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.

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?

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…

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…

Thank you. [Operator Instructions] Your first question comes from the line of Greg Burns of Sidoti & Company. Your line is open.

Greg, are you there? He may be on mute.

We'll get back to him at a later time. Check again. Your next question then comes from the line of Reuben Garner of The Benchmark Company. Your line is open.

Thank you. Good evening, everybody.

Hey Reuben.

Hey Reuben.

Maybe we could start big picture in the Americas. Last couple of quarters, you've talked a lot about seeing kind of signs of a turning point and discussed an increased project funnel in order intake and visits to the showrooms and that sort of thing. Orders still seem a little bit choppy, I think, is that fair to say or what do you think it's going to take for kind of the order level to turn the quarter and maybe return to growth on a consistent basis?

It's a great question, Ruben. Actually, we're pretty optimistic about order growth in the Americas. As Jeff mentioned in his opening comments, our comparisons to last year in September and October were pretty volatile and probably out of sync based on a price increase that we did last year. So if you normalize for that and you look at our trend coming out of October when we took the price increase last year, we're confident in the increases that we've seen from that point on. Jeff or John, what would you add to that?

I would just add, I think the work patterns that have really been sort of bouncing around sort of post-COVID have really begun to stabilize. And I think clients are now more in a position to take action than they have been previously. And I think the reference to funnel activity and showroom visits and those types of leading indicators really demonstrates that fact that they're getting closer to pulling the trigger on a lot of these projects and there's a fair amount of them in the funnel.

Yeah, Reuben, this is Jeff. I agree with all of that. The only other color I would add and I think you know this, but I think it warrants saying out loud. You know, that in moments of -- kind of the beginning of a recovery in this business, I think your word was right. Choppy demand patterns are very typical. And so, as Andi said, we had a fairly volatile start to the quarter, I think in large part due to that timing of the price increase, but really feels like things began to stabilize in November. And as I said in the opening remarks, up 8% in November, up 15% in the first two weeks of the new quarter. And a reminder, last quarter we were up 2% for the segment in total for the full quarter.

Got it. And any areas of particular strength or weakness within your contract business that you would call out or are you starting to see some of the bigger cities, bigger customers return in a bigger way? Is that what's driving kind of the recent stabilization?

Definitely seeing some of that. I think if you looked at the sectors, energy, public sector, pharma, healthcare are all pretty vibrant now, sort of across the board. I think there are still some geographic soft spots. Certain large cities that were maybe tech heavier than others are still a little bit slower to recover. But in general, they're all -- they all seem to be coming back. And then, of course, there are those that have been pretty robust throughout all of this, be that areas like Texas, Midwest, et cetera, that have been relatively stable.

And Reuben, I would say globally, we continue to see strength in the Middle East. We continue to see strength in India. We're seeing China sort of slowly come back, which is encouraging. And then I think Europe is starting to feel a little bit better than it had usually. So internationally, we have markets that are definitely seeing strength.

And you made reference to, I think, in the same vein as synergies and cross-selling and some other initiatives you have ongoing product and regional mix optimization. Can you refresh me on what you've got going on there and what kind of benefits you're seeing?

Reuben this is Jeff, I'll start and Deb, you might want to jump in because I think some of this certainly relates to you. So part of the mix that I'm referring to, it becomes segment and channel mix, Reuben. And when we index into retail, we get the benefit of the retail margin profile at the gross margin level. And of course, November, as we highlighted in the opening remarks, kind of the critical month of the year for that. Within the international business in particular, there are certain regions of the world where we tend to index a little higher into seating for example, and we've had some strength in those parts of the world in particular. So that's kind of the regional mix comment. Debbie, I don't know if you want to add any comment on the retail side.

Before we get to retail too, Reuben, as you've heard us talk about in the past, as we see our contract customers wanting to look more at ancillary options, those are obviously a little bit better margin for us than kind of workstations. So that's another piece in the contract business from a product mix standpoint. And then retail, Debbie?

And from a retail perspective, with a promotional posture we took this holiday season, we really focused on driving demand through owned brands, specifically the Herman Miller brand, where we saw really nice increases in performance in our gaming category and nice resilience out of our upholstery category. We were able to sell our large ticket items with rich margins and drive margin growth, both year-over-year and sequentially from Q1.

Got it. Thanks guys. That's it for me. Happy holidays and Happy New Year.

Thank you, Reuben.

You too.

Thank you.

Your next question comes from the line of Alex Fuhrman of Craig-Hallum Capital Group. Your line is open.

Hey, guys, thanks very much for taking my question. Andi, it sounds like you're pretty optimistic about your customers return to the office plans. There continue to be a lot of really negative headlines out there about office occupancy in North America and expectations for next year. Can you help us bridge that gap a little bit? You're obviously on the front lines here of the return to the office. Do you think some of the headlines out there are maybe getting it wrong or are too pessimistic for next year? Or is it possible that maybe your large multinational customers are returning to the office perhaps faster than small and medium-sized businesses? Just trying to better understand what you're seeing and how that squares with some of the headlines that are out there?

Yeah, funny. Alex, actually I think there's a little bit less headlines than there were about six or eight months ago, but I think every market is a little bit different. But what we're hearing and seeing as we sit and speak with our customers in the contract market is that there's a lot more momentum around getting people back together, for all the reasons that you see in the press as well. So we're seeing people come to us with, instead of, hey, we're thinking about, they have ideas about what they want to do, they have plans to bring people back to the office. So I think the key here is flexibility. I think return to office is absolutely picking up. I think, as John said, there are markets where we see much more momentum than others in the US. You would agree with that, John, but certainly momentum is building. What would you add?

I would add that a lot of companies are downsizing their real estate portfolio, but going to smaller spaces really triggers project activity for us. So even though from an overall commercial real estate perspective, there's a lot of headwinds, the movement within the commercial real estate creates activity for what we do and what our dealers do. So whether that's moves, ads and changes, or new workplaces to reflect new ways of working, it creates demand. And I think our clients realize that the real estate has to work harder than ever in order to attract people back into the office to make the social connections that they can't get working remotely or hybrid. And that's really our focus, is helping them figure that out.

Okay, that's really helpful. Thanks, guys. And then you guys have done a really good job of growing EBITDA so far this year -- in a year when revenue has been down pretty significantly. How should we think about kind of your margin profile heading into next year? Is it possible that you could continue to see further gross margin increases here, even if revenue remains kind of at current levels or at a certain point are you going to need revenue growth to resume in order to start getting earnings continuing to move higher?

Yeah, this is Jeff. I think we still have a little bit of room I believe in some of the more recent pricing actions. But I think you hit on a key point and that is at some point and I don't think we're too far off from it. We do need to see some top-line growth to drive leverage in our manufacturing operations. I think that the retail team is doing a really nice job. We talked on the prepared remarks about assortment expansion and some of the newness. I think we've got some real opportunity there to drive some margin rich products into that business and growth. But within the contract business in particular, I think our margin profile is at some point going to be reliant on top-line growth for meaningful, further expansion. I mean, our teams are constantly working on VA/VE type initiatives to drive efficiencies. They're really good at it. We expect it. We plan for those every year. And so I think there's a window here where without top line growth, we still can show some improvement with that, plus some of the pricing that we still have in place. But at some point history would say you've got to have that top line moving. The good news is, as we've said, we've got growing optimism that that's coming.

That's terrific. Thanks to all of you very much.

Your next question comes from the line of Greg Burns of Sidoti and Company. Your line is open.

Good Afternoon. Can you hear me this time?

Yeah. Hi, Greg.

Okay, great. So I just wanted to, I guess, touch on the kind of the relative strength in the retail segment or I guess the better than expected. It was definitely stronger than I was expecting, given some of the macro headwinds facing the housing market. So can you just talk about specifically what do you think you're doing right to drive market share gains there and then also on the profitability of that segment? Is that sustainable what you put up this quarter or there is some kind of one-off type of items that were driving the operating margin this quarter?

Yeah. Hey, Greg, I'm going to start very briefly and then I'll turn it over to Andi and Debbie. But I wanted just -- I want to say, no one-off items in the quarter. I mean, this was -- what was great about this quarter is that, it was just really awesome to see the team deliver a real clean, kind of high quality quarter of profitability. So there's nothing notable in terms of one-offs. And I don't know, Debbie, if you want to unpack that any further?

Yeah, I would give kudos to the team this quarter and for the last year, Greg, and really knuckling down and delivering strategic execution and they really did that this quarter. But again, no one-time, this is well done. Why don't you add Debbie?

Hi, Greg, it's Debbie. So a few things that I would just highlight. The first is we've been extremely focused on our foundational execution over the last 24 months and we're really starting to see some of the operational investments and improvements we've made paying off. That's driving up customer lifetime value. We're improving across all of our operational metrics. We had our fastest shipped lead times ever within the quarter, and that is in fact freeing up more time and capacity in our stores to focus on selling activity instead of post-purchase activity. The second thing is our marketing effectiveness. We actually spent 11% less in marketing expenses year-over-year and our organic sales are down 3%. So we got really nice leverage out of our marketing capabilities. That's driven by the beginnings of optimizing the customer data platform, we stood up in the last year. And then in terms of our promotional posture, that obviously drove really nice progress. We had our best month ever in November. November up 5% to last year in organic orders. That was really driven by the position we took to capture as much demand late in the quarter as possible. We've seen a shift over the last three years of customers waiting till later and later in the month to purchase. And so we wanted to be agile and have a promotional strategy that we could stair-step depending on the customer behavior we saw. And we managed that business in real-time to make sure that we were driving demand into our most profitable categories. So we're really proud of the demand trends versus the industry in the quarter. We're really also proud of the margin trends and we expect to see forward-looking trends from a margin perspective in line.

Okay, great. And then, Jeff, the interest in other expense line item, I think your guidance around $19 million or $20 million to come in, it came in at $16 million and you're guiding to that for the next quarter. What's driving the decrease there?

Yeah, the biggie is, we generated some good amounts of cash. I said in the prepared remarks, we've been pleased with working capital efficiency and that's helped generate cash not just in the US, but in a variety of jurisdictions around the world. And what we benefited from was higher interest rates, particularly outside the US, driving interest income. So that was a biggie below the line. That was a positive. We also had a slight currency -- good news on the currency line, which we tend to -- currency transaction gains and losses, we tend to guide those as flat. We had a slight gain and some good news related to an international pension plan. So it was really those three things.

Okay, great. All right. Thank you.

Your next question is from the line of Budd Bugatch of Water Tower Research. Your line is open.

Good evening, Andi.

Hi, Budd.

Yes, hi. Happy New Year and Happy Holidays and Happy New Year to everybody there.

Thank you.

I guess and congratulations on the margin performance. It's very nice. And I guess, Jeff, my first question is the 30s -- nearly 34% gross margin in Americas. Can you hang on to that given that the backlog continues to be -- looks depressed to me and that your comment about leverage is one that I worry about?

Yeah, but I think over the -- more than just one quarter, we're rolling into our -- as you know this very well, we're rolling into what is historically a seasonal low quarter from a manufacturing volume perspective. And that tends to drive some reduction in gross margin. But that's in the best of times. We see that in this business. So I think it would be fair to say that in the Americas segment will we see a slight sequential step down in margin performance? I think that's reasonable to expect and that's implied in our guidance for the quarter. But like-for-like to Q2 going forward, we don't see anything in this performance that we don't think we can hold on to. I mean, obviously we're keeping an eye on discounting pressure in the business and I think we've seen some signs of it on the edges, but nothing significant. That's of great concern. And as we see larger project opportunities, those are going to be priced more aggressively, that always happens. But with that comes more manufacturing production and an opportunity to leverage. So nothing that causes us any great concern there.

So in contract, the normal, as I recall, in normal times, the discounting impact used to be about 50 basis points or that's what was discussed. Is that what is normal and what you're expecting?

You know, it's funny. I don't know that I think of it in terms of basis points. I mean, that doesn't strike me as crazy, but I'm kind of going from memory. I don't have any data from history in front of me. Typically you do see some contraction in margins and it can happen in short bursts until the volume picks up and you start to be able to offset that with opportunity growth. And that's why these forward indicators that we've been following closely are so important and have us fairly optimistic.

And the difference between orders and shipments in the Americas implies about a $40 million drawdown of the ending backlog from the beginning backlog in the quarter. And I'll ask you, is that correct? And that strikes me as a number that I haven't seen that low, and I don't remember when. So help me understand, when do you start building that back? And it was nice to see you come back in retail. And I know international is down a little bit, but Americas was significant from what I can see from the numbers.

I think your numbers are right, Budd. That's correct. And I think that puts us down about 15% or 16% year-on-year in the Americas segment backlog. The number sounds right.

I think 19% is the number I look at it. It's like around the 380 level versus 470, I think it was at the end of Q2 of last year.

Just under 384.

Okay. Yeah, 383. Yeah, okay. And that's about -- and yeah, that's a big number, and that worries me. I mean a small number. So when do we start seeing that build? I was hoping that maybe that's the real thing, because I think that's the key here?

Yeah, I mean, you know, clearly we're watching that closely, too. I think the best indicators we have are what we've already highlighted and the fact that we've seen some -- a nice improvement in the order -- year-on-year order comparisons in the month of November and thus far through two weeks of Q3. So that's -- I mean at the end of the day, order growth is what it's going to take to drive that. And so far, we like what we see as we close the quarter and move into Q3.

Okay, I'm rooting for you. So, yeah, that's what I would like to see. Okay, well, Happy New Year to everybody there and stay warm if you can.

Same to you, Budd. Thank you.

There are no further questions at this time. We now turn the floor over back to President and CEO, Andi Owen for any closing remarks.

Thank you. I'd like to thank everyone again for joining us on today's call. In closing, we're very proud of the resilience demonstrated by our collective of brands and the continued progress we're making through our integration work and product innovation. We appreciate your continued interest in MillerKnoll and we look forward to updating you again next quarter. On behalf of all of us here at MillerKnoll, I want to wish you and your families a wonderful holiday season. Thank you.

This concludes today's conference call. You may now disconnect.