MillerKnoll Inc (MLKN) 2004 Q1 法說會逐字稿

Welcome to this Herman Miller Incorporated first quarter fiscal 2004 earnings results conference call. This call is being recorded. This conference call will include forward-looking statements that involve uncertainties and risks. There can be no assurance that actual results will not differ from the Company's expectations. Factors that could cause such differences include -- the Company's ability to improve operations and realize cost savings; competitive and general economic conditions; the future possibility of acquired companies; and other risks described in the Company's annual report on Form 10-K, its quarterly reports on Form 10-Q and its other filings with the Securities and Exchange Commission.

Today's presentation will be hosted by Mr. Michael Volkema, Chairman, President and Chief Executive Officer; Ms. Beth Nickels, Chief financial Officer; and Mr. Volkema and Ms. Nickels are joined today by Mr. Joe Nowicki, Treasurer and Vice President of Investor Relations. Mr. Volkema and Ms. Nickels will open the call with a brief presentation which will be followed by your questions. We will limit today's call to 60 minutes. At this time I would like to begin the presentation by turning the call over to Mr. Volkema. Please go ahead sir.

Good morning everyone, and welcome to our first quarter conference call. As is our custom, I will open the conference call with a brief introduction and then I will turn the call over to Beth Nickels and Joe Nowicki for a more detailed review of our financials, and then we will use the remaining time for your questions.

I'll begin by saying that I believe that we once again kept our promise by meeting the low-end of the range for sales and by exceeding the net income number that we forecasted. We are encouraged by the leverage that we're realizing from our restructuring efforts and its impact on margins, net income and EBA. We continue to generate good cash flow from operations and have a strong balance sheet with exceptional financial flexibility. In addition, the new products introduced at (indiscernible) are off to a great start and the repositioning of some existing products like Resolve and Ethospace are increasing our ability to compete on major projects.

At the same time, we are less than enamored with our topline results. As you already know, the economic news is mixed. Corporate profitability, GDP and consumer and business confidence continue to trend up, yet some of the key areas that drive our industry, like employment levels and construction starts, are less encouraging. We continue to believe that the positive economic trends will eventually impact those economic indicators more closely tied to our industry. Until that time, our market dynamic will remain challenging.

To summarize, we continue to make good progress on reducing our cost structure. We once again met the financial promises we made. Our new products are hitting the targets we've established. The market conditions have continued to be challenging and the economic recovery is moving slower than we hoped, but it is moving in the right direction. We are still firmly committed to our strategy and we remain confident that our leaner business model will ultimately deliver above-market returns to our shareholders.

And with that brief introduction, I'll turn the conference call over to Beth and Joe.

We would like to remind everyone this quarter's call is also being Webcast and includes a slide presentation, which can be viewed on our website at HermanMiller.com. And if you haven't received the press release, it's also available on the website.

First the highlights. Our sales for the quarter were 325 million and earnings per share were 8 cents, which includes the negative impact of a restructuring charge of 3 cents. We continued to demonstrate leverage on the gross margin line, which was only slightly lower than the year ago period, on 6.5 percent less volume. In addition, our operating expenses continued to show year-over-year improvement and our cash flow from operations was over $35 million, driving an ending cash balance in excess of 207 million.

Now let's get into the details of consolidated sales orders and backlog. On a consolidated basis, net sales for the quarter totaled 325 million, which is within the guidance we initially provided of 320 to 340 million. On a year over year basis, the sales for the quarter were down approximately 6.5 percent, but actually increased about .8 percent from the fourth quarter levels. We've continued to see sequential sales growth now for the past two quarters, which is definitely an encouraging sign, although as Mike mentioned, we're not satisfied with the current level of sales. Consolidated new orders for the quarter totaled 324 million, which is down 6.3 percent compared to last year and down 4.1 percent from the fourth quarter. As you may recall, in the first and second quarter of last year, it was stronger, which we now recognize as a false recovery; therefore, the first half of the year will be tougher comparisons.

Orders booked during the first quarter equate to an average of 24 million per week, as compared to 26 million per week in the fourth quarter. Our order patterns were very volatile again this quarter, and were similar to what we saw in the fourth quarter. We started the quarter strong, with average weekly orders of about 25 million per week in June, but were disappointed when the order rate after the July holiday fell back to only 23 million. The good news is we started to see the orders pick back up, and in August, we averaged almost 27 million per week, which has continued for the first couple of weeks in the second quarter.

We're also very encouraged by the high degree of acceptance of our new Mirra chair line. As you may recall from our NeoCon presentations, we began order entry in June and shipment in August. The initial responses from customers have been very favorable, and we're ahead of our business plan. We've also been pleasantly surprised with the high level of interest in our international markets for the Mirra chair. It's off to a great start, and is proving to be a wonderful complement to our Aeron seating.

In addition, we are continuing to see a whole new base of customers develop for Resolve, our pole-based system utilizing 120 degree angles, which we introduced in 2000. New customers include large manufacturing companies, several large banks and consulting firms. As we also mentioned at NeoCon, our goal is to continue to shift the price value curve and provide even more value for our customers at the same or lower prices. Our repositioning of Resolve is doing just that and is having a great reception in the market.

I did want to take a moment to talk about our order growth rates relative to the industry. I know that many of you follow the monthly (indiscernible) industry numbers that are published, and may be asking how the two relate. Frankly, the answer is that it's very difficult to compare the two on an individual month basis; we really need to look over a longer period of time. For example, last year, in three out of four quarters we exceeded the industry. In one quarter we were below the industry, but for the year we gained market share. Our order pattern continues to be erratic and we've had some initiatives that probably added to the volatility, including an order incentive program at year-end and a price increase that was effective the first of September. Thus, it's difficult to determine the normalized order pattern. We are hopeful that again this year, in total, we'll gain market share. We are encouraged by what we see when we look at our sales (indiscernible). The dollar value of potential business continues to grow, and the level of business activity as measured by client visits was very consistent with what we saw for the prior year.

Now on to backlog. For the quarter, our ending backlog of 188 million was up about 3 percent from the fourth quarter. On a year over year basis, it's down roughly 6 percent from last year's first quarter level of 200 million. Historically, revenues and orders in the first quarter reflect a seasonal slowdown due to the summer holiday season. This was consistent with what we saw in first quarter of this year, although it was not nearly as much of a decrease as normal due to the softness in orders and sales in the first part of fourth quarter, as a result of the Iraq conflict that was underway at the time. Our ending backlog continued to benefit from two very large projects in our international business that were both entered in the fourth quarter. One is for $6 million in Tokyo and the other is for $10 million in the UK. Both of these helped to increase last quarter's order entry and backlog, although only a minimal amount shipped in the first quarter; most of these two projects will ship in the second and third quarter.

Now I'll give you some specifics around domestic and international operations. Domestic sales decreased 6.5 percent, while new orders declined 6.8 percent on a year over year basis. On a sequential quarter basis, meaning the fourth quarter to the first quarter, domestic sales actually increased 4.6 percent, but orders were down 1.9 percent. At the end of the fourth quarter, we did start to see a pickup in our North American order rates, which is what drove the sequential increase in sales. Now, our international business environment was much more challenging this quarter. On a year over year basis, sales for the quarter decreased 6.3 percent, while new orders decreased 3.6 percent. On a sequential quarter basis, international sales decreased by 17 percent and orders were down 16 percent. We continued to see growth in Canada, Mexico and Japan this quarter. This was, however, offset by significant declines in our European volumes, primarily within the UK. The UK Office Furniture Industry Association recently reported a 25 percent decline in volume for the first half of this calendar year.

Now let's talk about gross margin. This is again one of our encouraging highlights of the quarter. With net sales down 6.5 percent, or over $22 million, from a year ago, we were able almost to maintain our gross margins at last year's levels. Our gross margins decreased slightly from 31.5 percent last year to 31.3 percent in the current year. The increase in discounts negatively impacted margins by 1.2 percent. We actually had improvements in almost all of the other areas of cost of goods sold -- material improvements, overhead improvements and freight improvements. Without the discounting impact, our margins would have actually improved on a year over year basis on substantially less volume. On a sequential basis, we did see gross margins decline from the 33.3 percent in the fourth quarter. As we discussed last quarter, we did benefit from favorable year end adjustments of $4.8 million for LIFO inventory valuations, as well as incentive and benefit accrual reductions. In addition, we had incremental discounting impact of approximately $800,000 in the first quarter. These unfavorable factors offset the continued gains we've made in material cost savings and manufacturing overhead expenses.

Material costs for the quarter totaled 37.4 percent of sales, which is improved from both the prior year of 37.8 percent, as well as last quarter's 37.6 percent. Our procurement and supply chain management teams continue to make great progress in working with our suppliers to lower our material costs. We did continue to see a year to year increase in steel and plastic costs, as we have discussed in past conference calls. Steel costs were up approximately $700,000 and plastics was up about 50,000, although most of the year to year increases have washed through the system and we may now start to see some improvement in these areas. As mentioned in last quarter's call, material costs in the fourth quarter also benefited from a LIFO inventory adjustment of 1.8 million, although in the first quarter this impact was only 150,000. Our direct labor costs increased slightly, from 5.2 percent of sales in the prior year to 5.3 percent in the first quarter. The increase was driven primarily by the general wage increase and benefit cost increases that went into effect this quarter. In addition, we did see a small amount of inefficiencies due to the transition of the Canton, Georgia manufacturing operations into West Michigan; but overall, this transition is going much better than anticipated.

On a pure dollar basis, overhead spending declined by over $3 million compared to the same quarter last year. This represents a decline of almost five percent, a great improvement. While overhead spending did increase by 4.8 million when compared to the fourth quarter, this was primarily due to the benefits we received in the fourth quarter from the accrual reductions. As I mentioned, pricing pressure has continued to compress gross margins. Higher discounting in the first quarter as compared to a year ago reduced our domestic margin by approximately $3.8 million. This amount has leveled off with what we saw at the end of last year, although it will continue to be an area that we'll watch closely as we go through the year.

I'd like to reiterate that our gross margin was a bright spot for the quarter. The really good news is that there is more benefit to come as a result of the Formcoat and Canton relocations that are in process. Both of these moves are on schedule, with the completion of Formcoat move to occur in the next quarter and Canton to be completed during the next two quarters. We should start to see the impacts of these benefits in the fourth quarter of this year. As a reminder, our annual savings from these are expected to exceed $10 million.

Moving on now to operating expenses. We continue to demonstrate significant year-over-year improvement in this area. For the quarter, operating expenses totaled 89.4 million, which includes restructuring charges of 3.8 million. This compares to 90.9 million in the prior year, which included restructuring charges of 300,000. Excluding restructuring charges, our operating expenses were down over $5 million, or 5.6 percent. The reductions were in compensation costs, as well as facility and fixed costs, as a result of the restructuring done in the prior year. Compared to fourth quarter levels, operating expenses were down by over $16 million. 12 million of this was due to the increased restructuring charges in the fourth quarter. The balance of the savings was primarily due to incremental costs that occurred in the fourth quarter for the annual NeoCon tradeshow, the launch of new products and the rollout of our new merchandising strategy. Restructuring charges for the quarter totaled 3.8 million, almost all of which related to the Canton and Formcoat consolidations announced last year. This amount was slightly less than we anticipated for the quarter, but it's mostly due to timing, and the balance of the costs for these moves will be incurred in the remainder of the year.

Moving down the income statement to other income expenses, taxes and net income. Other expenses for the quarter, net of interest income, totaled 2.5 million compared to 3.5 million last year. The decrease is comprised primarily of a reduction in interest expense of 700,000 due to our lower debt levels and the savings from our interest rate swap arrangement. It's also important to note that in the quarter, we acquired an additional ownership in OP Spectrum, our Philadelphia dealer, for $200,000. As a result, we began this quarter to consolidate the financial results. The overall financial impact was insignificant to the Herman Miller results for the quarter. In the past, our investment was accounted for under the equity method, with resulting gains or losses recognized through other income. When you roll this all up and include the restructuring charges, net income for the quarter was 6.2 million, or 8 cents per share. The negative impact of restructuring charges was 3.8 million before tax, or three cents per share for the quarter.

Some of you noted that the subsequent event footnote in our year-end Form 10-K mentioned that we expected to reverse an approximately $5.2 million accrual due to a favorable legal decision related to our Florida owned dealership. During the first quarter, the plaintiff in the lawsuit filed an appeal request with the Florida Supreme Court. Thus, we will not be reversing the accrual until the Florida Supreme Court determines whether or not they will take the case.

Now I will turn the call over to Joe Nowicki, Treasurer and VP of Investor Relations, to talk about our cash flow and the quality of the balance sheet.

Thanks Beth. In regards to cash flow, for the quarter, operating cash flow continued to be very strong. We generated 35.7 million of cash from operations. It is a decrease from the 74.8 million in the prior year, although the last year's amount included a tax refund of 34.9 million associated with the prior year's net operating loss and an offsetting payment of 13.6 million related to our (indiscernible) settlement with the IRS. We did see working capital improvements this quarter of over 10 million due to reductions in AR, and also increases in our accruals for competition and incentives. We continue to feel good about our success in strengthening our cash flow, which was one of the primary objectives of our restructuring plan last year.

In light of current industry conditions, we continue to monitor our AR and credit exposure very closely and believe we are adequately reserved for bad debt expense. Our collections of AR continue to remain relatively strong. During the first quarter, our inventory and AR balances increased from year-end by 3.8 million, driven by an increase in our GSA work in process that will be invoiced in the second quarter. Our DSO in inventory and receivables improved by four days from the same quarter in the prior year. In addition, our AR aging has continued to improve year-over-year, and as compared to last quarter. We continue to monitor the health of our dealer network; they're critical to the success of our long-term strategy, and are still feeling the pain of the current economic environment. As discussed previously, we will continue to work with them, and have developed action plans to be sure we have adequate coverage in key markets and also to limit our risk exposure. Capital expenditures for the quarter were 5.5 million. Our forecast for the full year is between 30 million and 40 million, which is consistent with the prior year. We continue to closely scrutinize capital spending to ensure we are making the right investments to sustain the business and to preserve our ability to introduce innovative new products.

Now I would like to give you an update on the status of the facilities that were exited in the restructuring. We continue to have a high degree of success in selling the facilities we vacate. This quarter, we entered into a sales agreement in our (indiscernible), Michigan chair plant, with a refundable deposit. The buyer will be completing due diligence through September 2003; the closing date is targeted for October 30, 2003. The price is in line with our current book value. As a result we have moved the property up into current assets held for sale. The other facility we currently have listed for sale is the Canton, Georgia building that we will be exiting by February 2004. This property has been appraised and listed and we have seen initial interest, but nothing beyond that at this early point. In regard to leased space, as we discussed previously we have entered into sublease agreements for about 80 percent of the Zeeland, Michigan facility -- called the (indiscernible). In addition, negotiations are currently underway that may help reduce our liability for the lease term (indiscernible) of the Formcoat building in Holland.

Now let's move on to our liquidity and cash position. We are again this quarter in compliance with all of our debt covenants and don't foresee any problems with compliance in the future. Our profitability and strong cash flow, combined with the 186 million available on our revolving credit facility and our significant cash balance, provides us tremendous financial flexibility. During the quarter, we did pay off approximately $2 million in a note payable from one of our prior distribution acquisitions. Our next scheduled principal payment on our private placement notes is in the fourth quarter for approximately $13 million. During the first quarter, we continued our share repurchase activity, buying approximately 108,600 shares for 2.2 million at an average price of about 20.64 per share. We expect to continue our repurchase activity, but over the next few quarters, we'll be evaluating our overall capital structure and how best to utilize our excess cash. We again improved our cash position considerably, ending the quarter with a cash balance of $207.1 million.

Thanks Joe. Now let's turn to the outlook for the balance of the fiscal year. As Mike and I have both discussed, we are encouraged to see some of the positive trends in the economy, but we remain cautious on the near-term outlook for revenues because of the volatility we have seen in our order rates over the last quarter. We are, however, very confident in our ability to continue to drive improvements in our gross margins, and also operating expenses. Our gross margin assumption is 31.5 to 32.5 percent. That's in line with our first quarter results and reflects some continued improvement. We do expect some inefficiency during the transition of the Canton operations to West Michigan; however, we also believe we have additional margin opportunities because of the prior restructuring. Our operating expenses may also increase slightly as additional new product and marketing program investments ramp up. As a result, we expect our second quarter sales to be in a range of 330 to 350 million, with earnings per share between 7 and 13 cents, which includes restructuring charges of approximately five cents per share for the previously announced actions.

It's important for us to note here that we are currently reviewing the impacts of FASB Interpretation Number 46 on our financial statements. FIN 46 is scheduled to be effective for our second quarter results, although it's currently under review and could be delayed. It may impact how we account for a limited number of our current independent dealers that we have financing arrangements with. Under the guideline, we might be required to consolidate them within our results. This has not been included in any of the forecasts we have given you, as we continue to investigate our options around this issue.

In summary, as we said at the beginning, it's great to be able once again to meet the commitments we made last quarter. It's also great to see the leverage in our operating structure that we are able to achieve, even with the relatively low volumes. With net sales down 6.5 percent from a year ago, we were able to maintain our gross margins within 20 basis points. Excluding restructuring charges, the rest of our operating expenses were down over $5 million. We generated 36 million of cash from operations and our ending cash balance was $207 million. We're in 100 percent compliance with all our loan covenants and we're probably in the best liquidity position ever. Our new product introductions are being tremendously received in the marketplace. We are very excited as an organization about the opportunities in front of us. We have the right strategy, the right business model and the right people to continue our success. We're operating the business on a capital base of only about $400 million, which includes over 200 million in cash. This is down significantly from two years ago. The potential to generate above average returns and increase our overall return on capital is significant.

Now I would like to turn the call back to the operator to open it up for your questions.

(OPERATOR INSTRUCTIONS). Budd Bugatch with Raymond James.

With the facilities that you will have operating once Formcoat and Canton are done, what kind of capacity will you have? What's the revenue capacity?

We always, as almost a prerequisite, exclude labor (indiscernible) operations team to allow for capacity of $2 billion. Now obviously, you have to go in and look at each product group. We've had some new product introductions like Mirra, so there's different answers around what investment would occur if you had some mix shift. But in a very broad sense, we've always tried to maintain the target of $2 billion capacity, with the addition of labor and without the addition of facilities or major investments in equipment.

Do you foresee then, Mike, any potential additional facility restructurings? I guess you're somewhat at a 1.3 billion 1.4 billion right now?

At this point from an addition standpoint, there's no additional facilities that, I think, between now and 2 billion, that we anticipate putting in place.

I wasn't asking about additions.

Yes, you were asking about the subtractions. But we always, with some of the Herman Miller production system work that we're doing, always looked at whether or not we can continue to realize some benefit and do it in less space. But I think for the moment, we feel pretty comfortable that we have the right facilities for the operation.

We are looking in our international markets, however, at the capacity over there. And I think we mentioned on the last call that during this next year, we will be evaluating the facilities -- the number of facilities we have there, but probably we will tie that to expiration of leases and a potential sale of a building where we have an interested party.

You gave us a number of the factors of production. Are there any factors at -- I guess freight was -- as long as we don't have the numbers out?

Our freight out costs as a percentage of sales -- probably what you were referring to -- was 3.7 percent for the quarter. That compares to last year when it ran around 3.5 percent.

Margaret Whelan, UBS Warburg.

You talk over the last couple (indiscernible) six quarters about the gross margin erosion because of price discounting or unfavorable mix. Just looking at maybe not necessarily the next couple of quarters, but the next couple of years, what do you think the environment is going to look like if you look at secular shifts in the end-users in your business? And what kind of margin is (indiscernible) normalized sales rates do you think we could be forecasting? Will we get back to the kind of 37 percent high -- would we exceed that level?

I think we're obviously going to get some significant benefit if we get any uptick in the business. The stage is set for that. And frankly, we are expecting that there will be a recovery. We're on record already with indicating that because of the false starts that we had two years in a row, that we think the business community is going to be cautious to make sure this recovery is in place. But after that happens, we think that it'll have a significant impact, and I think you'll see the historical margins return.

That I guess is part of the question. The demand will normalize at some point, but do you think anything is going to change in the business so that you'll get the same margins, the same kind of product demand that you've had before?

I don't think we anticipate that the pricing will go back to the levels it was at in the past. That's why we're focused on the other operational efficiencies to make sure we more than make up for that. We can then get additional leverage as the volumes come back. And a lot of our new product initiatives, I think you are aware -- our strategy around creating great places to work, that we don't believe a great place to work should have to cost more. (multiple speakers) be able to go after that also with new product innovations.

But in that, I think there will be more units that go out the door at lower prices. But we're doing the work we need to do to reproduce the margins that we once historically enjoyed. (multiple speakers) showing some moderate recovery.

Looking at -- as an extension to that, what opportunities do you see in your industry to take market share maybe, or to do small acquisitions or to integrate? (indiscernible) FIN 46 has determined that some of these dealers would be put back to you, would you get more involved with the dealership part of the distribution? I know you've done that before.

We've done a pretty good review of -- not only on the dealer side but on the vendor side -- of those businesses where their expectation of a return on invested capital might be different than ours. I think you could see us continue to complement in selected areas of the business with smaller organizations -- we obviously have the financial flexibility to do that -- where we think we can leverage the distribution network that we have, which we think is our biggest off-balance sheet asset. So I think you could see that happen, as well as we begin to start to explore new segments that we don't have a high degree of penetration in today. And that could result in us getting associated with, either through alliance or acquisition, other companies, other products that would allow us to more deeply penetrate some of those new market opportunities.

You mentioned the dealer network and some of them who are still not financially strong, and we've done a very comprehensive review that we talk about every month around each area of the country, and where we have dealers who may be having some difficulties in today's economic environment and which ones it's important for us to make sure we support. And we'll continue to do that in limited ways, but it's not the intention that we would go out and actually acquire dealers.

Finally, you mentioned -- you know the situation in the U.S. market; the UK market now is stalling. How are you looking at global opportunities in Asia from a sales perspective?

We from a strategic standpoint have certain areas of the world which you are aware of that we are pursuing market leadership, and the US and the UK happen to be two of those. We're planting the seeds in Japan for a more significant presence there. That's going very well, by the way. Again, we take that one market at a time. In the rest of the world, we have a baseline of service and support capability for our global multinational customers that we try to maintain a variable expense relationship with those marketplaces. So our strategy is clear. There are opportunities there, but as you know, the vast majority of people in our industry who have been very aggressive in the international arena have destroyed more shareholder value than they have created.

Chris Hussey with Goldman Sachs.

Perhaps you could expand a little bit on the dealer network issue? Could you maybe provide us -- how many dealers do you have now in the US? How many of those do you own? How many of those do you (indiscernible) finance now which may be subject to this FASB 46?

In total -- and I don't have the exact number with you -- but roughly 200 dealers in the United States would be a gross number. Nine of them, we are in a position of ownership. And of course, we're not including the Canadian and Mexico group of dealers in that group. From a financing standpoint --

We finance -- about five or six of those dealers have some kind of financing arrangement with us.

That would be non-owned.

That would be non-owned. Correct.

Even if FASB 46 makes you consolidate these five to six, it's not a particularly onerous issue?

It's not onerous from the ramifications to our financial statements, it's onerous from the standpoint of can you really get comfortable with an entity that you don't own and its financial results, and including those in yours.

From a forecasting standpoint -- understood. On the cash flow -- cash flow is terrific. How sustainable is that? Maybe you can talk a little bit about the working capital in an improving sales environment? Should we expect to see -- I would imagine we would -- more working capital usage? What should we be modeling in there? And then, maybe, what would you use some of the cash flow, as well as your cash in general, for?

From a cash flow perspective for the year, I think we said that our estimate for the year is somewhere between 80 and 120 million of operating cash flows; strong in the first quarter. And unfortunately, part of that was because the sales wasn't at the level we had expected and we didn't need a big investment in working capital. As we see sales pick up, you'll see some of the inventory, and hopefully, especially accounts receivable increase. So we will have to use some of it for that and it may not be quite as strong in each of the quarters going forward. But we've tended to be very conservative in our estimates for cash flow. In terms of what will we use the cash for -- we are looking at probably all potential options, like most companies are today, in light of the tax law changes. We don't believe we need to keep the excess on the balance sheet anymore. We've been holding onto it to make sure we got through the economic recovery and that we were generating consistent positive cash flows, and we believe we are there. So over the next six months, we will take a look at our current debt levels at dividend options, at share repurchases, and make some decisions around that.

What is the process behind it? What are you guys thinking now, in terms of debt reduction, share repurchase, dividend? Or if you can, tell me what the process is that you go through there? What should we expect? When will we hear whether you guys might implement a stronger dividend?

I will tell you that we have it on the Board agenda for the January meeting, and the work is being done around that as we speak. So that would be both the process and the timing.

And Mike, going back to some of your comments -- just trying to think -- I want to make sure we understand exactly what you're sort of targeting in terms of in the future for acquisitions. Did I hear you correctly? You are not going to acquire more dealers but you may consider acquiring something in a segment of the office furniture industry that you are not currently strong in?

Yes. To give some explanation, you're correct in saying in that we don't plan any what I call forward vertical integration, which would be out in the dealer community, other than we'll help periodically with transitions of dealers to new owners. Likewise, we don't plan any rearward integration; which is, we don't plan to get more vertically integrated and to acquire some of our vendor relationships. What we do plan to do is pick up complementing products that not only allow us to compete more effectively in the office furniture arena -- and we can do that through appliance, not just necessarily through acquisition -- but we have the same format with, what I will say, pursuing other segments; like whether that's health care or higher education, or how we could get a greater penetration ins some of those vertical market segments than what we have today.

Looking for a health care, or a higher education, office furniture specialty supplier?

It could be that we find someone that completes the package and puts us in a position to better compete, and that would be either an alliance relationship, or it could in fact, at some point, turn into an acquisition to complement what we have.

Given that you guys -- it's fascinating, you guys are in the trough of your cycle, and yet, Beth, you make the comments we have the best liquidity position ever. How aggressive will you be on trying to make one of these acquisitions before things start to maybe improve and the prices start to go up?

I would just tell you that we think acquisitions are risky business. And if you'll notice, we have had some successful acquisitions that we've done, in large part because we de-risked many of them through alliance relationships. So that we understand not only the company, the management, the product, but also oftentimes find out whether or not they will be adopted by our distribution network in an intelligent way and accomplish what we need accomplished. So we are careful to do that, but we are going to get more aggressive about pursuing some vertical segments like health care and higher education. And so there's going to be a degree of intensity in making sure that we also couple with that an appropriate product portfolio and offering that allows us to be successful in those. So if you can sense that balance or that tension that will compete there between a prudent move around acquisitions, coupled with a strong desire to expand our market opportunity.

(OPERATOR INSTRUCTIONS). Michael Drenske (ph) with Bennett (ph) Asset Management.

I just had two clarification questions if you could. You'd mentioned that you expected operating expenses to be up slightly, particularly given new product introductions. Would this be a sequential increase or a year-over-year increase?

Sequential.

And also, I think in one of your earlier questions you had talked about prices still being under some pressure, that you expect in the future that products (indiscernible) go out the door at lower prices. Can you elaborate on what kind of -- the magnitude, I guess, of pricing pressure, and when you might see that abating?

We have in our forecast baked in an assumption that pricing pressure will continue for the year, and I think that number is about 12 to $14 million of additional discounting over the prior year levels.

And in turn, we also have, then, the objective to recover that through material --

(multiple speakers)

-- and other efficiencies. As you can see, we more than covered that difference this quarter, where the effect of the pricing was actually a 1.2 percent decrease in our margin.

Has that slowed now as we are progressing here? Was the discounting that you saw in this past quarter at the lower rate than what you had seen in the previous quarters?

It was very similar to what we have seen in the prior quarter. On a year over year basis, it was still deeper. But it has definitely leveled off.

(OPERATOR INSTRUCTIONS). Aaron Braun, Willow Creek Capital.

A couple of questions, one industry related, one accounting related. And I'm relatively new to the story, so I hope these aren't too elementary. On an industry basis -- I think we all watch the employment data and have seen the lack of progress on that aspect. But on your other metric that you said you monitor, the new office --

(technical difficulty)