff again, I might just add.

I think if you think about the business in the more medium term, we still are believers that de leverage if we if we feel pressure on the top line de leverage is probably in the range of 25% to 30% I would I would say that based on recent performance that's probably at the lower end of that range, but that kind of a kind of how to maybe.

Think about it at a high level.

Okay.

And then looking at the kind of the run.

Relative strength of international Where's that coming from is that was that on the.

Third the back of the backlog coming into the quarter or where you're seeing are you seeing businesses. There start opening up and as they as they do bring employees back they're forced or are there.

They're they're incentivized to start making buying decisions to adjust their offices I'm just trying to get a feel for kind of what's driving that relative strength internationally and maybe is that something we might see in North America as we start to open up here.

Yeah, you know its a great question, Greg I think international sort of give that house. If we look at what's happening in North America, right now, but I would say a big portion of what's happening there is that I've kind of heard that many of the countries and the rest of the world are unrelated to covert. So if we think about the APAC region. You know China is in many ways up and running in a very very normal.

The way we look at our business is there people are walking around without massive people are back in the office. So we are really seeing that part of the world kind of coming back up to normal even in parts of Europe, particularly around Denmark and places like that we have seen life returned to the new normal. So we are optimistic that as we continue down the curve and co then we'll see those things start.

To happen and also don't forget what the opposition of not one hey, we're seeing a really nice up tick in bucket. That's good that's that's supporting international business as well. So a strong indicator, we think of what's coming in the U.S. hopefully if we get this under control, but that business is very bad and very healthy temperature that no I think thats. Good I think just regionally Andy you alluded to.

China, you alluded to parts of Continental Europe, I would also add Japan, and the Middle East Yeah, we're to a really strong performers for the business. This quarter. So that would I think it bears mentioning.

Okay, and then lastly can you just talk about order trends throughout the quarter and I think in the press release you mentioned.

Some pretty good moderation of declines in the first couple of weeks of the second quarter. So can you just give a little bit more more detail is that specific to maybe retail or is it across the board. He just give us a little bit more color on.

Order.

Yes.

Greg This is Jeff maybe just a little bit and I'd ask John and Debbie feel free to chime in and add color here at the headline level. The consolidated level just to give you an idea we were down in total these are organic numbers by the way we were down about 35% organically in the month of June.

Itself that improved we were trending closer to down 20% organically by the time, we closed the quarter and I would say through kind of the back half of the quarter and in the first couple of weeks of the of the second quarter organically on the order of that down 20% still so more consider.

Currently and then just a frame that free with acquisitions were down closer to 10% in the first couple of weeks of the quarter.

Jon Michael or Debbie would you Jon Michael you went away in our North America contract.

Sure Andy Thanks, Good morning, Greg I would say, we definitely saw strengthening in order trends in the <unk> in the back half of Q1 and into Q2.

Another relevant data point, if we look at that opportunity funnel going forward.

It is not down nearly as much as the order trend is and I think that ended.

Indicative of the fact that our clients are still trying to figure out what's next in terms of the future of the office, where we're obviously in conversation with them on that but.

But there is a bit of a pause as as people are trying to figure out what the right. The right next moves are relative to the workplace.

Yeah, I think that's a great place on because I think what we're seeing which we've mentioned to you guys. Before is we're not seeing many cancellations that we are seeing people kind of push things down the road a little bit. So we think of it as things start to turn around and start to see some of that funnel become our operational which we're starting to see in Q2 that he would you add any point of view on retail.

Absolutely. So in the retail segment, we saw June orders, plus 17% Oh, why and then July and August are both within a point or two of the states Oh why so we've definitely seen order trends pick up a couple of dynamics. There. If you consider the first is the engine or east coast brick and mortar locations or so close with.

The majority of that month.

And then secondly in July we launched our new DWR Dot Com website, which has had significant conversion improvement and with our mix contribution of the E. Com sitting at double out why that improvement of conversion has been significant for us our conversion rate about new DWR dot com website at 26%.

That increase.

First is our previous website experience.

There are some really exciting metrics indicate at bats departments right the whole customer journey online.

Okay, great. Thank you I'll hop back in the queue.

Thanks, Greg.

Our next question comes from Steven Ramsey with Thompson Research.

Good morning, everyone.

Oh man.

I guess I'll start with Ken Newman on auto retail.

Can you can you start with the brick and mortar side, you said demand was up 4% the traffic levels down.

Does that mean sales up 4% and then maybe can you go deeper into kind of whats driving driving that figure I mean is it bigger purchases of the bigger higher ticket items or is that customers buying more smaller items just any color.

Absolutely. This is Debbie I can take that question. So we are seeing traffic rate for the bank said, 50% to 55% to last year and her brick and mortar locations.

But we are obviously seeing that performance at the locations and sales force to last year. So what we're seeing is a higher intent customer.

Coming to the physical location at a different point in their customer journey versus what we typically see so usually the store interaction or studio interaction is very much consideration plays with the customers. So brazing.

Collecting ideas and that's what we're seeing is the customer coming to the store studio at the end of their journey ready to transact once it got and touched about the product and so we're seeing higher intent, that's driving higher conversion and the traffic that was coming through the door and were also seeing higher order value as well as customers are.

I think more on upgrading their home and that obviously, our homes have more pressure on them that they've ever had before we have to make species work harder with them. The whole people are looking for multiyear hurry.

Larry King and tactics and so we're really able to help with that drive a florida values for our store channels as a result.

Great color I guess on the web growth for retail.

I guess with the strong growth in the orders being up you know so strong as well in the quarter to two questions. I guess are you able to ship and deliver products in a timely manner.

Second how much of that order reflects a buildup of you know just demand not being able to ship as timely as maybe quote normal times and and the strong order patterns up 40% in Q1 does that indicate sales trending at similar levels on a year over year basis to Q1.

So were going into Q2 was pretty normal backlog coming out of Q1, you know that a little bit of a gen shipped fills volumes were obviously orders that we collect data in April or may and didn't ship, but our orders and sales levels are very close to each other but of course, that's Q1 in totality. So I feel really good about that.

The order trends that we're seeing.

Great. So there's no reason that that you know Q2 sales. There is no puts and takes that would take Q2 sales much much lower it necessarily but what orders would indicate.

Yeah, we got a slight bump coming into June from from orders that we took in April may, but we are expecting similar order rates that we're seeing in July.

July and August carry forward into Q2.

Great and then last one for me kind of switching to North America contract.

In discussions with companies and clients.

You know what are they saying about the future of the office compared to some of the.

Some of those theories and ideas that brokers and others have discussed as well as office furniture companies have discussed on what the office of the future looks like do any orders that you have now reflect kind of the new world of offices.

Yes.

You know I think these are this is.

Actually if I had John and I will have when you're done go ahead.

Okay. Thanks, Andy Hi.

Hi, Stephen I would say we're definitely.

Seeing customers make that transition in new thinking about the future of the workplace and I think the.

Our point of view and what we see in in client conversations is the work model, it's going to be much more distributed.

Pre co bid.

14% of employers said that their employees could work effectively remotely similar.

Similar survey done in June of this year that number was 42%.

So we've seen.

The migration to a more distributed work model, but we are I think the pandemic has definitely accelerated that and I think we're going to be in a mode, where the workplace, including the office is going to be more on demand more of an on demand resource that supports different types of work.

And adds value and the office is really shines in the areas of building culture, and community and enhancing individual focus and supporting intensive teamwork and collaboration.

And we're starting to see that.

The shift in terms of layout and design that supports those primary functions.

What would you add to that is yes.

Yeah, and I would just even if this is represented a real opportunity for us and one we're excited about because the distribution of the workforce has been happening for a very long time prior to closing, but given the multichannel distribution model, we have given our strength in residential furnishing and given the fact that we are here to help people sort of revamp the spaces. They do have better Austria.

10, as well as support workers that are working from home and now schooling from home. We think were even more set out for a distributed I worked for us in the future than we ever happened before so I definitely think that the companies we're talking to that customers were working with her on a continuum everywhere from we're coming back to normal.

He came back to the office just like we used to.

The way too.

Larger portion of our folks are going to be working from home well, we're supporting every customer in a different way along that journey. So it's been a really interesting really interesting time for the company and full of opportunity for our business model.

Great. Thanks for the color.

Thank you.

Our next question comes from Ruben guarded with benchmark.

Thank you good morning, everybody.

Hi, good morning, So had some technical difficulties and missed most of Gregs questions I caught the tail end, so sorry, if I repeat anything, but oh I want to start with the backlog I think you said it was flat year over year in the release.

It doesn't sound like any of that is driven by what's going on in retail so I guess.

I guess number one is that correct and number.

Number two if it is does that mean.

And.

Obviously in the prior crises there has been a big decline in backlog, but that's been kind of simultaneous with the order drops I mean does that give you guys increased confidence that maybe things might come back quicker this time around than they than they have in prior recessions and specifically talking about North America.

Hey, Hey, Rubin. This is Jeff good morning, and that will have a repeat question for the record. So a one for one [laughter], let me give you a little color on on the backlog.

So specific to the North American contract business backlog for for that for that segment is down about 20%, Okay rough numbers.

Retail as you said its Debbie said you know, it's where I don't know if you heard that comment, but she said its a fairly normal backlog coming out of the first quarter. So no big surprises there are actually in pretty good shape and the international backlog is actually up it's up it's up about 13% and that's organic okay. So Jim.

To kind of give you a little color by segment.

I would say generally speaking.

Well, while there's still a lot of uncertainty and I don't want to paint the picture otherwise I mean, obviously you with an AG business, we're seeing some order pressure and with backlog being down there's still a lot of uncertainty, but I would tell you just given the circumstances of whats driving the pressure.

Iris related field episodic I think.

I think we do have a bit more confidence that if we can get.

Get some some help from science around this I think I think we can get our get back on her on her feet a little quicker. So I think thats, our working assumption here now that's not to say rather woods by any stretch right. So.

So and the other thing I would say about international as we were really pleased no question that businesses performed very very well and then he said a little further ahead, perhaps on the recovery curve. The one thing I would I would point out though is with international in this segment of our business that tends to be a bit longer dated in the backlog just nature of the business you've got.

Projects that have longer shipping distances, it tends to be a bit more project driven in general So I just would caution.

Some of the some of the assumptions around translating that backlog into shift into shipments.

It tends to be a little longer dated in general terms than we see in North America.

Okay. No that was helpful. And then just a follow up to that you gave kind of or I think Debbie gave a retail a breakdown of what kinda order trends you saw throughout the quarter can you can you do the same thing for organically in the international business and then in North America.

What was the progression like I know you mentioned it was modestly better in the second half can you kind of break down what that looked like for us.

Yeah happy to this is Jeff again Rubin I'll start with ticking in order as you've mentioned some international business. We kind of started it started the quarter with organic order rates down about 20% just a little north of 20% decrease year over year on that.

That improved markedly as we moved through the quarter. We ended a as you saw the reported number or the organic number is that we reported down about 10% in total in the first couple of weeks of the new quarter, thus far down about 5%. So we've seen an improvement there.

Hope to hold on to that obviously and then in the North American contract side.

June was not not great right, we started off in a in a bit of a whole we were down close to 50% in order entry levels that improved meaningfully as we close the quarter I think the month of August was closer to just below 40% declines year over year and in the first couple of weeks of the new quarter down around 30%.

So still down meaningfully year over year, but we like the trend.

Yes. Thanks.

Thanks, Jeff that sums it sounds like him to for to let's.

Here's where I think I might be a might be replicating because I caught the tail end of the responses to Greg I want to hit on the go.

The sustainability of margins and you mentioned in the release, the 25% to 30% Decremental I guess my question is.

Given that everything.

How everything is progressing and I think mix and channel mix and product mix has a lot to do with with your margin profile. Today is it fair to take kind of where we are in Q1 and apply a decremental margin maybe.

Maybe sequentially rather than looking at it on a year over year basis I mean.

I mean, clearly the first quarter versus a year ago. The decremental margins did not come into the picture Hot help US go from 15 to at the Inc. level to you know the next couple of few quarters.

Yes Reuben.

That was I'd say your three for three somewhat here, maybe a follow tip on that with that last question.

[laughter] or so.

Maybe stepping back for a minute you know it you followed us long enough to know I mean, our overall margin performance in this business is never a straight walk right and so we always try to make the point that period to period changes you've got everything from you know.

In in periods, where were over performing you've got factors like bonus costs expenses that ramp up from one period to the next odd that can drive changes and so you know this is not normal time, clearly we're coming out of a first quarter, we had very favorable.

Mix factors, we can certainly get into that a little further for you if you'd like.

But what I would tell you is where we continue to be believers that probably the lower end of that range is reasonable I would say it doesn't seem unreasonable that you could you could look at that on a on a sequential basis, I guess I'd have to step back and and dig into that.

Math myself, a little bit, but I don't think thats sounds on reasonable certainly Q1 because of the significant pullback in cost that we that we pursue.

Pursued we saw we kind of bucked that that typical expectation on de leverage rent, we saw lower revenue and higher operating profit that's not the necessarily the expectation the business going forward because as I said you may be missed it.

We pulled back in a number of structural areas costs might some of those are temporary initiatives and so were we have a few of those under evaluation is for when it when the time is right to bring some of those things back things like temporary benefit reductions, we haven't made that decision fully yet, but it's in front of us.

Travel and entertainment right Teeny as we start to loosen up a little bit and get people moving around the world a bit we're going to see cost elevate related that we brought back the temporary pullback in wages earlier in the quarter that we had that we've announced and so weve already pulled some of those costs back theres more in front of us.

The other thing I would say is.

One of the things that that Andy has been you can't you can speak to that but I can say from my perspective, it's been a really I think past.

I think passionate about is really ring fencing. Some of these digital initiatives that we have in the business and protecting those and leaning forward into those investments as opposed to pulling back. So there's areas of the business that we are definitely want to be on our front foot in some of those investments are slated for the upcoming quarters and so we're going to see a ramp up in digital.

Spending in a few areas of the business that I think all some told.

Kind of give us a sense that that 25% to 30% de leverage is reasonable, but I would say based on recent performance probably toward the lower end of that range.

Okay and is there anybody in the queue behind me I do have one more but I don't want to be.

I don't want to be self this year.

Go ahead, and we were a bit okay all right.

All right I'll sneak one more and then so so I guess it kind of on that note, Jeff the E Commerce.

How much does it sort of in the retail business, specifically I mean does the does the E commerce.

Boosting that sounds like that drove a lot of the growth in the quarter and is likely going to continue I mean, how much of the margin.

A pickup that you've got is from selling through through that channel, where you don't have the brick and mortar and I know you are probably selling more of the home office through that E Commerce.

Channel right now but.

How much are you I guess, how do we think about long term what retail margins could look like and did the E commerce shifts if it's more of a permanent so.

Shift or a permanent pause.

Positive for the company. It is it possible that your margin targets or maybe you know get changed for the longer term.

So robin this is Debbie there there are really three dynamics at play there impacting margin performance in retail right. Now one of those is category makes me to see a big shift into our workspace category, which is predominantly a maturation.

Hi, curious enough product that we manufacture a perfectly we also saw an audience mix shift.

So we saw a shift from our retail contract business and our retail treat disease into the residential consumer so.

Residential consumer to treat penetrations that same last year were about 70 Safi and.

This year, we're serving 83% residential consumers directly versus 17 to trade and so that's an important note because despite the fact that we were slightly more promotional than last year.

Our trade channel has a higher discounting rate. So we were able to save on discounting as we as we drove record.

Through that residential channel directly and then the last element it's channel mix, So obviously with us shifting more volume there.

Yes, we saw significant improvement in margin and that's really because of the category mix that we're seeing in lab, but also because we don't have such a high commission structure associated with wet seal.

We do and sense I look this quarter, our studio sat with the wet seal they helped drive but obviously the commission structure sales doesn't studios is higher so some of these things are dynamics that we can actively in pain.

As we go through the rest of the year, but we do expect to see margins normalize.

A little bit to the course of the year.

Got it great. Thank you guys and congrats sorry go ahead and be no I would just add to that that.

You know we spent a lot of time at building a really strong leadership team in the retail business and building strength, there's been a ton of opportunity and then we had calls in the past a retail has not been a strength for us and I think when you said in your notes it's gone from laggard two liter and I think we all agree with that so when Debbie said, we see margins normalize.

The thing I think we see margins normalizing to what is the new normal in retail because of the opportunity. That's ahead of us. So we think that this is going to be a bright spot going forward certainly be benefited from mix into task seating I, but there have been a lot of other categories in the retail business that have performed extremely well given the focus on the distributed workforce. So we're very optimistic about this business in the future.

And the team we are and we have some tremendous lever for growth and talk a little.

Talk a little bit about the investment in digital.

Forming sourcing burden, new DWR dot com website, and we have no.

Learn a new hay website under.

Under underway, but beyond just the digital opportunity we have a huge assortment opportunity as this business was previously being run as a pretty.

Finally on the call I loved business was about what we get showpiece in a cyclical studio and our threat catalog and as we're moving to more of an omni channel approach to assortment duration that gives us a tremendous amount of growth potential.

Our audience management opportunity is also a huge we had been using a last touch attribution model and we're moving to a multi touch attribution models, who really understand the.

The role that each marketing channel plays in the customer journey, but we.

But in the meantime be making some shifts in the way that we think about our marketing spend across channels and are seeing redcard return I've been performing well.

We have opportunities and our planning and inventory in terms of enhancing inventory turns and reducing liquidation.

We're working on the launch of a new retail concept was just spoke briefly about an hour.

Shareholder letter last night, that's really focused on our performance during and work from home and retail as our Assortments and those stores are really offer the customers the opportunity to explore the breadth of our performance category and also really understand how did that perform as category can improve their personal prefer.

For me, it's a drag wellness and throughout the course of fairway.

We have opportunities in our fulfillment channels and with our warehousing as we grow the business and then lastly ongoing cost savings as we continue to strive toward the one Herman Miller our approach has been mixed retail segment.

Great. Thanks, again, guys for all the detail congrats on an impressive quarter and good luck navigating through the rest of the year and hopefully everybody stay safe.

You too thank you.

Sure.

And I'm not showing any further questions at this time I turn the call back over to Andy.

Thank you so much though you I'll just remind you we're big believers in our strategy, we really think it reinforces our purpose of design for the good of human kind and we believe that we will not only weather the near term disruption from coal bed, but that will emerge stronger on the other side. So thank you.

On the call today and we appreciate your continued interest in Herman Miller, I mean, I look forward to updating you again next quarter take care and they say.

Ladies and gentlemen, this does conclude todays presentation you may now disconnect and have a wonderful there.

Okay.