MillerKnoll Inc (MLKN) 2004 Q4 法說會逐字稿

Good day everyone and welcome to the Herman Miller Inc. fourth quarter fiscal 2004 earnings results conference call. This call is being recorded.

This conference 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 in realized cost savings, competitive and general economic conditions, the future profitability 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 Miss Beth Nickels, Executive Vice President and Chief Financial Officer, and Mr. Mike Volkema, Chairman and Chief Executive Officer. Miss Nickels and Mr.Volkema are also joined by Mr.Brian Walker, President and Chief Operating Officer and CEO elect, along with Mr. Joe Nowicki, Treasurer and Vice President - Investor Relations.

Miss Nickels and Mr. Volkema will open the call with a brief presentation, which will be followed by your questions. We will limit today's conference to 60 minutes. At this time, I would like to begin the presentation by turning the conference over to Miss Nickels. Please go ahead.

Well, this isn't Miss Nickels, but this is Mr.Volkema. Good morning, everyone. Welcome to our fourth quarter conference call.

I'm going to open the conference call with a few introductory remarks and then I'll turn the call over to Brian Walker for some comments and then Beth Nickels and Joe Nowicki will go through a more detailed review of our financials. As always, we'll use the remaining time for your questions. As you read in the press release, Brian will succeed me as CEO on July 26 and I will continue to serve as the Chairman of the Board. I want to let all of you know that I could not be more excited about the new leadership team arrangement.

Brian and I have been working together for more than nine years and he has demonstrated his leadership gifts in a number of different positions including Chief Financial Officer and then President of North America, and most recently as President and Chief Operating Officer. His intellect and tireless energy, coupled with a strong personal value have been invaluable to Herman Miller and to me personally during both good and difficult times. In my opinion, he is more than ready for the next leadership challenge.

Brian is going to be a great CEO. This new arrangement will also allow us to separate the roles of Chairman and CEO, which is widely regarded as the best practice in corporate governance. It will also allow me to allocate additional time to the work of the Herman Miller creative office. I'm passionate about this work and I believe it is very important to the company's future prosperity.

Let me end by saying that I truly believe we are on the other side of the industry down turn. Our industry is beginning to grow again. It is a new beginning for all of us. The future looks bright and especially promising with Brian at the helm. With that, I'll turn it over to you, Brian.

Thanks, Mike. Mike has been a great friend, mentor, and partner to me over the past nine years. And I'm grateful for the trust he and the board are placing in me.

To everyone on the conference call, I want to say it's great to be back here with all of you. It's been a few years since I was CFO and took part in this event on a regular basis. I know much has changed in the financial and the regulatory environment, but I'm very much looking forward to getting up to speed and working closely with all of you again. As Mike and the board and I have worked through the succession plan, we saw the separation of the CEO and Chairman's responsibilities is not only in tune with preferred practices in corporate governance, but it would allow both of us to focus on critical responsibilities. Having served on the board this past year and seen demand of the Chairman's role and the skills Mike brings to it, I'm personally thankful to have Mike's leadership on the board of directors and look forward to continuing our partnership. My personal focus the last few years was right sizing the business.

This past year with the encouragement and guidance of Mike and the board, we accomplished a great deal. We've mapped our strategic direction, identified a clearly defined implementation plan and we've continued to invest in the innovative new products and new business opportunity that will expand our opportunity going forward. My focus going forward will be on the strategy implementation, continued top line growth and leadership development. With those brief comments, I'll turn over the conference call to Beth and Joe who can talk in more detail about the growth we saw again this quarter.

Thanks, Brian. We would like to remind everyone that this quarter's call is also being webcast and includes a slide presentation which can be viewed on our website at Herman Miller.com. If you haven't received the press release, it's also available there.

Before I get started, I would like to acknowledge up front that our financial overview is still quite detailed, so, yes, this portion of the call is quite lengthy, but several of you have encouraged us to keep providing this level of information. If it isn't helpful, please let us know.

First, the highlights. You will hear the word growth a lot again this quarter during this conference call. Growth in sales, orders, backlog and earnings. Our sales for the quarter were almost $354 million, growth of 9.9% from the same period last year, and EPS was 27 cents, growth of 29 cents over the prior year same period. Our orders and ending backlog also showed significant growth over the prior year levels. With orders up 7.1% and ending backlog up 15.1%. Gross margins, although down year over year, continued on the growth trend we experienced during the year and was our highest gross margin rate for the year. Operating expenses also continued their year over year improvement as a percentage of sales. Our ending cash balance was, again, a strong $189 million.

Our current quarter results do include restructuring costs of about $900,000 before tax from the previously announced actions and a 6.9 million favorable impact from the resolution of prior year's tax audits. Additionally, the company adopted a new accounting standard, FASB interpretation number 46, titled Consolidation of Variable Interest Entities, affectionately called FIN 46, which resulted in a cumulative effect non-cash charge of $500,000 after tax.

I will explain all of these further as I get into the details. Let's start with the specifics of consolidated sales, orders and backlogs.

On a consolidated basis, net sales for the quarter were at the upper end of the guidance we provided of 335-355 million. On a year over year basis, sales for the quarter were up almost 10%. This is the second quarter in a row that we've been able to talk to you about year over year sales increases. Our sequential sales from the third quarter to the fourth quarter also showed improvement, up just over 7%. Consolidated new orders for the quarter are also a great story. They totalled 362 million, up over 7% compared to last year. This equates to an average of 27.8 million per week. The highest order entry rate we've seen in the past 11 quarters. In the three weeks since quarter end, we continue to see good levels.

We also continue to be encouraged by the level of business activity as measured by client visits, which were up almost 60% from the third quarter. Plus the attendance at our recent NeoCon trade show in Chicago was also up substantially from the prior year, all very positive signs for our top line as we head into this new fiscal year.

Now on to backlog. For the quarter our ending backlog was 209.5 million, which is up a very strong 15.1% from last year's fourth quarter level of 182 million. It's also up about 7% from third quarter's level of 196 million. It's worth noting that last year's backlog was unusually high at year end, as it included two very large international orders, one for 6 million in Tokyo and the other for 10 million in the UK. These orders had lead times beyond the first and second quarters. We only have about 4 million of long lead time orders in the current backlog.

Now I'll give you a breakdown of our domestic and international results. Domestic sales for the quarter increased 7.9% year over year, while new orders improved 4.6% on a year over year basis. This represents the third quarter in a row that our domestic orders have experienced a year over year increase. Our Florida, Texas, and Southern California markets continue to experience strong growth. It's important to note that last year in the fourth quarter we did have a special order incentive program under way within our North American sales teams. This helped to stimulate the higher order growth rate at the end of last year. This program was not in effect in the current year, so our prior year domestic orders may have been higher than normal.

Our international business environment was definitely a strong point again this quarter. On a year over year basis, sales increased 19.4% and new orders for the quarter grew 20.7%. In comparison to the prior year fourth quarter, our international revenues were favorably impacted by approximately 4.9 million due to exchange rates. But even excluding the currency impact, we're seeing both year over year and sequential growth in our international entities. Specifically, we continue to see revenue growth in Canada, the UK, and Asia exports. Plus we have won some new large orders this year in South America and in our European export markets. It's been another great quarter for our international team.

Now let's talk about growth margin. We continued the trend of improving growth margins through the year. This was actually our best quarter of the year for growth margins. We improved by 1.7 percentage points from the third quarter. The Canton consolidation is now complete and we really started to see the benefits of that work kick in this quarter. As a result, we saw the greatest improvement in the margins of our systems product lines. Our margins did decline from last year's fourth quarter rate, but if you recall, we had 4.8 million in benefits last year for LIFO inventory evaluations, as well as incentive and benefit accrual reduction.

Pricing pressure continued this quarter. Higher discounting in the fourth quarter as compared to a year ago, reduced our domestic margin by approximately $5 million. The good news is that the level of discounting was flat with what we saw in the third quarter. It hasn't improved, but it hasn't gotten any worse. As many of you are probably aware, we did announce a price increase effective August 1st of 2004. It varied by product line, but averages approximately 4% of list. We don't anticipate seeing the impact of this on our sales or margins in the first quarter, but by the second quarter, we should start to see the benefit. Similar increases were put in place by most of the competitors in our industry. We feel it should help to lessen the year to year impact of pricing pressure as well as the impact of increased material costs that I'll discuss next.

Material costs for the quarter totalled 39.6% of sales, up from last quarter, as well as last year. Total material costs as a percentage of sales have continued to increase through the year, driven by the higher discounting that I already mentioned, combined with higher costs, primarily on steel.

In addition, there was a favorable LIFO inventory adjustment in the prior year of 1.8 million that reduced material costs in the fourth quarter, versus a $600,000 million unfavorable LIFO adjustment in this quarter that actually raised material costs. That's a 2.4 million year over year impact. This was offset to a great extent by the continued efforts of our procurement and supply chain management teams to lower costs with the suppliers. We, along with most other manufacturers, began talking with you last quarter about the impact of rising steel prices on our business. Last quarter we experienced and reported to you a minimal impact. As expected, it did get worse this quarter. We saw our steel costs go up approximately $1.5 million from the prior year and 1.3 million from last quarter. This was within the expected range of 1.5-2 million that we mentioned in our last call. We still had favorable contracts in place, but we did begin to see the impact of steel surcharges. And we depleted the low cost steel inventory built up for the Canton move. Regardless, the increase was only about 6-8%, which was better than the market conditions.

The outlook for the next few quarters gets a little more difficult. We had expected steel prices to level off in June and to decrease through the remainder of the calendar year. However, the market hasn't responded as expected. Instead of prices leveling off or even decreasing, they have gone up. Now we're back in a market of rising steel prices and don't have the fallback of favorable contracts or low-priced inventory. Therefore, our estimate is that we will see somewhere around a $4-4.5 million impact per quarter as a result of increased steel pricing. The price increase in our own projects will help to offset this, plus our operations team is continuing to work on ways to offset these increases through the ongoing implementation of our Herman Miller production lean manufacturing system. So we are confident we will be able to offset a good portion of the steel price increases as we go through the year. Our direct labor costs increased slightly from the 4.8% of sales in the prior year to 4.9% this year. Although they came down significantly from the 5.4% that we saw last quarter, it's the lowest direct labor cost we've seen all year.

As we mentioned in prior quarters, the increases we were seeing during the year were driven by the inefficiencies from the Canton move. That move was completed this quarter. While we did see additional inefficiencies in the beginning of the quarter, at the end of the quarter, the efficiency greatly improved. We'll see direct labor costs increase slightly in Q1 as a result of our annual compensation increases, but this should be offset somewhat by the continued operational improvement. Overhead spending for the quarter as a percent of sales increased slightly from 18.7% last year to 18.8% this year.

During the quarter, overhead spending increased by 2.5 million as a result of incentive accruals, but in the prior year fourth quarter, overhead spending was decreased by 1.6 million due to the reversal of similar incentive accruals. That's a 4.1 million swing in costs. This accounted for the majority of the increase. As you may recall, last year we paid a very small incentive to our employees. This year based on our EBA results, we will be paying an incentive at approximately 50% of our full rate.

Our freight out and product distribution costs are another highlight. Combined, they amounted to 5% of sales for the quarter as compared to 5.6% of sales for the same period last year. They are also down from last quarter and represent our lowest percentage of the year for freight and distribution. Our efforts to continue to implement the Herman Miller production system in our physical distribution operations are having a great impact. In addition, the relocation of our Canton facility is having a very positive impact on these costs by allowing us to consolidate a higher percentage of shipments.

Moving on now to operating expenses, we continue to demonstrate year over year improvement in operating expenses. For the quarter, operating expenses totalled about 93 million, or 26.3% of sales as compared to 90 million, or 27.9% of sales last year. The dollar increase in spending is substantially due to variable selling costs, associated with the higher volumes. Combined with increases in new product research and development. The traditional fourth quarter spending increases were in line with what we discussed last quarter and represent costs associated with new product launches for the annual NeoCon trade show.

Operating expenses were also impacted by changes in incentive accruals. During the fourth quarter, operating expenses increased by 3.2 million as a result of incentive accruals. But in the prior year fourth quarter, operating expenses decreased by 700,000 due to the reversal of similar incentive accruals. Restructuring charges for the quarter totalled 900,000 versus about 16 million in the prior year and were primarily associated with the relocation of the Canton operation as previously announced. This amount was slightly less than initially anticipated due to the timing of employee pension settlement. There will continue to be a modest amount of restructuring charges in the future as the final costs are incurred.

Moving on down the income statement, other expenses for the quarter, net of interest income totalled 1.2 million compared to 2.9 million last year. Interest expense was down approximately 700,000 from last year, due to lower debt levels combined with approximately 500,000 in savings from the interest rate swaps that were executed in prior periods. We also recorded a foreign currency gain of 700,000 for the quarter versus 300,000 in the prior year. The gain was mostly the result of the strengthening of the U.S. dollar during the quarter against our balances in non-functional currencies, primarily in the UK.

We also had favorable adjustments to our taxes this quarter. As a result of the recently completed IRS audit for the years 1999, 2000 and 2001, we recorded a favorable one time earnings adjustment of 6.9 million to reverse tax reserves that are no longer necessary. In addition to that adjustment, we're able to reduce our full year effective rate down to approximately 30% due to the reconciliation of book to tax differences from the filing of several of our state returns this quarter. We believe this will only impact the current year and our forecasted rate in future years is still around 36%.

During the prior conference call, we mentioned that we would be adopting the provisions of FIN 46 during our fourth quarter. This new accounting standard broadens the requirements in determining whether a company is required to consolidate the financial statements of another entity. In adopting FIN 46, we determined the need to consolidate the financial statements of two independent contract furniture dealerships for which we are providing ongoing financial support through loans and/or financial guarantees. As a result of this consolidation, we recorded a non-cash cumulative effect loss of 500,000, approximately 1 cent per share net of tax.

As this new accounting standard was adopted at the end of the fiscal year, the consolidation had no material impact on any other line in our fiscal 2004 income statement. The effective adoption on our balance sheet as of May 29th was an increase to assets of approximately 2 million and an increase in liabilities of 2.6 million. Going forward, our income statement will continue to reflect the consolidation of these two dealers with our results. In total, their sales are approximately 30 million per year. Of this total, our consolidated sales will be increased by roughly one half of this amount.

When you roll this all up, net income for the quarter was 19.3 million, or 27 cents per share. It's a significant improvement over last year's loss of 2 cents per share and significantly better than the estimate we gave you last quarter. It's important to note it did include several unusual items, the unfavorable impact of restructuring charges of 900,000 before tax, the unfavorable impact of the implementation of FIN 46, and the favorable impact of the resolution of prior year's tax audits of 6.9 million after tax.

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

Thanks, Beth. For the quarter operating cash flow was 36.5 million. Which includes outflows of approximately 2 million related to the previously announced restructuring charges, working capital changes, net of deferred tax reclassifications resulted in a source of cash of 6.5 million, a slight increase in AR was offset by a similar decrease in inventory. The primary driver of the working capital change was an increase in accounts payable.

Our collections of AR continue to remain strong and are over 90-day AR aging has continued to improve year over year. Our DSO in inventory and receivables actually increased by 2.4 days within the same quarter in the prior year to 50.1 days, but that was due primarily to the impact of the FIN 46 VIE's that we consolidated onto our balance sheet.

Capital expenditures for the quarter were 7.3 million, this is down from the 9.3 million we spent in the same quarter last year. For the fiscal year, we spent 26.7 million in capital expenditures, this compared to 29 million in the prior year. We will continue to closely scrutinize capital spending to ensure that we're making the right investments to sustain the business and to preserve our ability to introduce innovative new products.

Going forward, we anticipate capital expenditures for next year to remain low and be in the range of approximately $40 million. As discussed in prior calls, we currently have listed for sale our Canton, Georgia building that was exited. This property has been appraised and listed, but due to market conditions, we expect it will take a while before it's sold.

Let's move on to the liquidity and cash position. We're again in compliance with all debt covenants this quarter and don't foresee any problem with compliance in the future. Our profitability and positive cash flow combined with the 186 million available on our revolving credit facility and 189 million cash balance continue to provide us with tremendous financial flexibility.

During the fourth quarter we significantly increased our share repurchase activity in alignment with the January press release that announced an additional share repurchase authorization. For the quarter we bought approximately 1,398,000 shares for $36.8 million and an average price of $26.35 per share. We plan to continue this level of activity during the current quarter. We have about 89.7 million left in share repurchase authorization still available to us.

Thanks, Joe. Now let's turn to the outlook for the first quarter of fiscal '05. We expect our first quarter sales to be in the range of 355-375 million, which represents growth of 9-16% over the prior year. This will be our third consecutive quarter of year over year growth. We also expect earnings per share between 16-21 cents.

Let me further explain our guidance on revenues. We start this fiscal year with the beginning back log of about 209 million. Included in that amount are 4 million of large orders that will not ship until sometime after the first quarter. This brings the backlog available to ship to about 205 million. We normally ship 80-90% of that amount in the following quarter. We then add in an amount for the 6-8 weeks available for order and shipment. We assumed a rate of 26-28 million per week, which is what we've been seeing the last few weeks. This gives us our guidance of 355-375 million. It's also consistent with the growth rate we're seeing in orders, which were up approximately 7% from the prior year and in the backlog, which is up approximately 15% from the prior year.

Now let me talk a little more about our earnings guidance. As you know, we had great EPS results this quarter, but there were several items that we don't expect to reoccur in the first quarter, like the restructuring impact, the FIN 46 impact and the favorable tax adjustment. These three alone account for about 8 cents of favorable EPS in the fourth quarter.

In addition, we're expecting our effective tax rate to be about 36% for the first quarter. As compared to the 30%, exclusive of the IRS settlement that we saw in the fourth quarter.

We do expect to see the continued benefits of the Canton consolidation through Q1 and our Herman Miller production system benefits will also continue. Plus we should get leverage on our operating expenses from the additional volume. But as we talked about earlier, we will see a significant impact from steel costs. Although we will put a price increase in place, realistically, it won't have any impact on Q1. So we will see a negative impact on margins this quarter.

In addition, we have increases in compensation and benefit costs that always drive the first quarter costs a little bit higher.

Those are the big items that should provide a little more clarity around our EPS forecast. In summary, we met or exceeded the commitments we made last quarter in both sales and earnings.

It was great to be able to report to you another quarter of year over year sales growth and we're again thankful for your patience as investors. Based on the recent order entry rates, the positive economic trends and our continuing investments in innovation, we're optimistic about our future revenue potential. Our Canton relocation is now behind us and we began to see the savings we promised.

Our cash balance is strong and we're in compliance with all of our loan covenants.

We made a significant step forward in the implementation of the capital structure plan that we communicated in January and that work will continue.

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

Thank you, ma'am. If you did have a question at this time, it is star one on your touch-tone telephone. Again, star-one for any questions. We'll go first to Susan McClary with UBS.

Good morning.

Good morning, Susan.

Great job on the quarter, guys.

Thank you.

Thanks.

Can you just give us an update on where your capacity utilization is?

Well, we've always said through the restructuring, Susan, is that we have the ability to get up to about 2 billion in revenue with the existing manufacturing square footage. As that happens, as the revenue goes up, we will continue to implement Herman Miller production system activities and we continue to free up space. So we could even at some point get to a higher than that depending on how quickly the revenue increases.

Okay. So as we start to see these revenues increasing and trending higher and in capacity utilization may be improving and you're getting some efficiencies, do you-- can you give us some sense of where you see your margins going with that? Benefits will be?

Well, we would hope to see our margins continue to increase. The quicker the revenue comes, the quicker, the easier it will be to have improved margins, so we said before that over time you start to have things like annual merit increases and inflationary area costs that go up, but if we continue to see double-digit increases in the top line, we should be able to see more in terms of gross margin, better gross margin.

Okay, and have you had to start rehiring any people at all? Have you increased that?

We've increased some direct labor and as part of the Canton move, we've increased direct labor specifically in west Michigan. We are trying to hold the line on the indirect labor and on the salary people who are included in the SG&A numbers.

Okay, and then can you just give us some sense of uses of cash going forward, maybe how you balance share repurchases versus debt payback and dividends, things like that?

We did quite a bit of work with our board a couple meetings ago to talk about what is our most efficient capital structure and our position is that we want to stay conservative.

We won't necessarily have the lowest cost of capital because we wanted to maintain a level around investment, around investment grade, but we do have a lot of flexibility on share repurchases at this time.

We don't have any intention of reducing our debt below the scheduled payments going forward for now, and we'll aggressively repurchase shares for the next year or so until we have less cash on our balance sheet.

Okay. Thank you.

We'll go next to Budd Bugatch with Raymond James.

Good morning. This is actually Chris Thornsburry on behalf of Budd. Quick question, I think most of the questions I had were fairly answered, but I want to know about FIN 46, the dealers you consolidated. You did give the revenue impact. Just want to know kind of in general what the overall financial health of these dealers, if you can shed more light on that.

There are two dealers. The revenue impact in our outlook for next quarter is about $3 million. One of the dealers is quite healthy and we're hoping over the next year or two that we will be able to move them off to an outside financial institution. The other one, the financial condition has deteriorated over the last six months and is not profitable.

Do you see potentially taking ownership of that dealership?

Potentially. Potentially or transitioning it to some other management team.

Okay. All right, and also secondly, you mentioned discounting effected the margins by about $5 million in the quarter, is that correct?

Compared to last year's, yes.

Okay. Could you kind of give a general outlook for where discounting is in light of the current competitive environment, you know, because we're kind of hearing that it's still pretty competitive out there and you and discounting running generally higher than it has been in the past?

Brian, do you want to answer that one around discounting levels.

Sure. I mean the discounting levels, we haven't seen a continued increase in discount levels. I would say that they are holding steady at where they were.

We do expect some additional discounting in the next year. I think the real question will be how do competitors respond to the raw material price increases, particularly steel. Everyone, as you know, has announced some form of a price increase, be that a surcharge or a direct price increase.

I think the real question is going to be, will folks become more disciplined around discounting to try to capture some of that price increase to offset steel. My belief is we will see some improvement in the discount picture as that starts to take hold.

Okay. As a follow-up to the steel issue, what are the steel kind of costs we're looking at, because I think steel scrap has pulled back in the last couple of months, but we also heard from other people that some steel costs have continued to rise, so could you kind of give more color on that?

Yeah, hey, Chris, this is Joe.

Hey, Joe.

In general, we've kind of seen it both in the hot rolled and cold rolled steel costs, so it's been in both of those that we're seeing an impact, so it's kind of across the board in our steel prices that we have. For us from a product standpoint, as you know, a lot of it goes into our file cabinets, so our filing and storage lines, but there is a lot in some of the components that come into us as well too. It's a little harder to track and see that part of it.

Okay.

The other thing to mention, as you know, and as Beth mentioned, our contracts that we currently have, they are expiring right now during this June timeframe. We're working through the negotiations in the markets for both of those areas.

Okay. All right. Thank you. That's all I had.

Once again, ladies and gentlemen, it was star-one if you do have a question at this time. We'll go next to Chris Hussey with Goldman Sachs.

Hi, guys. Couple questions, if I could, maybe a follow up on the capital structure question. Mike, perhaps in your unique role now as just chairman, why is it that the board wants to maintain a conservative structure if we're finally coming out of this cycle and, you know, you guys are generating much more EBITDA than you even have in net debt?

Chris, again, as we, as we went through this work as Beth mentioned, we're going to keep revisiting this question on an annual basis, but ultimately what we concluded is that as you, as you took a look at our cash position, it was really about how we were going to allocate cash that we had built up over time during the down turn that we thought we wanted in lieu of the condition of the marketplace, and now I think we really have an agenda in front of us for the next year.

Clearly when we have looked at the amount of debt that we have, we're comfortable with that level of debt and basically our capital expenditures, we have a pretty good idea what that's required for the next year.

We have allocated some dollars to the pension fund as we indicated to you earlier, and then the remainder really is the fall out number that gets used for share repurchases, and obviously that's a significant amount of money that we have allocated for precisely that activity.

Chris, the board definitely got more comfortable with the stability of our cash flows and our ability to generate cash flows even in down markets and recessionary environments and the doubling of the dividend showed part of that confidence.

That's a great add. Really, I think in many ways, the business model had never been tested or the elasticity of the business model had never been tested with such a significant down turn. So, again, the board got very, very comfortable with our ability to generate cash flow on an ongoing basis.

Should we as a best resun expect that you will buy back, you know, what you did times 4 here going forward for 2005, $160 million of shares?

I would say that that's probably a pretty good number. We had $2 million in cash. Of that, approximately 60 million of it is sitting in international entities and is expensive at this time to repatriate. We've said the balance, we are very comfortable using that for share repurchases and also for any other opportunities that may come up.

Plus you're going generate some pretty good precash flow.

Right.

The Canton facility, earlier you guys had indicated you could realize $10 million in annualized cost savings. Now that's pretty much done, how is that looking? Are we going to get the 10 million?

I would -- go ahead.

Chris, this is Brian. I think right now we believe we're starting to already see the benefits of that sort of pace. Now, we didn't see it through the whole quarter because the implementation really wasn't completed in a big way till sort of the end of March, early April. But we are seeing the savings at at least at the level that we expected to do. In fact, if you looked, Beth, when she talked through physical distribution costs really improving, that's actually been better than we expected it to be. We knew there was a lot of reduction between shipping stuff from Michigan to Georgia and back and forth.

What has been better than we thought is is actually intra plant stuff within the west Michigan area that in fact we've seen additional cost reductions there. So we're real confident we're going to see those improvements and the only, of course, difficult thing is with what's going on with materials, you kind of got to sort out those increases in cost versus the reductions that we're seeing. But right now, we're very confident and happy with what we're seeing so far.

Last question, then. Brian, could you maybe just comment on what are people buying right now as we're early on in the cycle? Is there any trends you're seeing in terms of what product lines they're gravitating towards.

You know, Chris, we're continuing to see very strong sales in the seating area, particularly of Aeron and Mirra. Mirra has done considerably better than what we originally thought we would do in the first year, which is fantastic, particularly, by the way, in the international market. It's been very, very strong there. We did see this quarter our mix begin to get stronger in the systems arena versus what we ran in the earlier part of the year. So I think we're starting to see some rotation, which would tell us that I think projects are starting to come back into play when you start to see the systems environment go.

We are seeing really strong international sales of a product line called Abak, which we recently introduced to the U.S. market at the NeoCon show. That has been as Beth referenced, some major project wins both in Europe and Asia, as well as in South America. That product has really been our lead along with Resolve. We have just seen the Resolve line begin to pick up in the last four to six months, based on some of the changes we made in marketing and promotion of that product line, which is really good because, you know, that hasn't-- been as strong as we originally hoped and coming out of the down turn, we really were hopeful that we would see some turn around in that product line and you start to see new projects where people weren't adding on. That so far appears to be the case.

By changes in marketing and promotion of Resolve, you're going in to call centers with that product now?

We've done some work with call centers, but we also got I think much more deliberate about selling the benefits of the product line from both a space utilization standpoint, ability to reconfigure, versus I think originally, Chris, I think there was a lot more emphasis on the aesthetics of the product line. We've done a much better, more effective job of taking the real facilities and people benefits to the customer and that seems to have made a real difference.

Terrific. Good luck, Brian.

We'll go next to Scott Hellernick with Ferris, Baker Watts.

Good morning.

Good morning, Scott.

Good morning, Scott.

First question, there is a big change in the other assets account, both year over year and versus last quarter. Can you comment on that, what sort of drove that?

That was netting of pension, assets and liabilities and differences in taxes, deferred taxes.

Okay. And second thing, can you give us a sense on what kind of customers are ordering now, bigger versus smaller, and I know financial and insurance, those type of customers have been strong.

What about some of the other customers that haven't been ordering as much? Are you seeing them come back?

I think we've seen strength, more strength in the project business and in some of the larger companies that hadn't been buying in the past. The industries that have been strong, oil and gas, the government, especially over in the UK, financial and insurance and utilities are probably our strongest segment.

Okay, and do have you an R&D spending number for the year? Do you have that available,hand that was versus last year possibly? If not, I can look that up.

About 25 million this year and that's about $1 million higher than last year.

Okay. And then last thing, Mike, I guess this question is for you, regarding the Herman Miller creative office, what new plans will you have now that you're spending more time with that side of the business? Is there anything more you can talk about?

Well, again, we're being cautious not to try to unveil some of that stuff prematurely, but the Herman Miller creative office is something that we committed to continue to invest in during the entire down turn. We are getting very close to where we're beginning to have initial customer engagements. We've hired a commercial lead for the area.

Brian and I have agreed that the commercial lead will continue to report to me as we drive that work forward, and I would say that in about four to six months, we'll be able to talk more openly about precisely what we think the big invention is and we think it's going to be significant and have a really positive impact on our long-term future prosperity. So we're excited.

All right. Fair enough. Thank you.

Thank you, Scott.

We'll go next to Anthony Chicumbo with Morningstar.

Morning.

Good morning, Anthony.

Congratulations on a great quarter. I know you talked a little bit about some of the areas that had been strong. You mentioned that seating is strong especially in Mirra and Aeron, I guess, you know, and I don't want to mention any names, but one of your competitors announced a new chair that's sort of comparable to your Mirra, they seemed pretty excited about it. I wanted to know if you see any trends in terms of sales or if sales have continued to be strong with that chair?

Anthony, at this point, it's way too early to know whether any of those products, quite frankly, have any impact on our sales, because most of them just got introduced, you know, two weeks ago at the NeoCon trade show.

But the net answer is, we have not seen any trend of anything negative as it relates to either Mirra or Aeron. Both of them are doing quite well and we believe both of them have unique features and competitive positioning that we're not overly concerned, although, you know, certainly there's lots of people with great products out there. We're not overly concerned that they will take a bite out of the progress we're making with those two product lines.

We came out with Mirra about a year ago. Sales were great. Just recently we came out with a new upholstered version of it, which has added a lot of new applications from our customer perspective and a lot of renewed interest just since that came out.

Okay. Just one sort of related follow-up, any sense for what your R&D spending's going to be in the new year?

Probably an increase slightly, again, from last year's level.

Okay.

And the number that I gave a few minutes ago did not include our spending in Herman Miller creative office. It was the other internal research and development.

Okay. That's all I had. Thanks.

Mr. Chicumbo, does that answer your question, sir?

Yes, it does.

Thank you. We'll move next to Tucker Anderson with Above All Advisors.

Yeah, just trying to fill in a couple holes and piggy back on some of the other questions. First, what you were just discussing, as you said, it's too early to tell whether the new competitive chair will really have an impact or not, but is most the competition there for that you're seeing simply based on the basis of price or are your competitors trying to do anything new and different either in terms of their lines or in terms of their sales practices or things like that that you see having the potential to impact you?

Tucker, this is Brian. We haven't seen, at least in the-- I think you're referring in particular to the seating arena.

Yeah, but also more general.

Well, in the seating arena particularly, we have not seen anybody do anything particularly different than what they've done in the past. Of course, you know, everyone has had competitive chairs, you know, even before their more recent introductions.

But we haven't seen anybody take a particular-- I will tell you that seating is probably the one area that we haven't seen as much price competition as we have seen overall, not so say it hasn't been competitive, but certainly at least in our case, I can't speak for the industry, but in our case, the level of differentiation that we have in our seating products has enabled us to maintain, sort of pricing power, if you will, if you compared it to our overall business. So certainly that level of differentiation has made that be a cornerstone for us.

In fact, you know, quite frankly, what you would like to see us do, we would like to do across the entire business, which is continue to develop innovative differentiated products where we'll have stronger pricing power.

Sure. So basically, the pricing competition, not to put words in your mouth, but to make sure I understand this has basically been on what I call plain vanilla systems where people who aren't interested in the ways you try to differentiate, where the customers aren't interested in particular ways you try to differentiate yourselves?

Yeah, even on differentiated products in the systems arena, because you tend to then be talking about the large project business, and winning the installed base, if you will, becomes sort of a big carrot for everyone.

Yep.

You'll see that stuff get priced not just on the systems, but in the systems always well, because there's kind of a bundling that goes on, if you will. But I would say even in those big bundled projects, we would be stronger. We could often win the seating even if we're not in there on the total project because of the level of differentiation we have.

Okay.

Tucker this, is Mike. I would add to what Brian said around the seating category. One of the things that historically happened and is continuing to happen to us, as we come out with a chair like Mirra, we always wonder if there is going to be some cannibalization of Aeron and actually both seating lines go up. That's been our experience in this case.

I would also suggest that even some of the new entrants into the marketplace, I'm not sure that they'll necessarily make any, be able to claim any space from Mirra or Aeron, but you can plan on them claiming space from a myriad of historical products and other products that are out on the marketplace that are less sophisticated and those are the products that will be ultimately going to be harmed by the new entrants into the market.

So in effect you're saying it's concept validation to some extent.

They always say that copying is a form of flattery. I've never agreed with that statement, but we watched a lot competitors do it over time.

The other area that I want to just try to drill down a little bit further in is when you were talking about the strength and weaknesses and where you have seen business come back and where you haven't.

If I could sort of differentiate what I would call the refresh business or the, you know, the simply upgrading and updating a little, whereas opposed to the company's really doing the major systems renovations, either because they are, they are hiring enough people so they now can't squeeze them into our existing space as they've been trying to do, and they are like you, other people are feeling a little more comfortable and maybe that's causing them to consider moving and things like that.

And have you seen a lot of not just, you know, major systems business where people maybe have to go to the next generation, but where people are now feeling confident enough so you see it as a result of both adding additional space and new hiring? Is your information base, you know, detailed enough so you can sort of figure that out?

Tucker, this is Brian. You know, what I would say to you, and I don't know if this answers wholly your question, but the size of project is still smaller on average than what we've seen in, you know, kind of pre downturn, if you will.

mm-hmm.

So we have not-- while there have been some large projects come back, we have not seen the same degree of large project in the mix, which, of course, has some impact on you know, sales force efficiency, meaning that they are still working on much smaller deals, which means their ability to leverage the cost is a little different on the sales side.

Yeah.

And now the only exception to that may be in international business where we've seen some fairly good size projects, as a part of our whole mix, which is what has really fueled some of the growth we've seen there.

In the U.S., we've seen a stronger come back. It appears to us in what I would call base business customers, customers we've done business with in the past, beginning to come back to do more small to midsize projects, which to me is probably a sign that we're beginning to see the employment increases happening there where they are coming back to refurbish facilities that they probably put on hold for a period of time.

Yeah, that's what I was getting at, you know, just from talking to companies, it's very clear they are starting to increase employment, but still trying to squeeze people in the same number of square footage and do all those sort of things. It sounds like confidence in your customer base about the stuff they would buy from you is starting to increase, that there still sort of being pushed into it as opposed to what Alan Greenspan would say, really exhibiting their animal spirit.

I think so.

Okay.

One of the other things that we've talked about in the past are vacancy rates. When those peak, there are groups of customers who can actually get into new space, renegotiate their leases and the price of the furniture is small compared to a cost on a five or ten-year lease and we have had a few customers who are actually doing that and they are saying we can move to different space and cut our real estate costs by so much that it is a good time to do it.

Yeah, the opportunistic effect, thanks, guys. Excellent quarter.

Thanks, Tucker.

At this time, we have no other questions standing by. I would like to turn the conference back to management for any additional or closing remarks.

Great. Thanks, everyone, for your time and attention today. We look forward to talking to you all again next quarter.

Ladies and gentlemen, this will conclude today's teleconference. We do thank you for your participation and you may disconnect at this time.