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, Wendy Watson, Vice President of Investor Relations. Please go ahead.

Good evening, and welcome to our second quarter fiscal 2025 conference call. On with me are Andi Owen, Chief Executive Officer; and Jeff Stutz, Chief Financial Officer. Joining them for the Q&A session are John Michael, President of Americas Contract; and Debbie Propst, Vice President of Global Retail. We issued our earnings press release for the quarter ended November 30th, 2024, after market closed today. And it is available on our Investor Relations website at millerknoll.com. A replay of the call will be available on our website within 24 hours. 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 made as of today's date, and except as may be required by law, we assume no obligation to update or supplement these statements. We will also refer to certain non-GAAP financial metrics and our press release includes the relevant non-GAAP reconciliations. With that, I'll turn the call over to Andi.

Thanks, Wendy. Good evening, everyone. Thank you so much for joining us tonight. As you may hear from my voice, I'm recovering from a little bit of a respiratory infection, so please bear with me. I'm very pleased to report MillerKnoll delivered strong performance in the second quarter of fiscal year 2025. We continue to be optimistic for the year ahead based on momentum we're seeing in several of our businesses, along with leading indicators which vary by segment, strengthening our overall demand picture. While orders are trending nicely ahead of last year, they've recovered at a slower pace than we expected at this point in the year. This is reflected in our guidance for the balance of the year, that Jeff will discuss later in the call. Moving on to some highlights and trends by segments. Americas Contract continues to be a key growth driver for MillerKnoll with sales and orders up year-over-year in the second quarter, our third consecutive period of order growth, and looking forward, leading indicators in this segment such as project funnel additions, customer mockup requests, and pricing activity are all up year-over-year. Within the International and Specialty segment, we continue to see strong order growth in the Middle East and parts of Asia. We're thrilled to see the excitement that is building for our brand internationally. One of our key competitive advantages is the power of our collective of brands alongside our global scale and reach. As I mentioned last quarter, in September, we opened our MillerKnoll flagship in London and to date, we have more than doubled client appointments compared to the same period last year. We have some great initiatives that are building momentum in this segment as well. For example, with the opening of a new Fulfillment Center in Belgium, we…

Terrific. Thanks, Andi, and good evening, everyone. As Andi just mentioned, we're pleased with our second quarter results and despite what has remained a challenging environment from a demand perspective, we continue to be optimistic that the table is set for improved activity in each of our business segments moving forward. Consistent with our expectations, consolidated net sales for the second quarter were $970 million, representing a 2.2% increase year-over-year on a reported basis and a 2.4% organic increase. Second quarter consolidated orders of $922 million were down 2.3% as reported and 1.9% lower on an organic basis. Now, one important reminder as you digest our numbers is that order entry levels this quarter were impacted by that timing shift that Andi mentioned in the Thanksgiving and subsequent cyber promotional period within our retail business. Whereas last fiscal year, this entire two-week promotional period landed within the second quarter, this year it is equally split between Q2 and Q3. We are pleased to have maintained the gross margin expansion that we delivered in 2024, while strategically managing operating expenses and positioning ourselves for profitable growth. In the quarter, our consolidated Gross margin was 38.8%, which was down just slightly to last year, mainly due to product and channel mix. Turning to second quarter cash flows and the balance sheet. We generated $55 million in cash flow from operations, and we repurchased approximately 1 million shares for a total investment of $23 million in the second quarter. And through the first six months of the fiscal year, we've returned approximately $93 million to our shareholders through dividends and share buybacks. We finished the quarter with a net debt to EBITDA ratio as defined in our lending agreement of 2.94 turns. And with that, I'm going to move to our performance by…

[Operator Instructions] Our first question comes from the line of Greg Burns with Sidoti. Please go ahead.

Good afternoon. I appreciate that the tariff question or issue is kind of still up in the air. No one knows exactly how that's going to shape up, but when you look at your business, can you maybe just give us a little bit more color on where you might have the most exposure, whether it's specific product lines or with maybe manufacturing that's coming out of Mexico, or just any additional color you might give us on how we should think about the potential impact on the business, and the business profitability going forward?

Sure, Greg. This is Jeff. I'll keep my comments fairly high level, but I will highlight the fact that -- and as you well know and remember, we've been through this one round previously in 2018. So, as Andi highlighted in her comments, we do have a playbook of actions to take and maybe before I get into the exposures, I'll just reiterate those. We've got opportunities and we've taken action to identify alternative sources of supply. Now, we can't do that everywhere, but we're certainly doing it where we can. We're buying in advance component parts that we think are very low risk in advance of any tariff impacts. And we also have potential pricing actions that we will consider depending on the level of the kind of details that come out here after the first of the year. Additionally, we've got options around duty drawback, and applying for exclusions, which we had some success in the last round, as well as transfer pricing strategies that we think can help limit the impact. So, that's the, if you will, the playbook and we'll pick the combination of those things as necessary. But in terms of exposures, not a lot of exposure to Mexico in our business, but the two big regions of the world would be China and Canada. And the Canada exposure really came to us through the Knoll acquisition. As you know, we've got manufacturing in Toronto for some of our wood case goods. So, those are the two areas that we will be watching most closely as we move forward.

And I would say, just to add onto that, Greg, based on our last round of experience with tariffs, we spent a lot of time and effort making sure that we rationalize our manufacturing and our supply chain so we mostly build for region and region now. So, we are a lot less exposed to places like China than we have been in the past. But to Jeff's point, we have a playbook ready depending on what those tariffs end-up being.

Okay. Great. Thanks. And then in terms of maybe the slower order development you saw in the Americas or maybe more broadly, maybe it was elsewhere also, but can you just talk about that a little bit more? I think on the last call you mentioned that kind of book-to-ship times were extending. Maybe there was longer sales cycles. Is that part of maybe what you're still seeing this quarter?

I don't think the book-to-ship has changed too much, Greg, but I think this last quarter was unique for us in that we really saw in all of our businesses and I think a little bit throughout the country, a little bit of a slowdown pre-election. And so, I think when you look at how the quarter started off, it really was related to that. Post-election, we started to see things pick up. So, I don't think it's something to be concerned about or repeatable. And then, John, I don't know if you want to add to just order-to-ship. Nothing has really changed there since our last call, I don't think.

No, I think it's -- it is pretty similar. Customers are still planning for -- planning in advance, perhaps more than they did pre-COVID for some longer lead times with everything that goes into a construction project. But it's been pretty steady and consistent throughout the quarter.

Okay. And then internationally, the orders I guess we're down a little bit more than we were expecting. Can you just talk about the demand dynamics there? It sounds like it's different across different markets, but also I just was wondering in terms of maybe some of the integration, in terms of Knoll and the dealer network and some of the growth investments you've been making internationally, where are you at with those and how are those impacting the business right now?

Yes. I think we continue to increase our dealer distribution internationally and across the board, Greg, continue to add a full line of MillerKnoll dealers. We've had great success with that so far. I think when you look at the International business in general compared to the Americas Contract business, it tends to be a much more project-based business. And therefore, to use a technical term, it's a little lumpier than what we see in Americas Contract. We're still seeing strong demand, we're still seeing a very active funnel. I think there's a certain amount of uncertainty with everything that's going on in Europe right now, macroeconomically and politically, and we ride those waves out. But I think the nature of the business is that it tends to be a little lumpier. Jeff, would you add anything?

No, I think that's spot on.

Okay. Great. Thank you.

Thank you.

Your next question comes from the line of Reuben Garner with The Benchmark Company. Please go ahead.

Thank you. Good evening, everybody.

Hello, Reuben.

Hi, Reuben.

Let's see. So, our dealer survey the last few months has been pretty positive, especially the two readings post the election. I was wondering if you could kind of comment on any feedback you've gotten from your customers. I know you said it was softer before the election and maybe started to pick up since then, but any kind of feedback on what things are looking like as we get closer to 2025?

Sure. Hi, Reuben. This is John. I would say dealer sentiment, as it shows in your survey is, definitely continues to improve. There's a fair amount of market activity really across the board. And if you think about the leading indicators that we track to try and anticipate what demand will be going forward, they are all pointing in the right direction. Things like additions to our 12-month funnel were up over 64% this quarter over the same time last year. Mockup activity, those things that happen right before customers make decisions are up almost 30%. So, all in all, all the indicators we're tracking are healthy and that's consistent with what we're hearing from the dealer network as well.

Okay. Great. And then, Jeff, some clarifications on the guidance. I think that if I'm doing the math right, the third quarter kind of implies a little bit more of the same that we saw in the first half in terms of year-over-year, a little bit of margin -- or flattish to maybe a little bit of margin pressure at the operating Inc. line. The fourth quarter, depending on what your revenue number assumes, it looks like it implies a pretty big surge in margins, am I doing that right? Is there something that's going to drive that or is that another kind of expectation that this acceleration is going to come in the form of a big move in the top-line in the fourth quarter?

Yes, Reuben, I think it's -- our expectation would be more the latter than the former. We would expect with, as you saw, even this quarter and in our Q3 guide, you can see that we are sensitive to shifts in the top-line in terms of leverage. And so that's the big reason we're seeing a slight tick-down in margins in Q3, because we've got lower revenue and to some degree, you've got some channel mix that's moving around on some of our higher gross margin businesses. But our expectation based on what you heard from John, the fairly positive indicators that we're seeing internally relative to our Retail business, would tell us that we should expect an acceleration in revenue. So, I don't think it's a massive surge in margin that we're expecting. It's more -- it would be more typical improved leverage on higher sales. But it's more of a top-line story in our view.

And can you tell us what that top-line assumption is, so that if we think it's trending differently than that, we can adjust?

Well, Reuben, we haven't provided a full year revenue guide, so I'm not going to quantify it for you. But what I can tell you is that the gross margin expectation would be modestly improved from the second quarter. And we're going to do everything we can -- and just real quick, Reuben, by the way, we're going to do, of course, everything we can to manage those operating expenses prudently, so that we don't expect beyond variability on higher sales. We don't expect a significant uptick in OpEx.

Okay. And just to clarify, you said the fourth quarter gross margin would be modestly better than what I think you said second quarter, but I don't think that's what you meant.

That is what I meant. Yes. Yes, I think you'd expect it to be modestly better because we would expect better revenue.

Got it. Okay. All right. I'll jump back in queue. Thank you, guys.

Thanks, Reuben.

Your next question comes from the line of Brian Gordon with Water Tower Research. Please go ahead.

Good morning, or good afternoon, everybody. In your discussions with customers and partners, have there been any kind of meaningful directional trends in terms of what you're hearing in terms of, like, work-from-home or hybrid policies? And how are you thinking that could potentially affect business over the next couple of quarters?

Actually, John, why don't you start?

Sure. This is, John, I'd be happy to take that. I think what's been consistent for the last few quarters is conversations we're having with executives at companies. They're looking for ways, right, to get their people, attract their people back to the office. And they're seeking ways to connect in person in the ways that technology doesn't facilitate nearly as well, whether that's informal connection, learning and mentoring, problem-solving, right, all the things that are just a lot harder to do virtually than they are in person. And in that regard, they're beginning to engage a larger section of their employees to help with that planning, so that there's some ownership in terms of how the space develops and people's desire to want to participate and use it. And obviously, I think common in our industry is everybody wants the ability to adapt and flex over time. So, we all know that the work environment is going to change over time, and so, people want to make sure they've got space that allows them to do that. So, I would say that in general, the conversations with customers are robust. They're very targeted and focused in terms of how they engage their associates and get them back in the office, particularly to focus on those things that are not as effective from a virtual perspective.

Yes. I think the conversation, Brian, has really shifted to getting people back in the office. Not so much if, but when and how quickly. And I think another encouraging sign for us is to see how much our large projects have increased over the last several quarters, which typically means that people are looking to actually really revitalize their environment versus just a small area here and there. So, we're encouraged by both of those things.

That definitely makes sense. And I was actually going to follow up with that question. Last quarter, you guys had noted that those larger orders, the greater than $5 million category, was up quite strongly. I was wondering if you could kind of give us a little bit of color on how that segment of the business has been performing over the last quarter.

Yes, Brian, Jeff here. Same. We were really encouraged. That was the highest category of growth for us. Again, this quarter was projects above $5 million. So, that trend has continued.

Great. Excellent. Thank you very much.

Your next question comes from the line of Alex Fuhrman with Craig-Hallum Capital Group. Please go ahead.

Hi, guys. Thanks for taking my question. It was nice to see that orders for Retail were up during the really important Thanksgiving weekend and beyond period. Curious how we should think about that given that the Retail business has been down year-over-year for a little while now. Is this potentially the beginning of turning a corner and starting to get Retail back to growth or was this just a matter of a well-executed promotional strategy around Thanksgiving?

Yes. Alex, I think it's both. But Debbie is here, so I'm going to let Debbie answer with some details.

Hi, Alex. Thanks for the question. So, I think it's your latter point. I think we well executed our promotional period. However, that combined with many of the initiatives we have been working towards driving momentum as we deliver. So, just a few examples of those. Our newness continues to grow and is performing better than ever. Our marketing capabilities have been honed over the last few years with new tools like our customer data platform and now the add of data attribution. So, we're seeing significant results from that. I'll just give you one data point. Our return on ad spend for the quarter was up 5% to last year, while cost to acquire customers was up 15% because of the election noise. So, we're seeing really nice marketing economics. Our selling initiatives such as our design services, our small business outreach, those things are driving average order values 10% above last year. And then we have more initiatives across these three factors in the pipeline in addition to new stores in the last quarter. So, we do expect continued momentum and we expect to see growth beyond what's happening in the macroeconomic trends.

Okay. That's really helpful. Thank you very much.

As there are no further questions, we turn the floor back to President and CEO, Andi Owen, for any closing remarks.

Thanks again, everyone, for joining us on the call. Hope everyone has a lovely holiday season. We appreciate your continued support of MillerKnoll and we look forward to updating you on our next quarterly conference call. Thank you.

Thank you for joining our call today. This now concludes our conference call. You may now disconnect.