Ladies and gentlemen, thank you for standing by, and welcome to the MillerKnoll First Quarter Fiscal 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. We ask that you please limit yourself to one question and one follow-up. Thank you. Ken Diptee, the Vice President of Investor Relations, you may begin your conference.
Good evening, and welcome to MillerKnoll's first quarter conference call. I'm joined by Andi Owen, Chief Executive Officer, and Jeff Stutz, Chief Financial Officer. Also available during Q&A are Debbie Propst, President, Global Retail, and John Michael, President, Americas Contract. 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 call 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 assumes 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'll turn the call over to Andi.
Thanks, Ken. Good evening, everyone, and thank you for joining our call. MillerKnoll was created to lead our industry and deliver results by offering customers modern design solutions for their workspaces and homes through a unique collective of brands and channels. We continue to leverage and build on the competitive advantages we established during our first year as MillerKnoll. This quarter, we successfully launched our MillerKnoll sales organization and dealer network, introduced new products at the company's first Design Days, and continued to capture synergies through our integration work. First quarter results are a testament to our diversified global business. Our multi-channel, multi-brand collective is designed to sustain shifting economic conditions and drive growth.
During the first quarter, we experienced the impact of economic softening in various parts of the world, and our results reflect how we can drive strong performance in different segments and regions to balance the performance in others. Around the globe, we hear from customers that the workplace matters. Companies see the benefits of a hybrid model and want to bring teams together for culture, collaboration, and productivity. However, the pace at which companies are placing orders and enhancing their workspace varies based on location and sector. In the Americas segment, we posted healthy growth in revenue compared to last year, but saw a slowdown in order activity. We are feeling the impact that the economic uncertainty is having on our customers, particularly in the U.S.
They are voicing concerns about inflation, piloting smaller orders, and requiring more revisions to projects as they learn to operate in a mostly hybrid environment. Given this macroeconomic backdrop, we are proactively taking action, including continued pricing increases and careful management of discretionary spending. Our International Contract & Specialty segment sales and orders continued to grow after a strong fourth quarter. Our global presence and the ability to take brands into new markets is an important advantage that we will continue to leverage. The international dealer cross-sale pilot now includes 41 dealers from 17 countries on three continents. We plan to expand it to India, the Middle East, and Africa later this year.
Holly Hunt, which appeals to a premium residential customer that is more resilient to inflationary pressures, and Spinneybeck FilzFelt, whose customized solutions help our customers enhance the acoustics and walls of their spaces, both delivered record sales leverage for the quarter. In addition, Geiger and DatesWeiser generated sales growth from their elevated designs for executive offices and conference rooms. Turning to products, we've introduced more than 15 new products this year, including new task chairs from both Herman Miller and Knoll, an innovative inlet screen from Knoll, new textiles from Maharam and Knoll, new outdoor and ancillary collections from Muuto, and naughtone cafe tables and stools. In addition, we've launched new takes on iconic pieces, including a fun and vibrant collaboration with Rolf and Mette Hay on select Eames pieces, and the reimagination of the Eames Shell Chair, which is now available in 100% recycled plastic.
These new products reflect innovation in design and functionality and our commitment to delivering on our 2030 sustainability goals. Whether it's incorporating more planet-healthy materials, using advanced manufacturing practices, or reducing our packaging, we are seeing momentum across all areas of our business to lower our carbon footprint and design out waste. We also launched the MillerKnoll Foundation. This philanthropic platform unites the strength of our legacy foundations with programs dedicated to engaging underrepresented youth in design, advancing equity in MillerKnoll communities worldwide, and protecting our planet through sustainable design. In addition, we continue to deliver on our commitment to diversity, equity, and inclusion through ongoing education across our company about unconscious bias and inclusive spaces, the sponsorship of new CEO Action Fellows, and new diversity and design programs. I have confidence in the programs and innovation we are pioneering across our collective.
We are actively managing all facets of our business with close attention to market drivers, economic conditions, and local market interests. We are prepared for the road ahead. With that, I'll turn it over to Jeff, who will discuss the financial results in greater detail before we open it up for questions.
Thanks, Andi. Good evening, everyone. Our results for the first quarter reflect the steps we've taken to position MillerKnoll for growth.
These results also leverage the benefits of our diverse business model, which has helped to mitigate some of the pressures from the current macroeconomic environment. We also saw signs of stabilization in our supply chain and lead times return to near normal levels. Although some pockets with longer lead times still remain. As we look ahead, we will continue to focus on what we can control and providing solutions to our customers. As you saw in our press release issued today and the 8-K filed on September eighth, we changed our reporting segments to align with changes in our organizational structure, which was effective at the start of the first quarter. As a quick reminder, our segments now consist of Americas Contract, International Contract & Specialty, and Global Retail.
Turning to our results, consolidated net sales in the first quarter were $1.1 billion, an increase of 37% on a reported basis and 12% organically compared to the same quarter last year. Consolidated orders continued to exceed prior year levels on a reported basis, with orders of $1 billion reflecting an increase of 11% year-over-year. On an organic basis, orders were down 11% compared to the same period last year, primarily driven by the Americas Contract and Retail segments. In the Americas Contract segment, sales in the first quarter were $537 million, an increase of 41% on a reported basis compared to the same period last year and up 15% organically.
Order levels in the first quarter increased 3% to $511 million compared to the same quarter a year ago on a reported basis, and declined 17% organically. The decrease was due to several factors. These include a challenging comparison due to pent-up demand caused by the pandemic last year, projects taking longer due to dealers being understaffed, and general uncertainty surrounding the current macroeconomic environment. Now I'll turn to the global retail segment. Sales in the quarter for this segment were $269 million, up 11% compared to the year ago period on a reported basis and down 4% organically. New orders totaled $249 million in the first quarter, up 9% to last year on a reported basis and down 8% organically.
The segment's performance was mainly impacted by a shift in consumer spending toward experiences such as post-pandemic travel and continued macroeconomic uncertainty. We're making targeted investments to both scale the retail business and drive new customers to our channels, while at the same time carefully managing our overall cost structure in this business. During the quarter, we opened six new stores across Los Angeles, New York, Denver, West Palm Beach, Copenhagen, Denmark, and Nagoya, Japan. In the second quarter, we plan to open an additional Herman Miller location in Ginza, Japan. Given the ongoing rationalization of our store fleet, we also closed two locations in the quarter. These stores were in Portland and Costa Mesa. Turning to our International Contract & Specialty segment, favorable business sentiment and healthy demand across several key international markets continued to drive impressive growth.
For the quarter, sales totaled $273 million, reflecting an increase of 63% on a reported basis and up 30% organically. New orders in the first quarter were also robust, totaling $252 million, an increase of 31% year over year on a reported basis and up approximately 1% organically. We are very pleased with the strong order growth in India, South Korea and the Middle East, which was partially offset by softness in China and Central and Eastern Europe. Our consolidated gross margin for the first quarter was 34.5%, which is down 70 basis points compared to the same period a year ago.
Adjusted gross margin decreased 150 basis points compared to the comparable quarter last year, and the variance was primarily driven by higher commodity costs and other inflationary pressures, partially offset by recently implemented price increases. Last month, we announced an 8% average list price increase in the Americas Contract segment, which will take effect in October to help further mitigate inflationary headwinds. Looking ahead, if the inflationary environment stabilizes, we believe that additional traction from net price increases and cost reduction initiatives will drive gross margin expansion in the periods ahead. Given the current macroeconomic backdrop, we are proactively taking additional steps to improve our near-term profit and cash flow outlook. These include offering a voluntary retirement window, further optimizing our organizational structure, reductions in program spending, and rationalizing capital expenditures.
As a result of these planned actions, we expect to realize annualized expense reductions of between $30 million and $35 million. These savings should begin gaining traction during the third quarter and be more fully realized in the fourth quarter. Our operating margin for the first quarter on a reported basis was 4.7%. On an adjusted basis, the operating margin was down 40 basis points compared to the prior year. The decline in operating margin reflected the near-term inflationary pressures in gross margin, which were partially offset by well-managed operating expenses. We reported diluted earnings per share in the quarter of $0.34 and adjusted diluted earnings per share were $0.44 in the period, compared to $0.50 in the year ago period. Turning to the balance sheet.
At the end of the first quarter, our liquidity position reflected cash on hand and availability on a revolving credit facility totaling $402 million. Regarding our guidance for the second quarter, we expect second quarter net sales to range between approximately $1.03 billion and $1.07 billion and adjusted earnings per share to be between $0.39 and $0.45. I might also mention that we've provided other elements of our guidance in our supplemental materials that were included with the earnings release. This guidance considers the near-term inflationary environment as well as the proactive steps that we're taking to offset these pressures, and we'll continue to prudently manage our cost to maintain our financial flexibility during these periods of economic uncertainty.
To close, we have a strong collective of brands that provides MillerKnoll with an unparalleled competitive advantage to meet and exceed the needs of our customers on a global scale. We believe we have a unique and diversified business model that provides resiliency for our business going forward. With those opening remarks, we'll now turn the call back to the operator who will take your questions.
As a reminder, if you would like to ask a question at this time, please press star followed by the number one on your telephone keypad. Please limit yourself to one question and one follow-up. Your first question comes from the line of Budd Bugatch with Water Tower Research. Your line is open.
Good afternoon, Andi, Jeff, Ken and Debbie. I guess I just would love to get a little bit more color on the order book, maybe versus what you expected in the quarter in terms of orders and what you're seeing in terms of what your customers are telling you and what you can see in terms of visits and sales activity that I know you monitor.
Hey, hey, Budd. Nice to hear you. It's Andi. Look, as far as customer visits, I think that's a really encouraging sign. Our customer visits are up 10% from last year and also up on the quarter. I think the orders trend for us in the Americas was slightly lower than we've been hoping that it would be, but I think it was varied throughout the quarter. I would say stronger than we thought it would be in International. The demand in Retail has been, I think, on par with our competitors from an orders standpoint. John, what would you add from a Contract standpoint on orders?
I think I would agree, Andi, and add that there's robust activity. If you talk to the dealer network, they're all incredibly busy. I think some of the things that we're seeing is a lot of hesitation on the part of customers in terms of pulling the trigger on a new and more hybrid-focused work environment. Also, probably some hesitation in terms of the size of projects going forward in terms of what's going to be required. That said, most companies that we talk to realize they have to do something, and they're in the process. It's just an iterative process, and it takes a little bit longer to get the order to close than in a pre-pandemic kind of environment.
Okay. For my follow-up question, I guess Inventory came in pretty much higher than I expected, as did debt, so I would like to get maybe some color on inventory and debt and maybe if we can get the ratio for the banks and for the debt holders. But Jeff-
Sure.
If you could comment on inventory and debt. It looked to me like you were maybe $60 million higher in inventory than I thought you were gonna come in, and same for debt.
Yeah. Budd, great question. Good to talk to you. I hope you're staying clear of the storm. I assume you are, given that you're on the call.
It's here and it's notable, but we are safe.
I can only imagine. Clearly, we did have a buildup in inventory, and you see that in the cash flow. I think our cash flow from operating activities was a negative $67 million. It's in that hunt, Budd. A big chunk of that is working capital tied up, related to inventory. A couple areas where we're seeing it. We do see some inventory buildup in the contract business related to the continued relative strength in international. I would make that point that one we'll certainly take. I think if you ring-fence the area that was a bit of a surprise, we did have an inventory buildup in the retail business.
Debbie can unpack this a bit in a little more color, but I would just simply say that, you know, the lead times that business was contending with back in the spring and even the early part of summer were such, and demand levels were such that we were ordering in front of it, right? We were trying to get in front of it. With the falloff in demand that we saw in the quarter, as I mentioned in my prepared remarks, orders organically were down 8% for that business. We did see a buildup in inventory levels. They piled up.
In fact, we had to incur some costs that we weren't expecting related to warehousing and storage and transportation of that inventory that weighed on margins in the period. So that's really the primary area.
Do you have any color-
Debbie, I don't know if you have any color.
I'd add, Budd. I'd just add, this is Debbie. In our dedicated retail inventory increased quarter-on-quarter by 7% as a result of the shift in demand trend. As Jeff alluded to, that 7% increase was largely stored in short-term warehousing locations. We've now secured longer-term locations that are at much lower cost impacts than where we've been storing that buildup that we've had over the last few months. The great news is that our inventory is largely not liable inventory. Only 3% of our total inventory for retail is seasonal, meaning outdoor. We do, however, have a year-round outdoor business, and about 3% is what we would call discontinued, and we're moving through that in our outlets and our clearance section.
Yeah, Bud, and then just to kind of close it out on your question on the leverage ratio, the net debt to Adjusted EBITDA and per our lending agreement, end of the quarter at 2.9x.
Okay. All right. Well, good luck. I'll let others have the floor. Thank you very much and-
Thanks, Budd.
Thanks, Budd. Stay safe.
Thank you.
Your next question comes from the line of Greg Burns with Sidoti & Company. Your line is open.
Afternoon. Just wanna start off with the order trends. When we look at the 17% decline organically in the Americas, how much is that price versus volume?
Greg, this is Jeff. I don't have those numbers split out precisely, but I mean, your question is, it's a fair one that you've got a fair amount of pricing that's built up, right, over the last 12 months. In the Americas, you know, it wouldn't surprise me to see unit volume demand declining, you know, 20%-25% in that run, 25%, whereas order entry levels in dollar terms were down 17%. I think that's directional.
Okay. Then just the early part of this quarter, has there been any kind of shift in the trajectory or similar type trajectory in the early part of this quarter?
Yeah. First three weeks of the quarter, Greg, Americas orders were improved a little bit, down 12% organically to last year.
Okay. When we look at the overall, I guess, corporate enterprise office business, are you able to size, like how big the business is now or versus pre-pandemic? Like, how much has it shrunk, and do you feel like you need to focus on maybe some adjacent areas like healthcare or education, maybe some other verticals to kind of grow that business?
Greg, this is Jeff. John will probably wanna tag onto this, but I would say I don't think. I think the big question that we're all anxious to find out is how much of this is macroeconomic dislocation and that has resulted in lags of return to office. We really simply can't answer what size of industry types of questions right now. John, I don't know if you feel free to tag on.
Well, I think in terms of the question about the verticals, we've got an active and healthy healthcare business. We're very active in higher education as well as public sector. We, you know, in times when the office business is softer, we lean into those verticals that are more resilient. Certainly, we've been doing that. I would say even in sort of the core office business, there are pockets there where there is still a lot of strength and activity, professional service firms, investment banking, legal, life sciences, pharma. All those types of firms are still very active in providing a lot of opportunity. Tech companies obviously are down as compared to where they were in the last few years. Manufacturing is probably not quite as active as it has been. There are definitely pockets of activity across the verticals and in the office segment as well.
Okay. Thank you.
Your next question comes from the line of Alex Fuhrman with Craig-Hallum. Your line is open.
Great. Thanks very much for taking my question. You guys have done a very good job of navigating through all of the supply chain crisis and passing on cost increases to your customers. Wondering, you know, as you look at maybe the next step of that with everything that's happening, particularly in Europe and just the surge in electricity prices and producer prices in general, do you think you're gonna be able to continue to pass on a lot of those cost increases in Europe? Are there perhaps opportunities to increase manufacturing elsewhere in the world and import more product there? Just, you know, curious to how you're thinking about, you know, the spike in manufacturing costs for your European businesses.
Alex, it's a great question. I think when you look at how we're manufacturing around the world, we are localized as much as we possibly can be in all the markets where we sell. I would say from a price increase, it is also market by market. Where we felt most of the brunt of commodities, we've been able to raise prices, and I think so far, we haven't necessarily seen an increase in discounting or anything like that. We're watching Europe very closely. You know, like everything else these days, it's changing minute to minute. We feel we have a very flexible and agile approach because we are localized there. I think that will make a difference in how we look at what's coming forward.
Okay. That's really helpful. Then just, you know, if I could ask another about the decline you're seeing in order volumes. I mean, looks like it's been just the last couple of months that things have slowed since the last quarter. I, you know, I know you talked about the, you know, perhaps the difference between units and dollars here. You know, are there any other additional, you know, callouts regionally or, you know, anything like that? I mean, it just seems like a pretty, you know, meaningful decline in orders from the last quarter.
Just wondering if there's any, you know, noise like one, you know, or two just massive orders last year that maybe screwed up those comparisons, that could shed more light on that?
I think from a comparison standpoint, if you look at last year, this quarter in the Americas specifically, we had a much bigger flurry of activity around kind of that first, if you remember, sort of post-COVID return to office. I think comparatively there's that in the numbers. I also think regionally, when you look at it, Alex, North America, United States in particular, we have a lot more indecision. We have a lot of CEOs that are still kind of iterating and iterating on what they want their return to office to look like. In other parts of the world, we have a lot more decisiveness, so we haven't seen this questioning. The projects are taking longer. I think if you were to ask John Michael, "What does your funnel look like in the Americas?" He would say, "It's super healthy." It's just taking a lot longer.
I look at this order decline and I say, not incredibly worried. I think we're certainly facing uncertainty, and I think we will see some decline, but I also think there is a matter of people being indecisive and understanding how to work in a hybrid environment. I would say activity is strong, projects are taking longer, and there's definitely a regional variant on how we're approaching the return to office post-COVID.
Now, it's the only other thing. Real quick, this is Jeff. The only other thing I would add to that is a data point which I find encouraging. By the way, lots of uncertainty, right? No doubt about that. The encouraging thing for me is when you look across the book of business in the Americas segment, day-to-day business activity has been relatively healthy. That's maintained quite nicely. If you just consider past cycles, that has been one of the things that has been a kind of a leading indicator of significant decline. I'm not saying that it's not down, but it's hung in there better than in past down cycles.
I think that's certainly a positive and probably a testament to the activity that John talks about when we talk to dealers, when we talk to customers. Okay, that's really helpful. Thank you both very much.
Your next question comes from the line of Budd Bugatch with Water Tower Research. Your line is open.
Thank you for taking the follow-up. I guess, Jeff, maybe thought the question would've been asked about price versus cost in the quarter. Do you have any way to characterize that in terms of what you realize pricing versus the commodity inflation and labor inflation and what you're seeing future on that?
Sure, Budd. I'll just to make sure we're level set, I'll talk year-over-year. From a gross margin standpoint, we saw a nice benefit from pricing at the consolidated level about 330 basis points of net price realization to last year, which is encouraging. Commodities remain at elevated levels. There's some signs you probably see this in some of the categories that they're beginning to stabilize and begin to roll over, but they still remain at elevated levels across most categories to prior years. That accounted for about a 240 basis point erosion in gross margin. The freight and transportation costs as well remain elevated. We estimated that to be 90 basis points of margin pressure.
Bear in mind, some of that includes some of that retail inventory related costs that, while meaningful, are temporary, as we work down those balances. Labor and overhead collectively about 70 basis points of pressure. That's kind of the cost price. If you kind of walk the rest of that gross margin, you've got product and channel mix changes that accounted for 60-80 basis points of pressure year-over-year as well. That should get you the walk.
We got 330 positive, and I'm looking at about 460-480 negative. Is that right?
Yeah. Inclusive of product and channel mix shift, which is not a, you know, I factor that out of the price cost equation for, you know, in the spirit of your question.
Right.
Yep. Yep.
Okay. All right. Thank you very much, and good luck on the balance of the year.
Thanks, Budd.
Your next question comes from the line of Greg Burns with Sidoti & Company. Your line is open.
Hi. Thanks for taking one more here. I just wanna dig into the price increases and the impact that has had on demand. Is there any element of pull forward that's happened over the last couple of quarters, where that's like exacerbating or why we're seeing such a significant decline this quarter maybe instead of maybe a more moderate slowdown? Like, how do you think pricing has affected demand in previous quarters? Going forward, if things are slowing down, do you still feel comfortable being able to pass along as much price as you've been passing along, especially with the new proposed increase?
Sure. Hi, Greg. This is John Michael. Yeah, I think from a price perspective, you know, conversations with customers, there's never been a better time to have a conversation with a customer about price increase 'cause they all understand it because inflation is pretty much across the board. I think as we look at our competitive set and how prices have gone up, we see that we are in line with others. I don't think we see any significant impact from the price increases. I think the conversations we've had with customers and the projects we've been pricing of late would indicate that the market's accepting the pricing that we have and we should be able to continue to realize it going forward.
Okay. Thank you.
There are no further questions. I'll turn the call back to Andi Owen for closing remarks.
Thank you. Thank you, everybody, for joining us on this evening's call. In closing, we're really proud of the resiliency demonstrated by our collective of brands and the progress we're making through our integration work. The leadership team and I feel strongly about the opportunity that lies ahead for MillerKnoll, and thank you again for your time today, and we look forward to speaking with you next quarter. Thank you.
This concludes today's conference call. You may now disconnect.