MillerKnoll, Inc. Reports Second Quarter Fiscal 2023 Results
- Sales growth of 4% over the prior year, up 8% organically
- Year-over-year operating margin expansion in the Americas Contract and International Contract & Specialty segments
- Continued progress with the integration of Knoll
-$101 million of run-rate cost synergies captured to date
-Increased targeted run-rate cost synergies from $120 million to $140 million within three years of the Knoll acquisition
To our shareholders:
Throughout the second quarter of fiscal year 2023, MillerKnoll demonstrated the power of our diversified business model from our collective of design brands across multiple channels, customer segments and geographies. Despite continued uncertainty in the markets that we serve, our financial results delivered on our commitments with revenue and adjusted earnings per share at the high end of our guidance. This performance included operating margin expansion over last year in both our Americas Contract and International Contract & Specialty segments, which helped offset short-term margin pressures from supply chain disruption in Global Retail.
As MillerKnoll, we are leveraging our increased scale to capture synergies, increase capabilities and refine processes and organizational structures to maximize efficiency and agility now and for the future. MillerKnoll also continued to innovate and push design boundaries, with several second quarter product launches and collaborations across our collective brands, that will help us meet customer needs where they live, work and play.
MillerKnoll Consolidated Results
Second quarter consolidated net sales were $1.07 billion, reflecting an increase of 4.0% on a reported basis and 7.6% organically compared to the prior year. Orders in the quarter of $1.01 billion were 12.5% lower on a reported basis and decreased 9.2% organically year-over-year. In addition to current economic uncertainty, the decrease in orders this quarter reflects higher orders experienced in the prior year as a result of pandemic-driven pent-up demand for projects associated with return to office.
Gross margin in the second quarter of 34.5% was 10 basis points higher than the same quarter last year on a reported basis and down 40 basis points on an adjusted basis. The year-over-year decrease in adjusted gross margin was primarily due to higher commodity costs and other inflationary pressures, as well as near-term incremental inventory-related costs in our Global Retail business. These costs were partially offset by the realization of recently implemented price increases and benefits from integration synergies. As expected, gross margin performance this quarter in the Global Retail segment was negatively impacted by elevated costs associated with the storage and handling of inventories, which are expected to abate as we move through the second half of FY23. Despite these near-term pressures, we were highly encouraged by the sequential-quarter improvement in the Americas Contract segment, where gross margin improved 320 basis points from the first quarter.
Consolidated operating expenses for the quarter were $328.9 million, compared to $346.8 million in the prior year. Consolidated adjusted operating expenses of $303.9 million, were up $9.5 million from last year, primarily due to higher variable selling expenses and new stores, partially offset by synergies and overall cost management.
Operating margin for the quarter was 3.6% compared to 0.6% in the same quarter last year. On an adjusted basis, which excludes acquisition and integration-related charges, consolidated operating margin was 6.0% compared to 6.2% in the prior year.
Diluted earnings per share was $0.21 for the quarter, compared to a diluted loss per share of $0.02 for the same period last year. Adjusted diluted earnings per share were $0.46 for the quarter, compared to $0.54 for the same period last year.
At the end of the second quarter, our liquidity position reflected cash on hand and availability on our revolving credit facility totaling $428.4 million. The business generated $59.5 million of cash flow from operations during the second quarter and repaid $50.5 million of debt as part of our capital deployment priority of maintaining a strong balance sheet. We ended the second quarter with a net debt-to-EBITDA ratio, as defined by our lending agreement, of 2.8x.
Net sales in the third quarter of fiscal year 2023 are expected to range between $980 million to $1,020 million. The mid-point of this range implies a revenue decrease of 2.9% compared to the same quarter last fiscal year on a reported basis and a decrease of 0.7% on an organic basis. This guidance takes into consideration the relative seasonal slowdown that we normally experience from the second to the third quarter. Adjusted earnings per share are anticipated to be between $0.40 to $0.46 for the quarter.
As announced last quarter, we have proactively taken additional steps to improve our near-term profitability. These included offering a voluntary retirement window, further optimizing our organizational structure and reducing program spending. As a result of these actions, we expect to realize annualized expense reductions of approximately $30 million to $35 million. These savings will begin to be realized during the third quarter and be more fully realized in the fourth quarter.
Solving Customer Needs Across the Globe Through Strong Brands and Complementary Channels
For the second quarter, the Americas Contract segment posted net sales totaling $529.7 million, up 6.1% compared to the year-over-year on a reported basis and up 7.3% organically. New orders in the quarter totaled $474.1 million, a decrease of 17.3% from the same quarter last year on a reported basis and down 16.2% organically. The decline in orders year-over-year reflected the impact of pandemic-driven pent-up demand last year, compounded by a challenging macro-economic environment and customer preference to pilot smaller projects as part of return to office efforts. Despite this near-term uncertainty, as we integrate all our brands into one MillerKnoll offering, we are exceeding our initial cross-selling targets in the early days of these efforts signaling that our customers are finding value and options in our broadened product range. With over 300 dealers in the Americas, we will continue to boost our cross-selling capabilities to enable customers to even more easily purchase across our collective of brands. Our recent price increases helped increase segment profitability, reflected in an adjusted operating margin that was 560 basis points higher than last year.
International Contract and Specialty
The International Contract and Specialty segment delivered net sales in the second quarter of $264.9 million, an increase of 7.2% from the year-ago period on a reported basis and up 15.4% organically. New orders in this segment totaled $241.7 million, representing a year-over-year decrease of 7.4% on a reported basis and increased 0.1% organically.
During the quarter, lower demand levels in China, France and Ireland were partially offset by growth in India, South Korea and the Middle East. Our International business has relatively out-performed the Americas business, benefiting from both a faster return to office in many regions plus opportunities within less penetrated markets to capture new regional accounts. We have onboarded nearly 50 dealers to cross-sell the MillerKnoll collective of brands in Europe and will emphasize Asia Pacific and Middle East dealer onboarding during the back half of the year. Within the Specialty portion of this segment, lower order demand for Holly Hunt was offset by growth in our textiles brands and Spinneybeck Filzfelt. Looking ahead, we see many opportunities to introduce these brands to new markets and new channels.
The International Contract and Specialty segment also delivered improved adjusted operating margins for the quarter, up 180 basis points from last year.
Net sales in the second quarter for our Global Retail segment totaled $272.3 million, a decline of 2.8% over the same quarter last year on a reported basis and up 1.2% organically. New orders in the quarter totaled $297.6 million, down 8.1% compared to the same period last year on a reported basis and down 4.4% organically.
As expected, operating margins in our Retail segment were negatively impacted this quarter by elevated inventory-related costs. These expenses resulted from the build-up of inventories ordered earlier in the calendar year when many supplier lead-times were extended and overall demand trends in the business were at higher levels. Robust Cyber Week and holiday orders are aiding our efforts to normalize retail inventory levels and we expect that a partial quarter of elevated costs will be recognized in the third quarter. As we look ahead, we expect profitability in the Retail segment to steadily improve over the next two quarters, and we expect to end the fiscal year with high single-digit operating margins.
Overall, Retail orders were lower than in the prior year, as we felt the impact of a slowdown in the housing market. Despite this, we finished the quarter with the strongest Cyber Week in Company history, delivering an increase of 22% over sales during that week last year. Our investment in digital capabilities, customer service and experience as well as strategic promotion management helped us navigate the season, magnifying customer interest and intent to purchase. In addition, we introduced a significant number of new customers to our brands. Looking ahead, we see opportunity to expand our relationship with these customers across all of our Retail brands. We also expect to leverage increased capabilities to serve our customers through our direct-to-consumer channels.
Using Integration to Capture Savings, Unlock Capabilities and Drive Future Success
We have made further strides on the integration of Knoll and as a result are increasing our target for run-rate cost synergies by the end of the third year following the close of the acquisition from $120 million to $140 million. As of the end of the second quarter, we have captured $101 million in run rate synergies. Successful efforts from our integration teams to identify additional sources of savings have given us the confidence to increase our target for synergies.
As we review our combined global operations portfolio, we have established centers of excellence and created dedicated teams to deploy the MillerKnoll Performance System to realize opportunities where we can better scale capabilities and unlock value. As an example, we have transferred veneer production in multiple regions to centralized facilities, allowing us to leverage equipment, capacity and skilled expertise.
Our efforts to sell the entire MillerKnoll collective of brands across our distribution network and channels continues as part of our promise to create commercial opportunities. This includes expanding the global reach of our brands, as demonstrated by the Muuto eCommerce site which launched in the U.S. in the second quarter to strong response.
We are also going to market in new ways, such as a new trade site for Design Within Reach and a new contract online ordering platform. These new systems will make it easier for the architecture and design community and dealers to bring our whole portfolio to market as we seek to capture greater share of wallet. Supplementing this, we are enhancing and implementing several customer performance, tracking and marketing systems to provide new levels of insight into customer sentiment and preferences to help strengthen ties and encourage repeat purchases.
Harnessing Research, Product Innovation, and Doing More For Our Planet As MillerKnoll
Our research and insights team is providing invaluable data and guidance to our contract clients, assisting them as they address the challenges and opportunities of hybrid working environments. With renewed interest in enhancing home offices as employees accept the permanence of working both outside and inside the office, our retail teams are also helping customers focus on well-being and comfort.
MillerKnoll continued to innovate this quarter, launching several collaborations across our collective brands including HAY’s collection of tableware and kitchen accessories with conceptual artist and chef Laila Gohar; Maharam’s new upholsteries and rugs designed with designer Bertjan Pot; and KnollTextiles collection of draperies, wall coverings and upholsteries with artist and educator Nick Cave. Our collective of brands pushed design boundaries with new launches, including Geiger’s Full Loop Chair designed by EOOS, a re-introduced Ward Bennett classic low armchair, Holly Hunt’s new lighting fixtures, and Datesweiser’s executive office offerings. We are also attracting and building our appeal to the gaming audience with the recent launch of Vantum, the latest performance gaming chair from HermanMiller Gaming.
As a core strategic pillar, we remain committed to our People, our Planet and our Communities. In September, we reintroduced the Eames molded shell chair, now made with 100% post-industrial recycled plastic, and earned a silver rating in Corporate Social Responsibility by EcoVadis, placing our company in the top 7% of companies in our industry. We will continue to look for ways to innovate and responsibly source materials across our collective of brands and products.
While economic uncertainty exists in some of our operating geographies, we remain confident in the resiliency of our collective of brands. MillerKnoll’s diverse channels and customer segments provide opportunities for growth and expansion. As always, we appreciate your continued support of MillerKnoll as we continue to innovate and deliver for our customers worldwide while creating value for our associates, shareholders and other stakeholders.
President and Chief Executive Officer
Chief Financial Officer
The full text of MillerKnoll’s 2Q23 earnings release, including all tables, and a replay of the company’s Dec. 21 conference call webcast may be accessed at www.millerknoll.com/investor-relations
MillerKnoll is a collective of dynamic brands that comes together to design the world we live in. MillerKnoll brand portfolio includes Herman Miller, Knoll, Colebrook Bosson Saunders, DatesWeiser, Design Within Reach, Edelman Leather, Fully, Geiger, HAY, Holly Hunt, KnollTextiles, Maars Living Walls, Maharam, Muuto, NaughtOne, and Spinneybeck|FilzFelt. MillerKnoll is an unparalleled platform that redefines modern for the 21st century by building a more sustainable, equitable and beautiful future for all.