MillerKnoll, Inc. Price & Performance (MLKN)

And welcome to our third quarter fiscal twenty twenty five conference call. On with me are Andy Owen, Chief Executive Officer and Jeff Stutz, Chief Financial Officer. Joining them for the Q and A session are John Michael, President of North America Contract and Debbie Probst, President of Global Retail. We issued our earnings press release for the quarter ended March 1, 2025, after market closed today. Along with our earnings release, we filed an eight ks announcing a change in our segment reporting structure. The eight ks includes recast segment financials, from fiscal twenty twenty three to date reflecting the new reportable segment. The segment change has no impact on our historical consolidated financial results.

These documents are available on our Investor Relations website at millernoll.com. Before I turn the call over to Andy, 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 measures. And our press release includes the relevant non GAAP reconciliations. A replay of this call will be available on our website within twenty four hours. With that, I'll turn the call over to Andy. Thanks, Wendy, and good evening, everyone, and thank you for joining us tonight. Our results in the third quarter of fiscal year twenty twenty five reflect the advantages of our diverse business model. Strong performance in certain markets and channels mitigated softness in others and a disciplined focus on our cost structure helped us weather unpredictable and dynamic macroeconomic conditions.

During the quarter, we saw a notable difference in demand in our retail businesses, compared to most of our contract businesses. Leading indicators within our contract segments are mix and overall demand in many geographies were sluggish during the quarter amid uncertainty related to tariffs and other macroeconomic factors. Our consolidated net sales were up year over year, We saw impressive order growth in global retail, particularly in North America. Earnings in the quarter met our expectations. I'm especially proud of how nimble and responsive our teams have been. I want to thank them for driving sales and order growth in a challenging environment and for their focus on controlling our costs while preserving our growth investments. Next, before I move to segment specific highlights from the quarter, I wanted to walk through the changes we've made to better align the business with our long term strategies. And to offer more visibility into our performance in key end markets. With the integration of Knoll largely behind us and a pivot towards driving growth, we have resegmented our operations. Our three business reporting segments are now North America Contract, International Contract, and Global Retail. We moved our textile businesses, Maheram, Knoll Tech Textiles and Edelman, as well as Spinnebeck Filtsfeld into our North America contract segment.

Aligning these teams allows us to report all our business to business sales in North America through one reporting segment. To that end, as we continue to focus on the tremendous opportunities for growth abroad, our Latin America contract business will now be reported within our international contract segment. The Latin America region is very similar to our other international markets. Lastly, removing Holly Hunt, to our global retail segment. Holly Hunt shares an important similarity with Design Within Reach because they both have close ties with the residential to the trade designers. Structure. And as Wendy mentioned, concurrent with the filings of the earnings release, we also filed a REIT recast segment financials back to fiscal twenty twenty three to assist you in understanding the new segments. So now I'll move to some highlights and trends in these new segments. While sales were up, North American contract orders were lower than expected marked by caution of current environment.

In international contracts, we continue to see positive signs in less mature markets, and we're pleased with strong orders in APMEA, especially in The Middle East, India and Japan, along with Mexico, Brazil and portions of Mainland Europe. We also added new team members in key geographies in filling increasingly positive about momentum going forward. In global retail, there was much to be excited about in the third quarter. Reported orders were up nearly 15%, Organic orders were up 17%. And organic orders adjusted for the year over year timing differences in the Black Friday Cyber Monday period were up over 4%. We were particularly pleased with retail demand in North America, where cyber adjusted orders were up 14%. In the quarter, we saw strength in both new product introductions and with our best sellers. We are continuing to grow overall product assortment and we're approaching new product development with an eye towards unique author design, and an appreciation for style, quality, livability.

Our new product pipeline is driven by a strong combination of timeless iconic pieces and new exclusive collaborations with external designers. New product launches in springsummer twenty twenty five are up over 65%, compared to springsummer twenty twenty four. As we grow our product assortment, we are also growing our store footprint and brand awareness. In the quarter, we opened a new design within Reach Studio in Palm Springs, California. And a new Herman Miller store in Fairfax, Virginia. In Palm Springs, during Modernism Week, we hosted a series of events and brand activations. The foot traffic during opening week was triple back of some of our most highly visited locations. We plan to open two more stores in the fourth quarter, a Find Within Reach studio in Paramus, New Jersey, and a Herman Miller store in Coral Gables, Florida. Currently, we're working on over 15 exciting new locations in North America, and expect to open 10 to 15 new locations in fiscal twenty twenty six. And just in time for Fulton market design days, this June we're opening a newly repositioned design center location just steps away from our existing showrooms. These spaces will create a much improved co located flagship experience, bringing together the full breadth of our contract and retail design portfolio.

A few highlights include new design within reach in Herman Miller stores, new showroom presentations from Herman Miller, [indiscernible] courtyard designed by Michaels and Volkenberg Associates. We also recently opened a MillerKnoll archives at our space in Holland Michigan Designer location, showcasing one hundred plus years of design history. Our archives are a critical resource for MillerKnoll associates, as well as our architecture and design partners, curators, and academics. The early response to this new space has been overwhelmingly positive. We are eager and excited to continue to introduce our brands and our spaces to more customers as we expand our footprint. Now I'll shift to a supply chain update and discuss how we are navigating tariffs. As we've seen in the past several weeks, recent tariff announcements have created uncertainty in our industries, but as policies evolve, we will remain flexible and seek to adjust our approach to minimise impact to our valued customers. We're using what we've learned from earlier rounds of tariffs and the pandemic along with our manufacturing and supply chain footprint, to manage our approach in this dynamic environment. To begin, we recently announced a 4.5% list price increase will become effective on June 2.

In addition, we will partner with suppliers, leverage value engineering, and available flexibility within our supply chain and manufacturing to offset cost impacts wherever possible. And we will also consider incremental price surcharges if necessary to manage this period of volatility. Importantly, all of this will be done with an eye toward what will be the most transparent and least disruptive for our customers and dealers. Jeff will discuss the expected impact of the tariff related cost increases in connection with our outlook later in the call. To close, despite entering the fourth quarter amidst an uncertain macroeconomic environment, we remain focused on our longer term strategies and growth levers. While managing our costs and remaining as nimble as possible. We have the balance sheet strength to weather the current conditions, and that will allow us to invest in profitable growth opportunities. I'll now turn it over to Jeff to discuss our results in more detail and share our outlook for the remainder of fiscal twenty twenty five.

Great. Thanks, Andy, and good evening, everyone. I'll start with an overview of our third quarter performance, followed by our outlook, which as Andy mentioned will include our most up to date view on tariffs. In the third quarter, we generated adjusted earnings of $0.44 per share, consistent with our midpoint of our guidance, driven by proactive cost containment measures. While extremely dynamic tariff and policy uncertainty negatively impacted sales and order pacing this quarter, like Andy, I want to thank our teams across the company for their quick and decisive actions to reduce cost. Consolidated net sales in the third quarter were $876,000,000 an increase over last year on a reported basis and slightly, and up 1.8% organically. Third quarter consolidated orders of $853,000,000 were up 2.7% as reported and 4.1% higher on an organic basis. Our consolidated backlog in the quarter was $686,000,000 which is up 7.4% from a year ago. In the period, our consolidated gross margin 37.9%. Down 70 basis points to last year primarily from unfavorable channel and product mix as well as lower fixed cost leverage. At the consolidated level, we reported a loss per share of $0.19 for the quarter. Compared to diluted earnings per share of $0.30 in the prior year.

This loss in the quarter included special charges related to intangible amortization impairment and restructuring of $140,000,000 Of these special charges, 130,000,000 were related to pre tax non cash impairment of goodwill attributed to the Holly Hunt and Global Retail Reporting Units, and indefinite lived intangible assets for the Knoll and Muuto trade names. Dollars 6,000,000 of the non cash charges were related to our typical quarterly amortization of Knoll purchased intangibles. And the remaining $4,000,000 of special charges related to restructuring actions taken in quarter to better align our cost structure to the current demand environment through workforce reduction. On an adjusted basis, which excludes these items, diluted earnings per share were $0.44 the quarter compared to $0.45 the same period a year ago. Turning to cash flows on the balance sheet. In the third quarter we generated $62,000,000 in cash flow from operations. We repurchased approximately 786,000 shares for $18,000,000 and importantly, reduced our long term debt by 61,000,000 We finished the quarter with a net debt to EBITDA ratio at defined by our lending agreement of 2.93 turns. And available liquidity at quarter end was $468,000,000 Now with that, I'm going to move to our performance by segment.

Within our North America contract segment, net sales for the quarter were $468,000,000 up 1.4% on a reported basis and up 1.7% organically from the same quarter a year ago. New orders in the period were $434,000,000 reflecting a 1.8% reported decrease and a 1.5% organic decrease versus last year. Order trends during the quarter were lower than we expected And while we saw solid year over year growth in December, orders declined significantly in January, concurrent with trade policy and larger macroeconomic uncertainty. Encouragingly, we did see orders improve versus the prior year in February this improvement has continued into March. Where orders in the first three weeks are up more than 30%. Highlighting the lumpy nature of projects in the contract segments of our business. Third quarter operating margin in this segment 3.6% compared to 5.5% last year. Adjusted operating margin was 9.1% in the quarter. An 80 basis point improvement compared to the same quarter last year primarily due to lower variable incentive compensation and focused cost control in general.

In the international contract segment of the business, net sales in the third quarter were 146000005% lower on a reported basis and 1.5 lower organically year over year. New orders in the quarter were 159,000,000 a 1.6% decline on a reported basis but a 1.4% increase organically year over year. Here again, similar to the North America segment, order trends in the quarter were much lower than what we saw in the month of December. With global trade policy and macroeconomic challenges impacting demand significantly more than we expected. On the positive side, as Andy mentioned, order growth in the APMEA region among others, continues to be strong. And it's worth noting that the international contract orders in the March have trended up 2% to last year. From an operating margin perspective in the third quarter, reported operating margin was 6.8% compared to 11.4% last year, and adjusted operating margin was 9.3% down two sixty basis points primarily from deleverage on lower revenue. Turning to the retail segment, Net sales in the quarter were $263,000,000 up 1.9% on a reported basis and up 3.9% organically. New orders in the quarter were $260,000,000 which is up 1414.7% to last year on a reported basis and up almost 17% organically compared to last year.

Although sales and orders in the third quarter benefited from the shift in timing of year's holiday and cyber promotional period, Compared to last year, new orders were up 4% in this segment and up 14% in the North America region after adjusting for this timing difference. Furthermore, retail segment orders in the March are up 10% to last year. We did report a negative operating margin in the retail segment this quarter of 36% compared to positive 4.7% last year. And this loss in the current period resulted from the asset asset impairments I previously described. But excluding these non cash charges, adjusted operating margin totaled 6.2% in the quarter, which is 80 basis points higher than the same quarter a year ago. Driven by higher shipping revenue and increased leverage on higher sales. Now I'll turn to our Q4 guidance and outlook. Which is informed by recent order trends and our most up to date information on tariffs and related mitigation efforts. For the fourth quarter of fiscal twenty twenty five, we expect net sales to range between $910,000,000 and $950,000,000 which would be up 4.6% versus last year at the midpoint of $930,000,000 Our gross margin is expected to range from 37.5% to 38.5% and adjusted diluted earnings are expected to range between $0.46 and $0.52 per share.

Our gross margin and EPS outlook includes our estimate of tariff related costs in the fourth quarter of between $5,000,000 and $7,000,000 before tax and between $0.5 and $07 of net earnings per share. This range includes our expected exposure under all known active tariffs, and is net of expected mitigation efforts in the period. Given its fluid nature, as the tariff situation changes we will provide further updates of course in future calls.

For all other details related to our outlook for the remainder of 'twenty five, please refer to our press release. With that overview of our financial performance and outlook, I'll now turn the call over to the operator. And we'll take your questions.

Thank you. Before we open to floor for questions, just a quick reminder, if you'd like to ask a question, please press and the number one on your telephone keypad. Again, is and the number one on your telephone keypad. And our first question comes from the line of Brian Gordon from Water Tower Research. The line is open.

Good afternoon, everyone. I guess my first question is about the impairment charges, especially in global retail. And how we can sort of square that with the rather impressive performance, especially in North America.

Yep. Brian, this is Jeff. So there's a couple of things. First of all, we're required under US GAAP to do quarterly evaluation and be on the lookout for any any triggers that might signal impairment. And this quarter there were two things. First off, relative to our own internal expectations, the overall profitability of the segments had lagged expectations. So that was a first signal. We also re segmented the business as we outlined in our prepared remarks. And so for that reason we ended up doing as required a full review and valuation, which would normally take place in the fourth quarter of fiscal year, but we pull it ahead of quarter as required under the rules. And so really that was the driver behind it.

Okay, that definitely makes sense. And just sort of like a follow-up on the new stores and new locations that you guys are thinking about in that segment. For that 10 to 15 new locations number, how even will that be across the '26 timeframe?

Hi there, thanks for the question. This is Debbie. We're pacing them pretty evenly, quarter by quarter. We have two additional locations as we said this quarter, and then we'll pace fairly evenly throughout the quarter and throughout next year.

Okay, great. Thank you guys very much. Thank you.

Our next question comes from the line of Greg Burns from Sidoti and Co.

The line is open. Good afternoon.

Just in regards to tariffs, I know it's a fluid situation and the net impact is going to be that 5 to $7,000,000 in the fourth quarter. But do you think you're based on what you see now, we'll be able to fully offset that in future quarters?

Yes.

Greg, this is Jeff. I'll start and Andy, if you add anything, please. Yeah, our belief would be, here's the wild card is what happens in April. There's a whole slew of potential tariff that changes that seem to be changing a bit by the day.

So our outlook, we carved all that out. This really difficult for us to estimate right now what that's going look like until we see some of the movement settle down. So based on what we see, this active today, yeah, our belief is that through pricing and other mitigation efforts we can offset those.

Okay. Great. And then in terms of the revenue guidance, you're coming in with a higher backlog, I think, think you said plus 7% and the order growth seems to be accelerating at least in the first part. So maybe there's you're not fully sure how the quarter is going shake out, but it seems like things are [indiscernible] building a little bit of momentum from the softness you saw this quarter. I'm just trying to square away that higher backlog plus the improved order growth versus the revenue guidance for, like, 4% to 5% growth?

I think what you're seeing there Greg, is I think the lumpy nature of the business between Q3 and Q4 I think we're really excited about what we're seeing at the beginning of Q4. However, we're all reading the headlines, we all know what's happening in the world, and I think as we look Q4 we're trying to be prudent in how we think about how this could all shake out. So I think what you see there is a little bit of our prudence on how we're guiding right now for the quarter. I think we're very optimistic about what we're seeing in the momentum. I think given some of the choppiness in this last quarter, what we're hoping for is some stability. And I think that will be welcome.

Okay.

Okay. So just maybe digging into what you saw this quarter. In the North American contract segment. In the last couple of quarters, you talked more more positively, I think, some of the pipeline metrics, the pipeline activity seemed to be a little bit more mixed this quarter. So can you just talk about maybe what you saw there, how it maybe changed this quarter, and if you're seeing any improvement in those pipeline activity metrics that you've talked about in the past like mock ups or anything like that?

I think those metrics are still strong. I think it's a little bit more of a mix bag, but we're not seeing massive changes. I'll let Jonah let you go into specifics. There if you want to.

Sure, thanks, Andy. Yeah, I think from a leading indicators perspective, we still have quite a bit of optimism and momentum. If you look at things like our twelve month funnel, it's up 7% year over year. We look at awarded projects that haven't ordered yet.

That's up 27%.

Year over year. Contract activations where we let pricing for projects is up double digits as well.

So I think what you're seeing in, and as Jeff alluded to the the nice start to Q4, it just takes a little longer for some of these leading indicators to show up in the order rate. And as Andy and Jeff alluded to, it's a little choppier perhaps than we're accustomed to. But certainly, backlog order momentum and leading indicators are all pointing in the right direction. All right, great. Thank you.

Thank you.

Our next question comes from the line of Alex Fuhrman from Craig Hallum. The line is open.

Terrific. Thanks for taking my question. I want to ask what you're seeing in terms of demand from consumers on their direct to consumer side of the business. I think you mentioned that orders to date in March have been up really nicely. Year over year. Is that indicative of demand remaining strong from your high end consumer for your consumer brands? Or is there maybe something about the timing of promotions that maybe would have influenced that March result?

I think so far, Alex, we're seeing a plus 10 so far this quarter for orders, which we're really encouraged about. I think we have a couple things to unpack in our retail business. Number one, as I feel like I say always, we're very nascent business We have a lot of opportunity to grow in both locations and assortment. What you're beginning to see is some of the new assortment and product extensions that Debbie and her team have been putting in place for the last several years are beginning to track. And so we're very positive about way that will help us kind of outperform the competition. One of the key indicators as well as the locations that we're opening. So we see momentum in that business continuing. Debbie, what would you add? I'd just add, Alex, that as you know, we shared in the remarks that our North America retail business is up 14% last quarter, adjusted for the cyber shift. That business is almost entirely direct to consumer, direct to trade. Whereas our international business is more significantly wholesale. And so where we are able to control all the levers to drive demand, we are outperforming versus our wholesale business where we are dependent on the open to buy of third party retailers.

So we're really excited that our our new offerings and our assortment with 30 new collections added last quarter, our new store locations, these things are all off to a great start. And our marketing attribution capabilities are also driving progress. So what's working is repeatable, and as Andy said, we have a lot of market share opportunity And our total addressable market is growing as we expand our assortment offering.

Okay, that's really helpful. Thank you both. [indiscernible] question comes from the line of Reuben Garner from The Benchmark Company. Your line is open.

Thank you. Good evening, everybody. [indiscernible] I guess to start on the changes in the outlook for the full year. So I understand the tariffs piece. I have a question on that in a second. But the bulk of the cut seems to be outside of that. I'm trying to figure out what what exactly has changed from three months ago when you gave that to make that level of adjustment on the earnings side. And I understand you didn't necessarily give specific top line guidance At least I don't think you did. So maybe the outlook was much higher, but maybe walk me through the components or the pieces that have changed since you kind of last updated us.

Yeah, Ruben, this is Jeff. So maybe I'll confirm to start, we had not provided a top line guide for the full year. We had been talking kind of more from a bottom line perspective.

But look, I would just double down on what Andy just highlighted, and that is we really do view our fourth quarter guide as being a prudent view of the next thirteen weeks, given what we see in the news every day. I mean this has been a wild ride of changes related to trade policy. And as you know, you have followed this space for a long time. Confidence matters and it matters a lot. In this business. And that's true for both the contract side of our business, with business confidence measures, but it's also true of course in the retail side of our business with consumer confidence. And consumer confidence has taken a real beating here the last four months straight. We're still waiting on the next reading of CEO confidence. But I think based on the headlines and all of the work internally that we've been doing to try to keep abreast of the raft of changes that are coming about potential tariffs. And I emphasize potential, Every one of our customers is doing the same thing. So we just viewed it as reasonable and appropriate in the current environment to be more cautious, perhaps more so than normal.

In the outlook. So it really kind of comes down to a top line story.

Okay. And so I guess that's what so it's not actually you're seeing in your business that's leading to this level of reduction? Because I mean the bulk of the tariff uncertainty has been in the last sixty days and it sounds like your orders have accelerated over the last sixty days.

That would be correct. That is true. Absolutely That is true, Ruben. I think, again, as I mentioned, I don't want to overemphasize this because we don't know where this is going to go. But there's an awful lot of kind of next wave talk about what the impact of tariffs could be. And the wild card question at one level becomes, and I'm not an expert in this area by the way, so I'm going partly pretend to be one right now, but what happens with retaliatory tariff impacts and what that means for end market demand. And we certainly are not trying to make a prediction of that. But we're doing the best we can with the outlook. As I just again would just say it's probably a bit more cautious than normal, but we felt it was prudent under under the circumstances.

And I think given the situation, I think the thing that I think it's important for us to keep outlining here. Is that our revenue is growing to last year. We are growing even with these circumstances, and I think it's important to note that and not lose sight of that.

Okay. And then on the tariff side, just given how uncertain it is why take the approach of putting through a I think you said a price increase, a list price increase in June just given that some of these tariffs could come and go or already coming and going, why not use a surcharge tactic? I know you referenced you could use that, but why not lead with that?

Well, the first thing I would say is, the it would be wrong to think that the price increase is squarely aimed as a response to tariffs. It's in part that. But I would point out that even domestic U. S. Steel prices have run up since the start of the calendar year. And it has been coincident with this tariff conversation, and that has happened in the past as well. So it's not just the potential cost implications of the tariffs, There are some derivative effects that seem to be having an impact on key input costs like steel. And there are other cost inflationary pressures in the business as well. So we felt like a base price increase was appropriate and as we mentioned on the call, we will, we're at the ready with surcharges if needed.

Okay. And then one more clarification for me. Don't think you give backlog specific to North America, maybe you will with the new segmenting, but what you're not seeing any cancellations to date in orders. Is that correct?

No.

Yeah, that's correct.

Okay. And I said last one, I'm gonna sneak one more in actually. I'm sorry, on the restructuring side, I feel like we didn't really hit necessarily [indiscernible] what the goals are or the purpose of that. I understand there's some charges in workforce realignments, but it sounds like you're also adding in retail. You talked about investments last quarter in North America. Where are these cost reductions aimed? And I guess what are the ultimate savings that come from the the one time expenses?

Yeah, Ruben. So, I'll just directly answer the question. We had $4,000,000 as I mentioned in the prepared comments, four million of restructuring related charges. They were principally related to workforce reduction.

We expect annualized savings from that on the order of $4,000,000 It's between four and four and a half is our best estimate. And look, have a long we have a long track record of when we sense that there's potential for uncertainty in the business and we're feeling the of that on our cost structure and on our leverage. Look, we'll take action. And so we view that as, again, with a prudent with a prudent outlook, we felt like it was appropriate to to manage costs. You know, it was a set of painful decisions, certainly what we felt were right for the I don't know Andy if you want to add any other And I think it also enables us is just good hygiene. I mean, you're always looking at things as you look at your outlook, and with the uncertainty out there I think we want it to be again, prudent. And also, to make sure that we are able to continue to invest in our growth strategies like retail, growth in international. So continue to invest in research and development around new products. So those are the things we're really protecting here. Got it. Thank you guys and good luck.

Thank you.

There are no further questions. We turn the floor back to President and CEO Andy Ohman for any closing remarks.

Thanks again to everyone for joining us on the call, and we appreciate your continued support at MillerKnoll. And we look forward to updating you on our next quarterly call. Have a good night.

The meeting has now concluded. Thank you all for joining. Have a pleasant day.