MillerKnoll, Inc. (NASDAQ:MLKN) Q2 2024 Earnings Call Transcript
MillerKnoll, Inc. (NASDAQ:MLKN) Q2 2024 Earnings Call Transcript December 20, 2023
MillerKnoll, Inc. beats earnings expectations. Reported EPS is $0.59, expectations were $0.52. MLKN isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good evening and welcome to the MillerKnoll's Quarterly Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Vice President of Investor Relations, Carola Mengolini.
Carola Mengolini: Good evening, and welcome to MillerKnoll's second quarter fiscal 2024 conference call. I am joined by Andi Owen, Chief Executive Officer; and Jeff Stutz, Chief Financial Officer. Also available during the Q&A session is John Michael, President of Americas Contract and Debbie Propst, President of Global Retail. Before I turn the call over to Andi, 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.
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 millerknoll.com. With that, I will turn the call over to Andi. Andi?
Andi Owen: Thanks, Carola, Good evening everyone and thank you for joining our call. MillerKnoll has delivered another quarter of strong financial performance marked by a 28.3% year-over-year increase in adjusted earnings per share. Our second quarter results speak to the benefits of strategic emphasis we have placed on diversifying our business model. The benefits of our synergy capture and the resilience of our company as we continue to navigate various global challenges. By leveraging the synergies across our collective, and focusing on what is within our control, the team drove year-over-year margin improvement in all three areas of our business again. And while we faced relative high interest rates and geopolitical concerns, positive signs are emerging throughout our industry, metrics such as project funnel activity, order intake, and recent measures of dealer optimism reflect that CEO confidence is improving.
As it pertains to each of our segments, revenues for Americas Contract declined quarter-over-quarter, but we delivered another quarter of margin expansion, mainly due to positive price dynamics and synergy capture. Since our integration with MillerKnoll, we have invested resources into our dealer network, and we continue to see the fruits of this labor. Our immersive dealer training session this fall was one of our best-attended sessions to date. Cross-selling is up from the same period last year, along with digital tool adoption. The faster and easier we can make our processes, the more we see a direct correlation to a larger share of the wallet and higher sales. We're also delighted to see how our dealers are investing in their showrooms, to tell the story of all our brands and products.
Similarly, we opened our first MillerKnoll Showroom this past quarter in Dallas. The first of its kind, this showroom showcases Herman Miller and Knoll, as well as an immersive MillerKnoll area, designed with settings from a variety of our collective brands. Places like this, which integrate our wide portfolio of solutions under one roof will continue to enhance our leading position within the contract furniture industry. Consistently our corporate customers express their desire to discover innovative ways to foster team connections and enhance the overall quality of the work experience. This includes the creation of more purposeful, inclusive spaces, even in situations where downsizing may be a factor. Corporate leaders seek guidance and information about available options and our team is actively responding to these requests by offering carefully curated and thoroughly researched solutions.
As an observation, we perceive a stabilization and return to office trends. In the fall, we conducted a survey involving 5,000 people across nine countries relevant to our business. The results indicated that 49% are employed by organizations with full in-office policies, while 37% work for organizations with hybrid policies. Notably, only about 13.6% of organizations have adopted a remote-first approach. Shifting our attention to the International Contract and Specialty segment. We continue to see strength in healthcare, tech, and the financial services verticals. We continue to focus on these market-resilient sectors, where our products compete strongly due to our scale, agile manufacturing capabilities, and distribution network. We are continuing to help our existing dealers transition to selling our full MillerKnoll portfolio, while also attracting strong new dealers to our international network.
This quarter, we also saw demand increase in our specialty businesses, including a double-digit increase within our luxury trade-focused business, Holly Hunt. Turning to Global Retail, the team delivered its strongest day in the company's history, with a record-breaking number of orders, followed by a record number of shipments in a single day. We were thrilled to see customers turn to us as a destination for key furniture pieces, with November being the largest sales month ever for our Retail business. Investments in our digital capabilities, excellence in customer service, and enhanced marketing capabilities, along with a focus of driving traffic to our largest banners and improved reliability, all played crucial roles in bolstering sales this period.
Our team also adopted an agile strategic approach to this critical period that resonated with our customers in this highly promotional environment and significantly contributed to driving demand toward our highest margin brands and collections. Design Within Reach remains a key avenue for reaching retail customers. In 2024, we have plans to enhance our DWR spaces through incremental assortment display and enhanced store design services. We will leverage revenue opportunities and also increase our brand awareness, enabling new customers to sit in their very first Eames Lounge Chair and personally experienced some of our most iconic designs, while also getting to know newer designers and third-party brands. Furthermore, as we continue to expand our e-commerce business and enhanced AI and visualization tools, in order to enhance conversion.
Throughout this quarter, we continue to innovate and reimagine our product portfolio. We reintroduced Knoll's classic Model 31 and 33 designs for purchase. Launched a high-profile limited addition Gaming Chair with G2 Esports and at Herman Miller we debuted a new nesting chair and further expanded our essential OE1 Workspace Collection for contract clients. NaughtOne introduced a playful new lounge chair, which received many notable accolades and Maharam celebrated 20 years, have continued collaboration with iconic British designer Paul Smith. Shifting gears, this past quarter we issued our first Better World Report of MillerKnoll. This report is a broad view of our efforts across the environmental, social, and governance areas. Also during this quarter and for the 15th consecutive year, we received a top score from the human rights campaigns Corporate Equality Index.
Inclusion and a sense of belonging are integral elements within our organizational culture and have the experiences we design and it's an honor to have our commitment to a quality recognized in this way. In November, we organized our annual company-wide Day of Purpose, providing our employees across the globe a day of leave from the office to contribute to their communities, and ensuring our US team members are able to participate in regional elections. Our associates organized over 150 Day of Purpose events around the world. This initiative brought greater support to our commitment to improve our local communities and our planet. We reaffirmed once more that when we come together as one MillerKnoll family, we can achieve more. In summary, while remaining agile and nimble in this environment, we will continue to focus on meeting our customers' needs, increasing our employee engagement, and adding value to our shareholders.
This is an exciting time for us, strengthening our business and accelerating as the market rebounds. As always, we appreciate your support. Now, I'll ask Jeff to walk us through the financials. Jeff?
Jeff Stutz: Thank you, Andi. Good evening, everyone. As Andi just said, we're happy to deliver another quarter of strong earnings and a further increase to our full-year EPS guidance to a midpoint of $2.08, despite what remains a rather challenging macroeconomic backdrop for our industry. Our consolidated adjusted operating margin for the second quarter was 7.9%, an all-time high since we became MillerKnoll and our adjusted EPS was $0.59, up 28.3% year-over-year. Moreover, we continue to improve our gross margins. This quarter we delivered a consolidated gross margin of 39.2% up year-over-year in all three of our business segments. As we mentioned in the press release, this marks the fourth consecutive quarter of consolidated year-over-year adjusted gross margin expansion.
Notably, these results were achieved in an environment largely affected by high interest rates and geopolitical concerns, both of which includes the housing market as well as sentiment measures. Our second quarter results reinforced themes that we've communicated over the past several quarters, namely the impact of strategic pricing initiatives, ongoing benefits of acquisition-related synergies, our focus on improved working capital management, and product and regional mix optimization. Our strong profitability in the quarter despite softness on the topline demonstrates the resilience that we are building around our operating margin. With respect to cash flows and the balance sheet, we generated $82.4 million of cash flow from operations this quarter.
This enabled us to pay down $19 million of outstanding debt and provided an opportunity to repurchase approximately 1.4 million shares, amounting to a total cash expenditure of $28 million. As the quarter concluded, our net debt to EBITDA ratio stood at just under 2.5 turns. New orders at the consolidated level totaled $944 million in the second quarter, reflecting an organic decrease of 6% from the same quarter last year. While new orders in total were lower than last year's level, we were heartened to see the sequential trend improve steadily as we progressed through the quarter. Within our Americas Contract segment, net sales for the quarter were $476 million, representing an organic decrease of 10.3% from the same quarter a year ago. New orders in the period totaled $437 million, down 8.1% from last year on an organic basis.
Within the quarter, order comparisons to last year were somewhat volatile between September and October. This is largely due to the timing of a price increase that became effective in October of last year. Setting this aside, order growth in the month of November stabilized, with segment orders coming in 8% higher than last year. Additionally, for this segment, orders in the first two weeks of Q3 were up 15% year-over-year. Our confidence is further bolstered by other forward-looking demand indicators, including project funnel activity and a notable increase in requests for project pricing and mock-up builds. Customer showroom visits were also higher this quarter, with West Michigan visits up 28% year-over-year. We remain committed to providing our dealers with compelling content and dynamic tools to aid them in their projects, and our investment in technology is playing a key role in accelerating these efforts.
In November, we launched a significant upgrade to our proprietary B2B e-commerce platform. This platform will substantially improve our ability to on-board new clients at a much faster pace. The on-boarding process is already underway and the backlog of new opportunities is growing. I'd also like to highlight the fact that our Americas Contract team delivered another strong quarter of earnings with its adjusted operating margin totaling 9.4%. This was the sixth straight quarter of year-over-year margin improvement for this segment, despite lower revenue. This year-over-year expansion reflects the positive price cost dynamics and benefits from synergy capture, which are contributing to the overall resilience and operational success of the segment.
Turning to our International Contract and Specialty segment, net sales for the quarter totaled $241.2 million, down 10.4% organically year-over-year, while new orders came to $234 million, reflecting a year-over-year organic decrease of 5%. Similar to the Americas segment, order trends improved as we moved through the quarter, and ended in positive territory for the month of November and through the first two weeks of Q3. Nonetheless, macroeconomic challenges, particularly in China and parts of Europe, have impacted the demand dynamics of this segment. In addressing these challenges and aligning with our commitment to agility and continuous improvement, we implemented targeted restructuring actions this quarter aimed at bolstering manufacturing efficiency and adjusting the operating expense run rate of the business.
With all that said, our optimism for the medium to long-term growth prospect of this segment remains high, especially in markets like India, South Korea, and in the Middle East. To this end, we're continuing to focus on transitioning legacy Herman Miller dealers to full-line MillerKnoll dealers. To date, we have transitioned just over 30% of the global network and we have more planned in the second half of this fiscal year. Adjusted operating margin within this segment was 11.3% in the second quarter, down year-over-year, driven by lower sales volume. This was partially offset by improved gross margin performance, which continues to benefit from previous price increases, cost synergies, favorable regional and product mix, and the restructuring actions that I just mentioned.
Moving to our Global Retail segment, net sales in the second quarter of $232 million were down 9.4% organically from the same quarter last year and new orders for this segment of $273 million were 3% lower from a year ago on an organic basis. This relative decline in organic orders is, however, an improvement compared to the 6.4% decrease posted in the previous quarter. The retail team's agile and strategic approach to promotions enabled us to drive year-over-year organic demand growth in November and as Andi highlighted, demand in this critical month of the retail calendar reached an all-time record level for the segment. Despite the challenges posed by the slowdown in the housing market and elevated interest rates, we remain optimistic about the retail team's efforts to gain market share through direct-to-consumer channels.
We believe the longer-term demand fundamentals for this business are robust, with the US housing market facing undersupply and demographic trends pointing towards substantial future construction growth. Accordingly, our retail team remains focused on investments and initiatives geared toward market expansion, including assortment expansion and innovation, and enhanced digital capabilities. Adjusted operating margin in the retail segment was 7.1%. This is 570 basis points higher than Q2 of last year due to a host of operational improvements including inventory management and enhanced shipping revenues. Now I'm going to turn my attention to our near-term guidance and outlook. Given the improvements we are seeing in gross margins across each of our business segments and continued signs of demand stabilization in the business, we're increasing our adjusted earnings guidance for the full fiscal year, which we now expect to range between $2 and $2.16 per share.
As it relates to the third quarter of fiscal 2024, we expect net sales to range between $890 million and $930 million, and adjusted diluted earnings per share to be between $0.40 and $0.48 per share. Consolidated orders through the first two weeks of the third quarter of fiscal 2024 grew 4% organically compared to last year. Our revenue guidance considers this, as well as the size and scheduling of the beginning backlog, and it also considers the relative seasonal decrease that we normally experience from the second to the third quarter, which is characterized by lower demand and shipping activity in the contract segments driven by the holiday season. So with those overview comments, and I'll turn the call back over to the operator and we'll take your questions.
Operator: Thank you. [Operator Instructions] Your first question comes from the line of Greg Burns of Sidoti & Company. Your line is open.
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