Q2 2023 MillerKnoll Inc Earnings Call
Good evening and welcome to Miller, Knoll's second quarter earnings Conference call.
As a reminder, this call is being recorded.
I would now like to introduce your host for today's conference Senior Vice President Kevin Veltman.
Okay.
Good evening, Thanks for joining us today I'm joined by Andi, Owen Chief Executive Officer, and Jeff Stutz, Chief Financial Officer also available during the Q&A are John Michael President of Americas contract and Debbie Propst President of global retail.
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. Please evaluate the forward looking information in the context of these factors.
Which are detailed in today's press release are forward looking statements are as of today and 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 Miller Knoll Dot com with that I'll turn the call over to Andy.
Thanks, Kevin Good evening, everyone and thanks again for joining the call as Miller Knoll, we know that one of our strongest assets as our collected up to dine brands often across multiple channels customer segments around the globe.
Second quarter results speak to the benefits of the strategic emphasis we have placed on diversifying our business model over the past few years and the resilience of that model and shifting economic condition.
Alrighty interaction includes both the expansion of our global retail business to now over $1 billion in annual revenue.
Combination of Herman Miller, Knoll, which creates even further opportunities to bring a collective of France to new channels and geographies.
We've led the way on industry consolidation with your acquisition of now this has created the opportunity to leverage our increased scale to capture synergies.
Further build capabilities and refine processes and organizational structures to maximize efficiency and agility.
Synergy opportunities ahead will help us further optimize our cost structures as we navigate the softer order levels across our business segments.
So glad with different regions are in varying stages of return to office compounded by very economic conditions and a general slowdown in the housing market.
Our teams continue to focus on contract wins retail success and delivering on our commitment to our shareholders.
And the American contract segment, we saw strong operating margin expansion over last year, while uncertain macroeconomic conditions pressured order levels for the quarter.
All customers take longer to make decisions and also take on small or returned to office projects.
Price increases and cost synergies have helped improve profitability.
Our international contract and specialty segment delivered sales growth and meaningful operating margin expansion over last year, the international business competency America different market conditions, including a faster return to the office and opportunity to capture new regional accounts.
These onboarding nearly 50 dealers to cross sell them at one oclock to the brands in Europe .
Emphasize Asia Pacific and Middle East you are onboarding during the back half of this year.
Similarly, our specialty businesses also contributed to sales growth for the quarter and offer further opportunities to expand in new markets and channels around the world.
Turning to global retail as I mentioned earlier, we're seeing a slowdown in the housing market, particularly in luxury. Despite this our retail segment also contributed to organic sales growth for the quarter. While orders were down overall, we finished the quarter by delivering our best cyber week on record with an increase of 22% over last year.
And our digital capabilities excellence in customer service and reliability and strategic promotion management, all helps to bolster our sales period.
Well continue to reach customers through our direct to consumer channels and our continued investment in technology with more robust customer data and metrics coming online in the latter half of this year.
These improvements will help us attract new customers and drive repeat business robotic collected with brands and products.
Turning to product, we continued to innovate launching several collaborations across hey, my hero and Knoll textiles are collected a friend's also question my boundaries with new launches, including Herman Miller, Inc. Shall chair with recycled material.
We'd sure Holly hunts, new lighting fixtures.
In addition, our used to perform as gaming chair with watched halftime in time for the holiday gift, giving season, we're attracting new customers with gaming and we are working to further expand the gaming category globally.
No. We know we can do more with our brands and our associates. This quarter, we held our companywide idea of purpose, giving our employees in eight out of the office to ensure they have time to vote in the U S elections, and also give back in their communities around the world. Our associates held over 150 days purpose events around the globe, bringing greater purpose and support to our commitment to better.
I don't know call communities on the planet.
We aim to serve as a model for the future of work in this quarter, our retail headquarters in Stanford, Connecticut received well certification at the platinum level, the highest level possible alongside receiving a while health safety, beating This award is only given to facilities that go through rigorous performance testing in 10 different categories.
I'm proud of our commitment to our associates and also developing spaces boundless and creativity and productivity.
Despite uneasiness in the current macroeconomic environment I remain confident in our ability to reach customers.
Heidi channels and markets and should deliver some of the results of our innovative products personal customer survey and dedicated associates and dealers, we continue to find synergy or integration, meaning to meaningful cost savings and opportunities to maintain a strong balance sheet and cash flow.
Well remain flexible and nimble in this environment, while continuing to focus on serving our customers' needs.
That I pass the call over to Jeff.
Thanks, Andy and good evening everyone.
Our results for the second quarter highlight the power of our diversified business model, which has helped to mitigate some of the pressures from the current macroeconomic environment.
As we look forward, we will continue to focus on those things that we can control providing solutions to our customers across multiple audiences channels in the regions that we serve.
Now turning to our results for the quarter consolidated net sales in the second quarter were just under $1 $1 billion, an increase of 4% on a reported basis and 8% organically compared to the same quarter last year.
Consolidated orders of $1 billion or 12.5% below prior year levels on a reported basis and 9% lower organically.
Well, partially due to the current economic uncertainty in our end markets.
It's fair to say, we also had a difficult prior year comparison due to pandemic driven pent up demand last year at this time.
In the Americas contract segment sales in the second quarter were $530 million, an increase of 6% compared to the same period a year ago.
Order levels in the second quarter decreased 17% to $474 million compared to the same quarter last year.
The decline was due to the fact that Andy mentioned earlier included a particularly challenging prior year comparison.
Positive price cost dynamics and synergies contributed to a meaningful 560 basis point increase in adjusted operating margins compared to last year.
Within our global retail segment sales in the quarter were $272 million.
Decrease of 3% complete compared to the same period last year on a reported basis and up 1% organically.
New orders totaled $298 million in the second quarter down 8% compared to the same quarter last year on a reported basis and down 4% organically.
As we expected coming into the quarter, we had some near term inventory related costs affect our operating margins as we work through excess inventory from supply chain issues earlier this year.
We expect retail profitability to steadily improve over the next two quarters.
Existing the fiscal year with high single digit operating margins.
Turning to our international contract and specialty segment sales for the quarter totaled $265 million, reflecting an increase of 7% on a reported basis and up 15% organically.
New orders in the second quarter of $242 million were down 7% year on year on a reported basis and essentially flat compared to last year organically.
Strong order growth in India, South Korea, and the Middle East was balanced by softening in China.
France and Ireland.
The international contract and specialty segments also delivered strong year over year profit improvement with an adjusted operating margin increase of 180 basis points.
Consolidated gross margin in the quarter was 34, 5%, which is 10 basis points higher than the same period last year on a reported basis.
Adjusted gross margin declined 40 basis points compared to the comparable period last year.
The decline in adjusted gross margin was primarily driven by inflationary pressures in the near term elevated inventory related costs for retail and that was partially offset by further realization of price increases and synergy capture.
Operating margin for the second quarter was three 6%.
Adjusted basis came in at about 6%.
Which was 20 basis points lower than the prior year.
Higher sales and well managed operating expenses helped partially mitigate the near term pressures on gross margin.
We reported diluted earnings per share of <unk> 21 cents in the quarter and adjusted diluted earnings per share came in at 46 cents in the quarter compared to 54 cents in the same period last year.
Turning to the balance sheet at the end of the second quarter, our liquidity position reflected cash on hand.
And availability on our revolving credit facility totaling $428 million.
We generated $60 million of cash flow from operations during the quarter and ended the period with a net debt to EBITDA ratio of two eight times.
Regarding our guidance for the third quarter, we expect sales to range between approximately $980 million and $1 billion $20 million and adjusted earnings per share to be between 40 and 46 cents.
This forecast contemplates the relative seasonal slowdown in factory production that we normally experience around the holiday period and in the month of January .
As announced last quarter. We are also proactively taking additional steps to improve our near term profit and cash flow outlook as we navigate the current macroeconomic environment.
As a result of these actions, we expect to realize annualized expense reductions between 30 and $35 million.
These savings began gaining traction during the third quarter and will be more fully realized in the fourth quarter of this fiscal year.
To close we have a strong collective of brands and a unique and diversified business model that provides resilience for our business going forward as we navigate the current economic climate.
With those opening remarks, we will turn the call over to the operator and take your questions.
Thank you.
He would like to ask a question today Press star followed by the number one on your telephone keypad.
We asked today that you limit yourself to one question per person and we invite you to rejoin the queue with a second question.
We will pause for a moment to compile the Q&A roster.
Okay.
Your first question comes from the line of Steven Ramsey with Thompson Research. Your line is now open.
Hi, Good evening, a maybe a couple of questions to start with on the retail segment. These inventory issues being at its peak a challenging points right now.
Maybe can you talk through kind.
Kind of why that is and if it's resolved by the end of the fiscal year or you see it being a improving point, but maybe the improvement drags into FY 'twenty four.
Yeah, Hey, Steven Thanks for the question and you know as we said in our last call as most retailers experienced we had such high demand in such a difficult supply chain going into this quarter that we had built up our inventory to compensate for that and demand dropped off pretty rapidly. So we were faced this quarter with moving through some of that inventory build.
That we have put in place to sort of safety stock to get us through what we thought it would be much higher demand that inventory came with much higher storage costs much higher freight costs and so did the retail teams credit we really did experience an amazing November a great cyber week as I outlined before so we really leaned into our promotional strategy that was not it.
Kras, it, but really coupled with the desirability of our product helped us move through a lot more of that cost weighted inventory this quarter than we had anticipated based on that we expect at the beginning of this quarter, we'll see a little bit of that still shaking through but we will see in Q3 that dissipate down to nothing and in Q4 that will be gone. So.
Back to our original point, we should see single digit operating margins in the high single digits and we exited the quarter.
So no it will not continue for the rest of the year.
Okay helpful. Helpful. And then maybe can you go through.
The order strength are picking up in the retail segment, maybe it was covered in what you said there Andy but if there's anything additional on retail order strength in the quarter.
Yeah, you know I think orders have softened in the residential home furnishings market I think a lot of that is tied to macroeconomic uncertainty Steven I think also with home sales slowing down I think we'll continue to see a softening in demand, but I think we captured more than our fair share of the market with how we positioned ourselves in the quarter and I think we're outpacing our competition.
Kathy I don't know Debbie for me tell us on what you like to add anything to the order trend.
I think beyond the trend we experienced during cyber are driven by our agile it personalized approach to our promotions coming out of that given the strong acquisition. We had during that time period, we have more momentum in our business now and so the trends coming out of cyber are stronger than the order trends, we had going into.
For that period.
Okay.
Helpful. And then last question for me a peer of yours recently talking about a lower.
Total addressable market in U S core office furnishings, I guess, how do you feel.
That perspective.
If you do think the market.
Over the next few years, maybe is lower than prior peaks, what do you need to do it at various verticals or internal strategies are to to reach prior sales and profitability.
Levels for yourself.
Yeah.
Yeah, you know I don't know if I can predict the future, but I would say Stephen as we looked at several years ago, what was happening in the office kind of workplace, we saw a hybrid coming it's been coming for the better part of a decade. This is the main reason why we acquired Knoll and we believe that the industry will consolidate and we believe that becoming one company would actually be up.
Much better strategic position to be in so we can capture the synergies we can capture the strength of both of US. That's one in addition to that we've really worked hard to diversify our business model. So we have a strong and growing billion retail business, we have multiple channels and new products that we can explore in the residential side of our business as well as our digital forays into not only contract but read.
So when you look at our business model with the D. M D to C side as well is really pretty extensive international expansion that we can pursue which has been a very profitable and strong business for us. We feel that we are kind of a one of a kind in our industry and that we really have set ourselves up to win.
Yeah.
Excellent. Thank you.
Your next question comes from the line of Reuben Garner with benchmark.
Line is now open.
Thanks, Good evening everybody.
Hmm.
Maybe can we talk about the progression of order patterns in North America through the quarter and then what Youre seeing of late has there been any noticeable.
Change in either direction.
After the salt that has kind of hit.
Earlier in the year.
Hey, Reuben this is Jeff Yeah, Let me start and then I'll I'll open it up for John to add any color. If you have anything to add so.
Maybe start with the with a big important caveat one of the things you've got to bear in mind is that.
Last year in January we put in place a 10% list price increase in the contract business in North America.
And as you probably know just from your history that that at least for our business that might be the single largest ever price increases certainly in my in my time with the business. So that pulled forward. Some some order activity into the month of December so you've got a bit of a.
Right, there you've got a bit of a non comparable.
Activity period, but in intra quarter in the in the second quarter. We saw things kind of started off kind of flattish and then we're somewhat consistently down in October and November to get us to that full quarter down I think 16% organically in the Americas segment.
And then as we've moved into the early part of Q3, it really hasn't moved too far off of that albeit a year ago, we had particularly strong order entry levels and I don't know John if you want to add any color feel free.
I think that's a good summary, Jeff I would say if you look.
We're only two weeks, obviously into the quarter, but even the last few days, we've actually had some of the best States we've had.
Since the start of the quarter.
I think the patterns or are bouncing around a little bit as expected. This time of year, but we're seeing continue to see a fair amount of activity.
Got it that's very helpful and then.
On the same kind of progression type question and on the price cost and margin side can you talk about where we are price cost kind of.
<unk> today, and what what kind of expectation is embedded in the guidance for next quarter and when do you think you'll kind of get back to them, whether it's it's neutral on a on a dollars basis or back to neutral on a on a margin basis Jeff.
Sure Reuben yeah, so for the quarter year on year.
I would say if I if I if I gather all the buckets that I think would fit into your into your category or price cost. We had a net positive year on year to the tune of about 160 basis points and I can break that out for you if you'd like.
In terms of just net price increase flow through at the consolidated level, we had about 350 basis points of net benefit which you know at long last we are seeing some momentum pick up on the margin front, particularly in the on the contract side of the business, which we were very encouraged by now obviously, we're still comping against elevated commodity.
Addity costs from a year ago, so that drove about 100 basis points of year on year margin pressure still.
It's still a little bit of a mixed picture, but I'd say in general we're feeling like the trend is in our favor from a from an input cost perspective, as we move forward anything could happen, but based on kind of the our experienced throughout the quarter that feels like it's actually perhaps a tailwind going forward labor and overhead costs.
So a bit elevated against last year. You can you just think of things like although the wage inflation that we didn't experienced over the last year that was about a 60 basis point negative on margins and then freight transportation year on year was down about 30 basis, but when you net all those together that's cost price of about 160 basis points positive.
And then the balance to get to the kind of the full quarter gross margin you had some adverse product and channel mix as well as those retail inventory costs.
Oh hit us in Q2, a little bit in Q3 going forward.
So let me pause there that's kind of the walk on the Q2 cost price picture.
Yeah No. That's that's the that's helpful. Yeah.
And if you wouldn't mind kind of like it doesn't have to be finite or piece by piece, but what what kind of high level are you expecting for the third quarter.
Yeah, Yeah, I won't go quite as granular, but I will say the guide implies or our assumption is that.
Sequentially going from Q2 to Q3, there is going to be some incremental.
Positive benefit from net pricing.
Somewhere at around 50 basis points. It would be my general expectation and I think commodities should flip to a positive.
Uh huh.
Now the one the one negative.
That we have to acknowledge is that with order pacing being a bit depressed in Q2, that's going to have a negative effect on our production leverage in Q3, which as you know tends to be the case anyway sequentially from Q2 to Q3 in this business. So that'll be a had a bit of a headwind from a margin perspective.
And then you're going to get some.
The sequential benefit of those of those inventory related costs rolling off.
Out of out of the retail business. So that's kind of the big picture expectation.
Okay, and I'm going to sneak one more in if that's all right.
Retail side, so just to be clear on the margin. So high single digit margin exiting your fiscal year is that.
Normalized go forward run rate to use at this kind of volume level I think in the past there was some higher targets thrown out there or are those targets based on maybe what the previous volume our assumptions work can you just kind of walk us through how youre thinking about that as we get into your next fiscal year and beyond.
Yeah, No I don't think they're normalized but I still I still think there's tons of opportunity for upside here and as you know as you can't have been with US for all these years. The retail team has really been working and investing to build up the infrastructure of this business to support what is essentially a business that's doubled in size over the last you know 24 months. So when do you think.
[noise] about fulfillment capability digital capability customer data capabilities all of those things are spooling up in the in the background, which will enable us to make faster decisions move more quickly get product to market more quickly. So we see expansion going forward and Debbie what would you add to that.
I would agree I think there is continued.
Opex improvements as we bring some of those investments to fruition and start to leverage that and continued revenue upside opportunities that will help us.
Leverage the Opex in a better way.
And also Scott about the brain.
The two companies we have opportunity on the knoll side, specifically in retail because that is one of our largest brands in our retail business to really get more efficient with margin. There. So that there's there's several things pulling up the background and why I'm, bringing these companies together that will improve the margin picture as well as operating income.
Thank you so much congrats.
Happy holidays, and good luck in the new year, and you guys stay safe and I know you've got some snow how did your way but they.
Stay safe and enjoy the holidays.
Thanks.
Your next question comes from the line of Greg Burns with Sidoti <unk> Company. Your line is now open.
Good afternoon could you just talk about the relative strength.
International segment, what's what's driving that relative to maybe North America and then.
What are some of the growth opportunities that you have internationally. Thanks.
I think I said, there's a few things and I'll elevate Jeff I didn't hear it but I I think internationally across the board. We in some cases never saw leaving of the office and in most cases, we've seen it much faster it returned to offset some of that kind of normalcy of how people are working and have worked hasn't really changed.
Nationally on top of that our business is it a little bit more knees and it is very diversified. So there's so many different as you know, we all know regions and things.
Things that are happening across Europe , and whether youre talking about southern Europe mainland Europe . So we really do when we have a business trend that is strong in one part of international and we made have been in speaker at another so I think that diversity is really really important coupled with the fact that we still have growth opportunity. You know we have a dealer network that is capable but weak.
Could actually still grow.
So there is there's quite a few things that are happening in international but what would you add to that.
With all that I think that geographic diversity helps us tremendously in Youtube, where we talk about this and sometimes it's easy to forget that youre talking about massive distances and get very geographies and fragmented.
Fragmented markets that all behave and act a little bit differently and sell when one is down we're at a scale now where we benefit where we're another one might be stronger we've certainly seen that now for the past several years and to your point on a white space I think there's opportunity to grow.
In into spaces, where in markets, where we simply just don't have the presence or even the dealer presence to to really capitalize on project and we've done we've had a big focus on that for a number of years. The other thing that I might mention.
Even pre COVID-19.
One of the biggest themes in the international business was this notion that companies where it was a fierce battle for talent in a lot of these businesses.
And that's been true in North America, as well, but I think one of the key differences in our that so many of the of the customers and some of these regions had always kind of opted for a lower cost.
Facility type of a solution and when that war for talent really began to heat up I think there was a real recognition on the part of first global multinationals and then ultimately local localized companies that investing in spaces was a strategic way of of attracting talent and I think that continues.
Even through Covid.
That would that would be the other bit that I would add the diversity of market share.
The ability to grow and I would also say with the acquisition of Knoll.
Mrs Didnt in major markets in Europe , and the middle East and the ability to really bring a much stronger ancillary collection and now it's now not only do we have manufacturing in Italy, but we have the ability to bring that to a wider selection of dealers though.
Okay, great. Thanks, Thank you.
Yeah.
Your next question comes from the line of Rex Henderson with water type of research. Your line is now open.
Good afternoon, and thanks for taking my questions I wanted to quickly return to the to the question about the.
Retail freight cost and the impact on gross margins there.
First of all it sounds to me like any of the issues that you once had in terms of demurrage and storage costs at the ports has been now solved but that that's been resolved and now it's just a matter of working that inventory through that through the system is that is that.
What I'm hearing.
Yeah, that's absolutely correct.
Okay.
And can you quantify for the quarter, what that impact of that those freight costs were this quarter can you help us kind of understand what might have been.
Excluding the impact of that.
We sure can sure Iraq. So what was the cost that we're referring to that do you think about it I mean, there's a number of factors there, but they all fit in in that inventory handling and storage related costs, including the demurrage fees that you referred to that was meaningful it was to the tune of about $15 million in the full quarter.
Okay.
That's very helpful.
The other the other question I wanted to address was particularly in the Americas segment.
Revenues or sales have been running ahead of order levels, which means you know you're you're working down backlog, how how much longer can you continue to do that before.
Sales and order levels start to match up more closely.
Yeah. So this is Jeff and John give you a perspective, if you'd like to add I wouldn't tell you that you are absolutely right. We have had an elevated backlog really across all of our segments.
Through really all of last year, and but the majority of last fiscal year and in through the Q1 and really through Q2.
So to your point, we've been eating into backlog the Americas backlog was down.
Year on year about 21% stands at about $456 million I think at the end of Q2, I think we're very close to nearing what I would call it normalized backlog backlog level for this business.
I expect that that our revenue picture going forward is it is nearing.
Our more historic relationship too are the.
The order trends that we're seeing in a quarter John feel free to add to that.
Totally agree Jeff I think.
Note that the reduction in the backlog is to some degree related to order levels, but it's also production and efficiency in the plants and lead times coming down.
The throughput is that much better which is obviously.
Bringing it more to an equilibrium.
From a from a production level.
Okay. So there's good news and bad there right.
But but thanks I appreciate that it sounds like you are now kind of at the inflection point, where you get to more historic relationships between orders backlog and sales is that right.
Yeah, I think we're getting much closer to that Rex.
Okay. Thanks, you go look at that.
Elevated backlog and say that that was more bad news, because we had more than 2000 customers with production supply in China.
I think getting to a more normalized level that's actually Saturdays.
Okay very good thanks for your call.
Hum.
Yeah.
There are no further questions, we turn the floor back to president and CEO Andi Owen for closing remarks.
Thanks, you guys I'd really like to thank everyone again for joining us on today's call in closing we are so proud of the resilience demonstrated by our collective brands and the private sorry.
So product innovation, we really appreciate your continued interest in Miller Knoll and look forward to updating you again next quarter on behalf of all of US here I want to wish you and your families I Wonder if one restful holiday season. Thank you.
This concludes today's conference call. Thank you for attending you may now disconnect.
[music].
Okay.
[music].