Ladies and gentlemen, good evening, and welcome to 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, Chief Financial Officer, Jeff Stutz.

Good evening, and welcome to our first quarter fiscal 2025 conference call. I'm joined today by Andi Owen, our Chief Executive Officer. Also available during the Q&A session are John Michael, President of Americas Contract segment, and Debbie Propst, President of our Global Retail segment. 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 earnings 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 that is posted on our Investor Relations website at millerknoll.com. With that, it is my pleasure to turn the call over to Andi.

Thanks, Jeff, and good evening, everyone. Thank you so much for joining us tonight. Before we get into our Q1 results, I wanted to take a moment to remember Budd Bugatch. Budd served as a research analyst covering our company for many, many years, and while we will miss the deep knowledge and insight that he brought to the contract industry, we will also miss the energy and enthusiasm that he brought to everything he did. Budd was a great man. Our deepest condolences go out to his family. And with that being said, Budd would probably say, let's get back to earnings. MillerKnoll entered fiscal year 2025 with momentum. I'm happy to say that again, orders are up year-over-year and demand is improving. First quarter order growth was largely driven by the Americas Contract segment where orders gained momentum throughout the quarter. Importantly, customers are placing large orders and the indicators that we discussed last quarter, such as project funnel additions, customer mock-up requests and new contract activations, continue to be up year-over-year, all of which underscore an improving demand picture. Orders also grew in our International and Specialty segment, largely driven by Asia, where we saw large orders from both global accounts and local technology companies. While this is encouraging, customers have also increased the time between their order entry and requested shipment times. This has pushed revenue into subsequent quarters, and we are carefully managing operating expenses to align with sales levels. Across the company, we are focused on growth. This quarter, we launched several initiatives to support our contract business, meet our clients' evolving needs and set us up for success as demand trends accelerate. Our insights team launched new research behind the importance of relationship-based work. It's part of our Design Within Impact platform that…

Thank you, Andi. I will start by providing an overview of our performance in the first quarter, followed by a few insights into our outlook and targets for both the second quarter and full fiscal year. As Andi mentioned, we are encouraged to see a continued improvement in demand trends across the contract elements of our business. Consolidated orders of $936 million in the first quarter were up 2.4% year-over-year on a reported basis and up 3.5% on an organic basis. This improved demand picture fueled an increase in our consolidated backlog, which ended the period at $758 million, up 9.2% from a year ago and positive 10.9% from the start of fiscal 2025. Consolidated net sales for the first quarter were $862 million, reflecting a decrease of 6.1% year-over-year on a reported basis and a decrease of 5.3% organically compared to the same period last year. It's important to point out that while order entry levels have improved, as Andi mentioned, the average time from order entry to customer requested ship date has increased relative to more normalized historic trends. This limited our ability to build and ship products within the quarter. Consequently, a higher percentage of orders remained in the backlog as of quarter-end than we were expecting coming into the period. Our consolidated gross margin was 39%, which was essentially flat to the prior year. Incremental net pricing benefit, favorable product and channel mix, and improved shipping and logistic efficiencies, all contributed to margin expansion compared to last year, but were offset by a loss of manufacturing leverage from lower production and sales levels. Turning to cash flows and the balance sheet, this quarter, we generated $21 million in cash flow from operations, we repurchased approximately 1.5 million shares for a total cash outlay of approximately $44…

Thank you. And we'll now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Greg Burns with Sidoti. Your line is open.

Good afternoon. Just a couple in terms of the guidance. So, looking at the 2Q guidance, it looks like the implied here is that operating margins are going to be down from a year ago, but revenue, I think, you're guiding to a little bit ahead of consensus. I think it's some of the lag here with the order pacing, shifting some revenue out. But I just want to get a little bit more color on your view on margins for the second half, what's driving, maybe the softer than what I was looking for or maybe the Street was looking for in terms of margins in the second quarter?

Yeah. Hey, Greg, good to be with you tonight. This is Jeff. I'll start. A couple thoughts for you. First of all, from a gross margin guidance perspective, we certainly expect, given the ramp-up in order activity in the contract elements of our business, we're expecting to see improvements in labor and overhead efficiency and leverage. So that's factored into our guide. The flip side, though, is that's being offset by a shift in business and product mix in the business. So that's really keeping a lid on our gross margin performance as we move from Q1 into Q2. So that's one factor. And that's just really the result of we're rotating a bit out of the higher margin, higher gross margin, retail sales as we move into Q2, as well as some of the specialty brands. And then, when you look from an OpEx perspective, that shift in cyber timing -- the cyber promotional timing that I mentioned, we have this kind of strange deal this quarter where we're front-end loading some of the marketing spend that is going to support that, but we're not going to get all the revenue associated with it in the quarter. So, the combination of those two factors, I think, is what accounts for what you're pointing out.

I think that bulk of that really fits in the cyber shift more than anything else.

Okay, great. Thanks for that color. Then, on the retail side, RH had, I guess, some incrementally maybe positive commentary in terms of demand momentum. Are you seeing anything in the retail market that would give you any kind of positive outlook in terms of coming quarters, maybe demand picking up?

Thanks for the question, Greg. This is Debbie. We're feeling optimistic about the outlook for retail as it pertains to our demand trend. We think that 0.5 point cut yesterday is really going to help stimulate a little bit more confidence in the consumer that we approach on a daily basis. We believe that the marketing economics that we saw in Q1 are evident in the fact that our order trend will improve. So, our orders in Q1, from an organic perspective, were down 1.6%. Our marketing spend was down 11%, and so we like the relationship between those two. As we move into Q2 and a more seasonally suitable time for us to be spending in advertising. We'll be reintroducing more traditional awareness campaigns to take advantage of that cyber timing. So, we're really pleased with our outlook in terms of where we think this business will trend. Now that the indicators are there that the housing market will listen up and the consumer confidence should start to rebound.

Okay, great. Thank you.

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

Hi, guys, thanks a lot for taking my question. I was curious why you're starting to see customers asking for delivery further away from the order date. Is that something you see as an ongoing trend that could potentially cause revenue to lag order growth over the next couple of quarters or years, or is that really more of a one-time thing that's impacting this year?

John, do you want to take that?

Sure, I'd be happy to take that. Thanks. Alex, this is John. I think there's a couple of factors. Number one, we've seen a lot more or a significant increase in larger projects in the last quarter. I think if you look at projects, we had over $5 million. It was up over 40% for the quarter. And those projects typically are a little more complex because of their size, and just by the very nature, have longer lead times and cycles. So, I think that's part of it. The other thing I would say is I think our clients are becoming accustomed to it just taking longer to get their construction projects done. So, they're moving a little faster. They're trying to get orders in a bit earlier to make sure that their delivery times are met.

Alex, this is Jeff. I might just tag on just to give a little perspective on trends over time. All of what John just described is certainly true for the Americas. The larger project sizes, I would say, is also being seen in the international contract part of our business. And it's driving the same phenomenon. And this isn't necessarily new, it's just kind of ongoing. And I think it's a little more extended this quarter than we have been seeing. But if you go back in time, we -- typically pre-COVID, our backlog tended to account for somewhere between seven to eight weeks of revenue. And since COVID -- during pre-COVID or just after COVID, it spiked way up. And then, since then, it's kind of settled down into the 10-week to 12-week range. And there, it's been hovering. So, it's certainly not a new trend. I suspect it's just changing customer behavior as John just described, and we'll see where it goes from here.

And I think just to add onto that one more data point, Alex, with this quarter, we saw our orders weighted heavily more in July and August. And so, as you saw that trend spike throughout the quarter, we just produced less in the quarter. So, it was sort of a conglomeration of all of those things.

Okay, that's really helpful. Thank you all for that detail. And then, nice to see order growth for North America Contract, leading the order growth for you this quarter. I'm curious if there's any particular industry groups that have been driving that. It was nice to see a headline this week about Amazon having their employees back in the office five days a week next year. Curious if you're seeing more companies kind of going down that route and driving more large projects?

I think certainly most of the conversations we're having with clients, the majority are looking for ways to continue to get people back in the office. They understand the power of connection and culture and well-being and all that goes with being together in the space. I think we've seen a lot of really good activity in financial services, banking, pharma, public sector, healthcare, excuse me, those segments you would expect to do well and have been doing well. We've actually seen some uptick in the technology sector. In fact, our Northern California region was one of the strongest performing regions in this past quarter. So, pretty widespread in terms of where the business is coming from.

And, Alex, this is Jeff. I might tag onto that and say, we're super encouraged to see that activity pick up in the Americas, but I'd also point out we had order growth for the International and Specialty segment. And what's really encouraging about that is we're beginning to see larger projects break loose, which is encouraging. We're building client relationships with the Knoll brand, particularly in the legal and business services sector in Europe, which is great. We're growing our regional account. These are accounts that are headquartered in the APMEA region and seeing some large project opportunities break loose there. And also some key technology sector wins in India, as well as healthcare in the Middle East. So, there's a number of sectors internationally that we're seeing some real positive momentum.

Okay, that's really helpful. Thank you all very much.

And your next question comes from the line of Reuben Garner with The Benchmark Company. Your line is open.

Thank you. Good morning, everybody -- or good evening, everybody, excuse me. I guess to start on the margin side, it seems that things have kind of leveled off here as your business is kind of stabilizing. I wanted to kind of look longer term at where you think things can go. I think you've been kind of in the 38.5% to 39.5% range the last five or six quarters now. Curious where you think that that can go longer term and how much volume is kind of -- or how much that is dependent on volume versus maybe things that you have within your control still.

Yeah. Reuben, this is Jeff. I'll share with a similar comment as I did last quarter, which is, I think you're right that we're at a point where we're seeing gross margins across the group somewhat stabilized, but for a given level of volume. I think the next leg up for us is we see economic conditions improve. We have a real opportunity to leverage overhead costs across our manufacturing footprint globally, as well as in the retail business across the SG&A cost in that business. That's going to be what our next opportunity is. I mean, there's some price -- incremental pricing benefit, but we're kind of returned to what are more normalized annual price increases. So, the next leg up is in leverage, and we expect to see that as we move into the back half of the year. I won't quantify for you a gross margin estimate for the back half, but we do have expectations that it'll be up from current levels.

And I would say long term, too, Reuben, just to add everything Jeff said as well, as we are -- our long-term growth plans for retail start to kick in. Obviously, that business is at a higher margin. So, we'll see that start to flow through and continue to stabilize and offset as these larger projects that come in that tend to be at a little bit lower margins, I think that will be a helpful balance in the future.

Got it. And then, Jeff, you mentioned the full-year guidance, I think you said it contemplated like an improving macro backdrop in the second half of the year. I was wondering if you could elaborate on that. Is that across all of your businesses? Is that kind of geared more towards maybe retail and the impact that rates can have there? Just any color would be helpful.

I think it's geared towards all of our businesses, Reuben. I certainly think there's a level of certainty with what happened yesterday with the Fed in the US. I think the indicators that we've seen in the business are coming to fruition. I think we've been talking to you guys about these indicators for two or three quarters now, and we're starting to see consistent orders above last year. I certainly think as it comes to mortgage rates and the resale market starting to opening up -- open up in the US, that will buoy the retail business. I think we've had some people sitting on the sidelines that we think will start to come and play and move. So, I think it will benefit the entire business, but the indicators for us continue to be moving in a very consistent fashion forward.

Great. Thank you, and good luck going through the end of the year.

Thanks, Reuben.

Thank you, Reuben.

And your next question comes from the line of Brian Gordon with Water Tower Research. Your line is open.

Hey, good afternoon, everyone. Last quarter, you guys noted that the work to integrate Knoll and some of the other brands into the international dealer network in particular was continuing. And I was just hoping you could give us an update on where you are with this process and maybe what is left to do there?

Hey, Brian, good to talk to you. This is Jeff. Yeah, a quick update on that. As of the end of Q1, we have integrated the MillerKnoll combined dealer network across -- about 60% of the international network. And the intent and goal is to, by end of this fiscal year, be through the entire network. So, progress continues. They're making good strides. And as I, in my earlier comment, mentioned, we're starting to see some real opportunities with the Knoll brand through that combined network.

That's great. That's good to hear. Second question, kind of maybe a bit of a bigger picture kind of question. Just kind of wondering what you guys have been hearing from your customers and your dealers about back-to-work and hybrid trends, and maybe where the expectation is the market is going to settle on this. And then, the follow-up to that would be, how you guys are feeling about your product portfolio for hybrid and collaboration and those kinds of things?

Those are great questions. I think we're hearing a lot less about the return-to-office quandary and a lot more about people making decisions to be together versus apart and to support limited hybrid in many occasions. I think the Amazon announcement was great news to us, but I think it has become less of an issue and more of a push to being together more frequently. And John, I'm sure you would add something from that from the US as far as what you're hearing from customers and dealers.

Very similar, Andi, in terms of everyone really realizing the benefit of being back, being together in the office. And I think the second part of the question, we feel really good about the product portfolio and all the brands in the collective and our ability to meet the changing needs of the workplace, right, as this whole post-COVID work environment continues to evolve.

I think one of the rich things about the last few years was our research and insights team has been able to study some very complex problems. And I think we've been able to use many of those insights to really help innovation and develop our product assortment. And we feel really strongly about that.

Great. Thank you very much for the additional detail.

Thank you.

And there are no further questions. So, I will now turn the floor back to President and CEO, Andi Owen, for any closing remarks.

Thanks, again, everyone, for joining us on the call, and we appreciate your continued support at MillerKnoll, and we're looking forward to updating you on our next quarterly call. Have a lovely evening.

And ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.