Q4 2024 MillerKnoll Inc Earnings Call
Good evening and welcome to Miller knows quarterly earnings Conference call. As a reminder, this call is being recorded I would now like to introduce your host for today's conference Chief Financial Officer, Jeff Stutz. Please go ahead.
Thank you good evening welcome to our fourth quarter fiscal 2024 conference call.
I'm joined by Andy Ali Chief Executive Officer.
Also available during the Q&A session are John Michael President of Americas contract, and Debbie Propst President of global retail.
Andy: Before I turn the call over to Andy Please remember our safe Harbor regarding forward looking information.
The call management May discuss information that is forward looking and involves known and unknown risks uncertainties and other factors that may cause the actual results to be different than those expressed or implied.
Please evaluate the forward looking information and 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 <unk> Dot com.
And with that it's my pleasure to turn the call over to Andy.
Jeff and thanks, everyone for joining us Tonight.
And there are no wrapped up fiscal year 2024, a strong cash throughout the year, we anticipated business improvement in the back half and we share the actions we took to align our operating cost with the economic environment to boost demand across contract and retail and to future proof our business I'm proud to report that by leveraging the scale of our collective.
As brands and our diversified business channels and global operations. Our teams delivered significant earnings per share and margin growth in the first quarter and.
Andy: In addition, we delivered consolidated organic order growth of two 9%.
Right now the demand environment for contract in key markets are heading in a positive direction and we put ourselves in a strong position to benefit from this shift we've adjusted our business to remain agile and productive and we see healthy levels of activity across our business as a result.
We're optimistic that a strong quarter and an improving market will contribute to our momentum for the upcoming year I'd like to share a few highlights about the work underway and then Jeff will provide a closer look at our financials and our outlook.
Speaker Change: We kicked off fiscal year 2025, with several events around the globe, including the nine days in the economy, Chicago and three days have defined in Copenhagen.
At Fulton market, Chicago showroom design enthusiasts, we're thrilled to experience our second nature of sustainability and tests that exists.
<unk> immersive experience underscored their design DNA, our commitment to sustainability and a rigorous process.
But our products are to ensure both innovation and quality are always present in Copenhagen, our flagship Hay house was packed with customer shopping new collaborations, including a fun partnership with Japanese sportswear pattern apex.
We hosted several events that Natasha lamb showcasing the brand's approach to creating intentional spaces.
<unk> and outdoors.
Traffic and you kind of back close to pre COVID-19 levels and appointments at our showrooms during design days were up year over year more importantly, conversations with customers have shifted.
News from the theoretical return to offense ideas.
Speaker Change: Project needs and with that we believe there is opportunity.
We're well positioned trying to find ways impact programs to solve these needs.
Speaker Change: I mean, you're ahead, well invest in Miller, no chevron's digital platforms and enhanced tools to fuel our contract business and support our melanoma dealers.
Finding new ways to bring our collective our brands together and go to a dealer showrooms and our own showrooms. This fall all opened newly enhanced Miller no spaces in London, New York, and Los Angeles to spotlight, our leadership and design and sustainability.
Also ramping up product launches to deliver unique solutions for our customers.
Must be launched every 30, new products, such as I engage capturing industry awards for Knowles Chicken Hot and Martha Hana chairs North Coast collection from private offices and not ones Percy Chair. In addition, Herman Miller refresh of our Arsenal and some gaming chair with ergonomic enhancements and showcase the new mirror to task chair with a lower carbon.
Speaker Change: Right.
And had three days of combined mentor introduced a new outdoor collection subtle and he introduced new ancillary seating our soup coffee tables cabinets and lighting.
Our international contract business as a growth vehicle and we continue transitioning legacy Herman Miller of Knoll dealers to for Miller Knoll dealers.
Corner, we transitioned 19 dealers in 17 countries in 19 cities.
Speaker Change: In addition, as we look at the full year, we added 29, new dealers in three countries and 13, new cities to expand our international distribution footprint.
It's close to 150 international melanoma dealers onboard it.
I look at the fiscal year ahead of schedule, allowing us to be even more responsive and align with our customers and clients.
So our dealer showrooms, we're expanding our physical presence in high performing region. This quarter dealers have engineered melano showrooms in India, Singapore and Indonesia.
Turning to retail we delivered organic order growth of 1% year over year, despite the tough macroeconomic conditions, our industry still faces.
We're continuing to do the work to drive orders in the short term, while optimizing our retail engine for significant long term sales growth we.
We maintain a strong focus on inventory management and optimizing our product assortment by continuing to complementary I'm, sorry, continuing to expand our complementary assortments.
And to capture more sales and productivity with less foot traffic, we're intensifying our storage space to show more about collections without huge margin improvement excuse me its efforts our adjusted gross margin in our retail business were up 640 basis points on a year over year basis.
We also continue to provide tools that help our retail customers build beautiful spaces and drive larger orders with fewer returns you configure your tools onsite and design services makes it easier and more rewarding to place orders at design within reach and Herman Miller stores.
As we look to the future we will invest in new stores applying this format and experiences we tested at our newest design within reach stores such as San Francisco.
In addition negative trends in home sales are beginning to ease a bit and National Association of Realtors reported that year over year declines in existing home sales are beginning to flatten. We believe there is pent up retail demand and we are prepared to heart attack.
Finally sustainability along with innovation is an important consideration for our customers and associates around the globe are work builds on a legacy of sustainable design and business practices that we have nurtured for decades today and extends across our collective and encompasses hundreds of projects big and small.
As I mentioned, we showcase our sustainability efforts to an exhibit up to five days in Chicago, we shared many of the things we're acting on now.
Now from incorporating or bio based materials and or products like your house to using more recycled content in embracing circular design.
During the quarter. We were also recognized her efforts a gold medal ratings for me cause he is putting us in the top 5% of companies you read about it because I guess in the past 12 months.
Speaker Change: All service ease of 'twenty 'twenty four sealed sustainable innovation award for our work leveraging Ocean Downs ethics to reduce waste and single use plastics.
All of this to say were optimistic and focused on growth in the year ahead with that I will turn it back to Chuck for closer look at our financials.
Andy: Thanks, Andy.
I'll start by providing an overview of our performance in the fourth quarter and some full year highlights followed by a few insights into our outlook and targets for both the first quarter and full fiscal year.
For the fourth quarter, we generated adjusted diluted earnings of <unk> 67 per share well above the midpoint of our guidance driven by strong gross margin performance as well as favorable tax benefits.
At the consolidated level net sales in the fourth quarter totaled $889 million, representing an organic decrease of five 2% from the same quarter a year ago.
New orders at the consolidated level totaled $933 million in the fourth quarter, reflecting organic growth of approximately 3% from the same quarter last year.
The improving demand indicators that we've been monitoring throughout the year were validated this quarter by a return to year over year order growth in the Americas contract segment.
This improved demand picture helped to drive a sequential increase of $44 million and the consolidated order backlog, which ended the period at $684 million.
Our performance at the gross margin line was a clear highlight in the numbers.
On a consolidated basis gross margin in the quarter of 39, 6% improved on a year over year and sequential quarter basis by 250 basis points and 100 basis points respectively.
Andy: These improvements were driven by price realization and benefits from inventory management product mix and channel performance.
Our consolidated adjusted operating margin was eight 3% for the period, which is up 240 basis points year over year.
Turning to cash flows and the balance sheet. This quarter, we generated approximately $78 million in cash flow from operations driven by several factors, including a meaningful reduction in working capital primarily attributed to our inventory management efforts.
We finished the fourth quarter with a net debt to EBITDA ratio of 263 times, putting us comfortably under the maximum limit defined in our lender agreements.
With that I'll now take a moment to summarize our fourth quarter performance by segment.
Within our Americas contract segment net sales for the quarter of $417 million were down 12, 2% on a reported basis.
While new orders of $480 million were up five 7% on a reported basis from the previous year.
And increased sequentially 14, 3% from the third quarter of this year.
During the fourth quarter orders improved steadily each month and funnel additions in contract Activations remain positive.
Giving us increased confidence as we begin the new fiscal year.
Fourth quarter adjusted operating margin in the Americas segment was seven 3%, which is down 280 basis points from the same quarter last year as a result of lower sales volume and the resulting impact on leverage of fixed overhead costs.
Speaker Change: Turning to our international contract and specialty segment net sales for the quarter totaled $245 million.
Up three 8% organically year over year, while new orders totaled $239 million.
And were essentially flat with last year.
We remain very optimistic about the growth potential in this segment, which for most of this past year, let our business in terms of new order growth.
This past quarter, we benefited from strong demand patterns in Korea, India, China, and the Middle East.
We also saw signs of improving demand in parts of Europe this quarter.
Our international team is making great progress, improving and expanding our Miller and all distribution footprint.
Date over half of the global network is now able to sell the Miller not collected and we expect to transition 100% by the end of fiscal 2025.
Moving to our global retail segment net sales in the fourth quarter were $227 million, representing a decline of seven 2% year over year on a reported basis and up slightly on an organic basis.
New orders in the quarter were $214 million down 6% compared to the same period last year on a reported basis and up just under 1% on an organic basis.
This organic demand growth stands out favorably relative to the broader retail furnishings industry data.
Our formula which combines a strong digital presence with excellent in store experiences is supporting above industry growth in.
And importantly, we have a lot of runway for further investment and growth in new markets in North America and longer term internationally.
The North American housing market slowdown and reduced spending on discretionary goods continue effective to affect demand levels in this segment.
In response, we are focusing heavily on effective inventory management and product mix optimization to drive operational efficiencies.
These efforts have helped us realize substantially improved gross margins compared to year ago levels. Despite the challenging demand conditions.
Additionally, we're enhancing brand awareness, while also prioritizing investments in our most established channels and brands in order to better leverage our scale.
For the full fiscal year net sales were $3 6 billion and adjusted earnings totaled $2 eight per share.
We made remarkable progress this past year, achieving our stated goals with respect to acquisition cost synergies and that was as of year end have achieved annualized run rate savings of $160 million.
Well above our originally stated target.
And importantly, these cost savings played an important role in helping us deliver significantly improved earnings throughout the year.
Let me conclude my prepared remarks with a few comments on our outlook for fiscal 2025.
Overall, we are optimistic as we enter the new year, given the multitude of data points, suggesting activity and interest in the contract elements of our business is ramping.
Traffic at recent trade shows around the globe, including the U S, Italy, and Copenhagen has improved and is close to pre COVID-19 levels as Andy mentioned.
In addition, we are bullish on the growth prospects of our retail segment, which we believe will benefit from eventually improvements in the housing market, coupled with our planned investments in new stores and assortment expansion.
We believe these factors point to an active year ahead.
And accordingly for fiscal 2025, we expect net sales to be above fiscal year 2024, and adjusted earnings per share to be in the range of $2 10 to $2 30 per share.
As we look to the first quarter I want to remind everyone of the seasonality of our retail business we.
We tend to see lighter demand in the summer months as consumers shift spending toward experiences and vacation.
Taking that into consideration, we expect net sales for the first quarter to be between $872 million and $912 million and adjusted earnings per share to be between 38% and 40 for such.
Okay with that overview of the numbers I will now turn the call over to the operator will be happy to take your questions.
Thank you if you have a question. Please press star one on your telephone keypad. If you wish to withdraw your question simply press Star one again.
Your first question comes from the line of Reuben Garner with the benchmark company. Your line is open.
Thank you good evening everybody.
Hum.
See that's nice to see some more positive trends.
Of that growth inflection Andy you referenced investments on the commercial side I think it's the first time in a while and I know, obviously youre always investing but wondered if you could kind of elaborate into maybe dollar amounts where exactly those investments are going in and.
Targeted that for growth in this coming year.
It's a great question Reuben I don't know if I can clarify dollar amounts, but I'll tell you. We're very focused on the contract side as I mentioned in my remarks, we're talking about investing in digital platforms and tools that will really help our dealers.
Make it easier for them to do business with us will continue to invest in international contract and expanding our Miller and all showrooms and also expanding the global reach of a known brand, which as you know pre acquisition was very small in the contract market.
And then the international retail front, we'll continue to build our wholesale footprint and then the retail business, our North America stores business has been very healthy and as we see that start to track will continue to invest in opening stores in both GW are and Herman Miller as well as continuing to expand our assortment.
Yeah.
And finally, the last thing I would add Rubin and so if you look at our product assortment you know we spend a lot of time. The last couple of years rationalizing two great brands and the products, we offer but also spending time innovating and thinking about what we're going to watch. So you can see more new products in all of our brands as we look towards the <unk>.
Sure.
Speaker Change: Yeah.
Great sorry, I was on mute at the end of the first part.
Speaker Change: But.
Jeff you mentioned gross margin.
<unk> in the quarter, obviously very strong.
Wrong I was wondering if you could kind of talk about within that guided range. You gave for this year, what kind of range you're looking.
Looking at from a gross margin perspective, and if you could kind of break us down a bridge of what the pieces are because I don't get a lot of moving parts of the World Cup.
The years with price cost and cost outs and synergies.
Speaker Change: If you could kind of give us.
And updated book of all that.
Yeah, Ruben I'm I'm gonna false we didn't give a guide for margin for the full year.
So I'm going to fall short of quantifying that but I will highlight I think some of the factors that will be on the lookout for and maybe I'll start with the guide we did provide for the first quarter to give you an idea kind of as we move sequentially from Q4.
From Q4 into Q1, what we expect some of the moving parts of it. We do believe we still have some net pricing benefit to benefit from that was a big factor in the year over year improvement in the fourth quarter. Our expectation is that net pricing benefit could be as much as 70 basis points of improvement sequentially moving into Q1.
We've got price actions plan here for later in the summer. So I expect we will continue to see some pricing benefit roll in as we move throughout FY 'twenty five I just as a generic comment.
Speaker Change: Also on a sequential change from Q4 to.
Q1, our guide does assume I mentioned in my prepared remarks, the seasonality in the retail business. So we will have some negative channel mix in the first quarter it.
Could be as much as 100 basis points, just simply based upon that seasonality you've got that that rotation away from retail sales in the summer months that comes at the expense of margin because it's structurally higher gross margins in that business. As you know so but I think that is partially offset by some benefit expected in freight and distribution.
And as we move into Q1, a little bit of labor and overhead benefit.
In parts of our business, where we're going to see some.
Production levels ramp up so.
So that's the kind of the sequential view is I think generally speaking as we move into this next fiscal year. The next big leg in terms of margin opportunity for us I think comes.
From volume pick up so as we get unit volume improvements in our factories, we should see improved labor and overhead absorption, which will really help us and obviously this is always something that we're on the lookout for us is.
Pricing and discounting pressure, obviously, we have not seen that in a significant manner.
It's far but we're always on the lookout for it in the business and John I don't know if theres anything specific you would add from a from a contract perspective.
Relate to margins going forward.
I think we're we've got a very strategic approach to too.
To discounting and being competitive in the market and I think we've got a good balance between day to day business.
And mid market business as well as larger contract opportunities. So we're expecting from a margin perspective that wall.
Still be significant.
Significantly positive position.
Yeah.
Okay, and one last quick one for me.
Margins vary.
Strong in the quarter despite kind.
No.
It seems to be a depressed.
Environment anything unusual from a mix.
Mixed standpoint.
Otherwise.
Strength or is that a reasonable baseline kind of build off of as volume recovers.
Hey, Reuben Youre, breaking up but I think youre asking about retail margins and if there was anything unusual or what that do two am I correct.
Yes: Yes, that's right.
I'll start and then I'll, let Debbie and I think what you're seeing in the retail margins is our real focus over the last couple of years on operational efficiency.
On last mile delivery really making sure that we have our inventory in the right place expanding our products and making sure that we're satisfying our customer needs I think there's a lot of infrastructural attention and execution. There that is really adding up to some healthy margins.
So remember last year, we suffered through a little bit of Overinvestment in inventory like everyone else that we had to work our way through so that's a little bit of an elevation year over year, but that's not the bulk of it W. W. What would you add to margins.
Yes, I would just add that our selling tools, which we've been investing and developing over the last several quarters such as design services are helping to drive more mix into higher margin categories like upholstery and Additionally, we've driven increased shipping revenue this year through increases in our shipped.
Great cards, which has helped offset some of those increased inbound costs that was seen over the course of the year. So we're really pleased with margin performance I would say this is a nice baseline that we can continue to build off of.
Your next question comes from the line of Greg Burns with Sidoti and company. Your line is open.
Good afternoon.
Wanted to follow up on the margin outlook.
For next year, what's assumed in the guidance in terms of.
Maybe some of the incremental growth investments you outlined earlier, Jeff how much.
If a detraction from margins or maybe some of those incremental investments youre planning on making in 25 versus what you spent in 'twenty four how much is that.
I expect it to detract from margins just because.
You know the guidance implies like maybe a little bit lower margins than I was looking for based on the revenue.
Yeah, actually I might I might shall I take issue with that I think our I think our outlook.
Assumes some modest margin expansion in total in FY, 'twenty, five and again I'm not going to quote it because we didnt, we didnt provide that in the guide.
That's driven by continued growth in retail at structurally higher margins.
And improved unit volume efficiency rolling through our factory those are the big factors I think there's maybe some incremental pricing benefit to be had it yet, but if we can get some some topline growth we should see some margin expansion in this business.
Speaker Change: Okay. Thanks.
Speaker Change: Yes.
Alright.
The product rationalization that we've been able to do that over the last three years and the hard work that the teams have put into.
Making sure that we are finding efficiencies and these two great companies assortments that they come together that has added that actually took quite a bit of margin as we found better ways more efficient ways to build our products together as opposed to apart and so part of that margin gain is showing up as we realize the synergies that we've kind of put in the bag for the last.
Three years.
Okay. Thanks that makes sense.
I know you talked a lot about the I guess the dealer initiatives you have internationally could you just give us maybe an update on.
Where you are at domestically in terms of bringing the dealer network together.
Assuming it's.
It's been completed for a while but I'm more looking for.
Do you have do you feel like the channel is operating.
Speaker Change: To its full potential yet is there still kind of learning learning curve that needs to happen to bring the dealers.
Domestic dealers up to speed like where where are you at in terms of.
Realizing the full benefit of the integrated.
Dealer network domestically.
John: John why don't you think that when you're the expert here sure.
We've been really impressed with the.
The investments that the dealers have made in terms of learning the product positioning the product displaying the product on their showroom floors.
Etcetera I think we're the network is very stable.
We are really well aligned.
You literally can't tell who is a legacy knoll dealer versus who is a legacy Herman Miller dealer anymore. They are all Miller and all dealers.
John: And.
They become more comfortable with the tools to help them sell effectively.
We've had a couple of strategic consolidations in markets that are really going to strengthen our position in some key markets around the country. So I think we feel like the networks.
It really good shape and continuing to grow I do however think there's still upside.
You know as they become more comfortable with the products the lead times for our projects.
John: Usually six 912 months. So I think we'll see continued momentum from them as time goes on.
Speaker Change: Okay. Thank you.
Speaker Change: Your next question comes from the line of Brian Gordon with Water Tower Research. Your line is open.
Oh, hi, Thank you for taking my call today.
Budd apologizes for not being able to make it on the call he's traveling.
Today.
And congratulations on especially the strong margin performance. This quarter I guess my question is have you seen any evidence that returned to work.
Has plateaued or may be reached an equilibrium at this point or do you think that there's any evidence that we could see some meaningful increases from here both sort of in North America and internationally and then my follow up to that would be when you're talking with customers are you seeing any sort of.
In terms of like a space per employee or spend per employee that that's changed with with hybrid work over the past couple of years.
Okay.
Thanks, Brian as far as the trend and return to work when I also returned to office because we've all been working the whole time.
I think I don't think around upon too I think we're still climbing.
Like I mentioned in my prepared remarks.
People are no longer sort of debating the value of being together more often than not and are really looking at their specific projects that are in a much more decisive moan about how they want to bring their teams together I think many people are in a hybrid world, but that hybrid world has gone from one to two days a week to three or four days, a week and sometimes full time so.
We will still continue to see that evolve, but I think it will evolve favorably for our industry based on the research and the data and everyone is learning themselves, but also seeing out.
Speaker Change: Out there in the world about how healthy it is for us to be together and worked together on this.
Second question as far as space per employee I think it really depends on the business and the purpose of what that business is trying to do I would say on average and John I'll I'll ask you to.
And yet we're not seeing space decline as much as we thought it would we're certainly seeing people reevaluate their space, but as they add in more collaborative workspaces and thinking about how they want to work in a hybrid environment, we're not seeing it really contract.
Yeah, I would agree with that Andy I think you know as we talk to our leaders of various organizations and we asked them what problems, they're trying to solve for.
As they are outfitting space number one every time.
Really for the last six to 12 months is how are we going to attract people back into the work environment right as Andy said, they understand the benefits of that and I think the balance between heads down space collaborative space team spaces is still sort of sorting itself out.
In some regards and I think people are being cautious about making sure they have enough space because.
As people come in maybe three or four days a week is everybody comes in on the same days you still need a fair amount of space is if you were coming in five days a week.
So I think those are the types of things that our clients are grappling with and we're working with them every single day to help them solve for that.
Yeah.
Great great. Thank you.
Did have a second question on the retail side of the business have you guys are broken out any sort of guidance over the longer term on like what percentage of the retail network is gonna be design within reach versus the Herman Miller stores.
Brian This is Jeff we have not broken any kind of that out in the forward guidance when I say, Brian. This is still such a nascent business. When you look at the white space that we have here for both GW arent Herman Miller, We're learning every day about how big these businesses can be and as I said before.
North America. These concepts and these brands are doing exceptionally well. So I think we're still exploring phases and as I said, adding new stores and learning as we go but tons of white space.
Hi, great. Thank you very much.
Within reach and our Herman Miller sitting side by side, Brian when we add a second location to the first and in a market. That's almost 100% additive. So there is a different customer that we're targeting with each of those go to market strategies design within reach has an important marketplace that can sell a collective of brands and sorry.
Third party modern design brands and Herman Miller as a door to market as an opportunity to serve the customer that brand in the purest fashion and we see them worked independently on site by site.
Well, thank you for that.
Your next question comes from the line of Alex Fuhrman with Craig Hallum Capital Group. Your line is open.
Speaker Change: Hey, guys. Thanks, very much for taking my questions.
Last quarter, you talked a lot about on the contract side, having a lot of projects that your sales funnel that we're pretty far along in the process, but hadn't yet turned into orders can you talk a little bit about how that pipeline of project look today and are those leads progressing through your funnel is as you'd expected.
John you might take that sure I'd be happy to thanks for the question Alex.
We're still seeing a lot of activity from a funnel perspective, we mentioned last quarter that are in our CRM that project smart one, but it has not yet ordered was up significantly over the prior year. It actually grew another 7%.
From sequentially from Q3 to Q4, so that activity continues and we are starting to see it flow through obviously as evidenced by the order growth in Q4.
It is a bit choppy still right some of it stays in the funnel longer than we'd like before it hits the order platform, but but the activity is still there and it's still growing.
Okay, that's really good to.
Thank you for that.
Starting to rebuild it.
Ben you know, obviously, a tough couple of years in a row now.
Our furniture buying.
Ben: The business sounds really healthy and profitable.
You know that that weak demand.
Speaker Change: What are you expecting this year in terms of consumer demand and end with the holiday season, just a couple of quarters away now.
The expectation that that this is going to be another tough year for the consumer when it comes to furniture.
Thanks for the question Alex This is Debbie.
I'm really proud of the performance. We just had for Q4, I think that plus 1% organic to Hawaii is significant especially with the context that our global marketing spend was down 12% year over year and traffic was down to our stores and our sites given the impact of that home furnishings market being so soft, but we're taking advantage.
Each of the topics I worked at King and we're driving the small amount of growth you saw in Q4 with a substantially higher average order value year over year, and we expect to continue to use some of those capabilities that we've been developing to bend the home furnishings trend curve.
We're feeling optimistic that as the home furnishings market continues to open up and we believe it will in the back half of this year that were ready to capitalize on that growth.
Okay. That's really helpful. Thank you all very much.
There are no further questions at this time I'll turn the floor back to president and CEO Andi Owen for closing remarks.
Thanks, everyone. Thank you for joining US Tonight. We appreciate your continued interest in Miller known and we look forward to updating you next quarter.
This concludes today's call. We thank you for joining you may now disconnect.
Please wait the conference will begin shortly.
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