Q3 2024 Earnings Summary
- Improving Order Trends Indicate a Potential Inflection Point: The company reported that consolidated orders were down 4.7% for the full quarter but improved to up almost 3% in February, showing a positive trend. Specifically, the Americas segment saw orders down 9.4% for the quarter but noted an improvement with orders up 5% in the last couple of weeks, suggesting demand is rebounding.
- Strategic Retail Expansion Offers Growth Opportunities: Management highlighted they are "very bullish on store growth," emphasizing that they are "very understored compared to our competition." There is significant potential to expand the retail footprint, particularly for the Design Within Reach and Herman Miller brands, which could drive future revenue growth.
- International Business Demonstrates Strength and Growth Potential: The international segment is performing well, with orders showing growth attributed to diverse markets like the Middle East, India, Asia, and China starting to recover. The company sees opportunities to grow market share internationally through further market penetration and the addition of Knoll products, enhancing their offering and dealer networks in these regions.
- Low backlog in the Americas Contract segment: The implied backlog in the Americas Contract segment is around $355 million to $360 million, marking the lowest level since before the acquisition. This significant decline raises concerns about future revenue visibility and the company's ability to leverage its manufacturing capacity.
- Ongoing economic pressures leading to restructuring: Management acknowledged experiencing a contract economic recession for 18 months. In response, the company is implementing targeted workforce reductions and cost-saving measures, including management layoffs and real estate consolidation. These actions suggest ongoing challenges in the operating environment and uncertainties regarding the timing of a demand recovery.
- Customers delaying order decisions impacting forecasts: Customers are taking longer to make final order decisions, adding complexity to forecasting and potentially delaying revenue recognition. Despite an increased win rate, the prolonged decision-making process may hinder near-term financial performance and growth prospects.
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Americas Backlog and Demand Trends
Q: When will the Americas backlog start to rise?
A: Management acknowledged that the Americas Contract backlog is at its lowest since before the acquisition, around $355 million to $360 million. They expect order rates to pick up soon, citing positive trends during the quarter and noting that Americas orders increased over last year's levels in the last couple of weeks. They are confident that the backlog will begin to grow as macroeconomic indicators point in the right direction. -
Order Patterns and Improving Trends
Q: Can you discuss order patterns during the quarter and outlook?
A: The company saw steady improvement in year-over-year organic orders throughout the quarter, starting with declines of 10-11% and exiting February up almost 3% on a consolidated level. The Americas segment also improved, ending the quarter down 9.4%, with recent quarter-to-date orders down 3%, and the last couple of weeks up 5%. Management views this as a consistent move toward an improving trend line. -
International Business Performance
Q: How is the international business performing compared to the Americas?
A: The international business is holding up better, with the last quarter showing growth. This is due to market diversity, with strength in the Middle East, India, Asia, and a reawakening China offsetting struggles in Europe. The international segment is less penetrated, offering opportunities to grow market share, expand markets, and grow dealers, especially with Knoll supplementing the product offering in Europe. -
Restructuring and Cost Savings
Q: Why announce restructuring now if demand is improving?
A: The restructuring is part of ongoing efforts to improve efficiency and complete the integration of the two companies. Management is becoming more efficient in certain functions and is closing the circle on integration activities. The restructuring is not solely about cost takeout but also about simplification and enhancing the combined brands' presence in major markets. -
Stock Buybacks vs. Debt Repayment
Q: Why buy back shares instead of paying down debt?
A: The company has been opportunistically buying back shares throughout the fiscal year, believing they are undervalued. They have taken a balanced approach, both buying shares and paying down some debt, and are comfortable with their leverage ratio. Management sees demand improvements on the horizon and notes that margins are strong, well above last year's levels. -
Pricing Actions and Inflation
Q: What is the outlook on pricing actions amid inflation?
A: Management feels they are back to a more traditional annual price increase cadence. Inflationary pressures persist but are significantly lower, negating the need for multiple price increases per year. Their last increase was in June, and future increases will likely align with pre-COVID annualized percentages. -
Retail Growth Opportunities
Q: Are there opportunities to expand retail stores?
A: The company is understored compared to competitors and sees opportunities to increase the store footprint, particularly for the DWR brand and Herman Miller. Customers who shop both online and in-store are better customers, and they're seeing successful trends in stores, especially with design services. They are bullish on store growth over the next 2-3 years. -
Retail Performance and Average Ticket Size
Q: How are retail channels performing, and what's the average ticket size?
A: The company is seeing consistent patterns across stores, web, and wholesale channels. Design services in stores are accelerating average order value, with orders over 2x the size of non-design service sales. The average ticket in retail is in the $2,000 to $3,000 range. -
Win Rates and Pipeline Conversion
Q: How are win rates and pipeline movement in the Americas?
A: The win rate is 3% higher than last year, which is encouraging. There's a significant increase in new opportunities added to the funnel, and projects in the final stages before booking have increased significantly versus prior year. However, customers are taking longer to make decisions, and factors like construction delays are impacting project timing.
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