MillerKnoll Inc (MLKN) 2006 Q1 法說會逐字稿

Good morning, everyone, and welcome to this Herman Miller, Incorporated first-quarter fiscal 2006 earnings results conference call. This call is being recorded.

This presentation will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These risks and uncertainties include those risk factors discussed in the Company's reports on Form 10-K and 10-Q and other reports filed with the Securities and Exchange Commission.

Today's presentation will be hosted by Ms. Beth Nickels, Executive Vice President and Chief Financial Officer, and Mr. Brian Walker, President and Chief Executive Officer. Ms. Nickels and Mr. Walker are joined by Mr. Joe Nowicki, Treasurer and Vice President of Investor Relations. Ms. Nickels and Mr. Walker will open the call with a brief presentation, which will be followed by your questions. We will limit today's call to 60 minutes and ask that callers limit their questions to allow time for all to participate.

At this time, I would like to begin the presentation by turning the call over to Mr. Walker. Please go ahead, sir.

Good morning, everyone.

As usual, I will open our presentation with a few introductory remarks and then turn the call over to Beth and Joe for a more detailed review of our financials. As the opener said, we will use any remaining time for your questions.

Over the past few years, the people of Herman Miller have worked hard to restructure our business and together we have laid the groundwork for our new operating model. This very important work is done. Last year, we established a clear strategy and goal for growing our business and we began implementation. This year will be all about continuing on that journey. We said we would double the business by 2010, which means growing at 12% a year. Last fiscal year, we grew at 13%. This quarter, we grew over 20% and our forecast for next quarter is 17 to 22% growth. I would say we're well on track there.

We said we would launch ten new innovative market-defining product platforms to grow our share of the North American and UK contract furniture market and to help us develop new sources of revenue outside of our core market. We formally launched two so far, and we've got several more in the queue. We said we would apply our core competency into new vertical markets such as healing, learning and living. We have already strengthened our distribution in those areas and have plans to add new product offerings shortly.

We also said we would continue to expand our international operations. I think our results speak for themselves. We continue to have great success in our traditional international markets as well as the emerging markets we're investing in.

Lastly, we said we would improve operating income to at least 11%. This quarter, we hit 9.1% and we are confident we can continue to improve.

In short, we are aggressively managing our costs while growing the top line with more new products and expanding business initiatives coming forward soon. I'm looking forward to sharing more of those details in coming quarters but for now, I will say we are pleased with the evident progress and excited about the opportunities that lie ahead.

I also want to take a moment and address what we've seen in the business environment since the events surrounding Hurricane Katrina. Overall, we have been very fortunate. We have seen minimal impact to our business and to the people of Herman Miller. We did have some customer orders in the Gulf Coast that will be delayed or canceled, but it was minor in total. We also have some dealers in that region who were impacted and we will be doing everything we can to help them through it. We don't have a lot of direct suppliers in the region, so again, the impact does not appear to be significant. Like everyone, we will see the impact of higher oil prices on our costs. In fact, it is pretty significant. Beth will give you more detail as to what we have seen this quarter and of course, we will continue to address this in future reporting.

From a more macro perspective on revenues, so far, we have not seen any significant fallout of customers or orders. That is encouraging, considering the potential ramifications that the hurricane may have on the economy. But we will continue to watch this closely and we will be ready to take any actions that are necessary. To date, our order rates have been very strong and all indications from the field are that we will be able to continue to grow our business according to the goals we outlined. Of course, it is impossible to predict now what impact Rita will have on our cost or revenue. We are concerned that Houston is a more major commercial center and of course there is more – there's additional refining assets in that area as well.

I would like to close by saying -- once more, we would like to thank the employee owners of Herman Miller for the hard work they have demonstrated again this quarter. Our results are a tribute to their efforts, commitment and creativity.

With that, I will turn the call over to Beth and Joe for additional discussion of our first quarter's results.

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 Web site at HermanMiller.com. If you have not received the press release, it is also available there.

In the past few quarters, we've run out of time in the Q&A section, so we have shortened our prepared comments slightly. And fortunately, there are not a lot of unusual items to explain this quarter.

First, the highlights -- as you saw in our press release, we made great strides in our financial results again this quarter. All of our key financial metrics -- sales, orders, backlogs, margins, net earnings and EPS -- improved over the prior year. Our estimates for the second quarter are evidence that we have more good news to come.

As we go through the results, it is important to note up front that we did have 14 weeks of operations in this quarter as compared to the normal 13 weeks. As I talk through the details, I will quantify the financial impact of the additional weeks.

In total, our sales for the quarter were 431 million, an increase of almost 21% from the same period last year. EPS was $0.34, an increase of 70% over the prior year. Our orders and ending backlog showed substantial growth over the prior-year first quarter with orders up by almost 29% and ending backlog up almost 16%. We again saw improved leverage in our gross margins, as it increased to 32.9% of sales from 31.4% in the same period of last year. Despite over 36 million in share repurchases during the quarter, we ended the quarter with a cash balance of over 147 million due to strong first-quarter operating cash flows of almost 21 million.

Let's get into the specifics of sales and orders now. On a consolidated basis, net sales for the quarter were right in the middle of the guidance we provided of 420 to 440 million. On a year-over-year basis, sales for the quarter were up over 20%, which marks the seventh quarter in a row of year-over-year growth. Even if you exclude the extra week of sales, the growth was a sizable 12%.

I want to draw attention to the mention in the press release around our FIN 46 entity. I'm very pleased to announce that we no longer have to consolidate the current FIN 46 variable interest entity independent dealership that we have been talking about for the past year or so. Their financial health has improved and they have been able to obtain outside financing. As a result, they have paid off most of their loan with us. They are still included in the current quarter's income statement but will not be in next quarter's results. This is another positive sign of the overall health of our dealer distribution network.

Our press release also mentioned the sale of two of our owned dealerships. As we have discussed, it is not our strategic intent to own our distribution entities for the long-term. We transitioned two of our owned dealerships to independent operators this quarter. We currently have seven remaining owned dealerships, plus our direct operations in Canada and Mexico.

Moving onto orders, consolidated new orders for the quarter totaled 493 million, up almost 29% compared to the same quarter of the prior year, including the extra week. If we calculate orders on a weekly average basis to eliminate the impact of the extra week, we generated over 35 million in orders per week in the quarter. This is an increase of almost 20% from the prior year and almost 9% from the fourth quarter. Our business activity in terms of client visits has continued at the high pace we experienced most of last quarter and project business is still strong.

It is important to note that the price increase we announced this past May became effective just after the end of our first quarter. As a result, we did see an increase in orders right before the price change took effect in the first week of September. But remember, we also had a price increase last August resulting in similar order trends. In fact, the orders in our backlog scheduled for shipment after the second quarter are only approximately $8 million, compared to the $10 million at this time last year. In addition, our orders the first two weeks after quarter-end have stayed strong, giving us even more confidence in our Q2 volume forecast.

Both our domestic and international businesses had strong performances this quarter. Even after adjusting for the extra week, domestic sales for the quarter increased over 11% year-over-year and new orders improved more than 21% on a year-over-year basis. Our international results posted a 14% first-quarter year-over-year sales gain and an almost 13% increase in orders. Again, those numbers are after adjusting for the extra week. We saw big gains internationally this quarter in Canada, Mexico and the Middle East.

Regarding backlog, for the quarter, our ending backlog was about 272 million, which is up approximately 16% from last year's first-quarter level and also represents an increase of approximately 19% from our fourth-quarter level. It is the highest quarter-end backlog in over four years, since November of 2000, which gives us a lot of confidence as we head into the second quarter.

Now, let's talk about gross margin. We continued to see strength in our gross margins this quarter. Gross margin was up 1.5 percentage points from the prior-year first quarter and down just slightly from last quarter. The additional volume drove great leverage and we saw continued benefit from the list price increase that went into effect last August. But this is being offset to some extent by the substantial year-over-year cost increases we continue to experience on many raw materials.

Price competition during the quarter drove some additional discounting, which partially diluted the benefits of last year's price change. All told, we believe the net benefit of the price increase to our domestic net sales, after the increased discounting, was approximately $7 million over the prior year.

Material costs were down for the quarter and totaled 39.1% of sales compared to the prior year's 39.8%. We continued to see higher raw materials costs, primarily in steel and plastics, but these were more than offset by the favorable impact of the prior year's price increase, which drove the decline in material costs as a percentage of sales. As we go into the second quarter, we anticipate steel costs to be flat year-over-year. Although given the current oil prices, we do expect plastic costs to continue to rise.

Our direct labor costs were 7.3% of sales this quarter, compared to 7.5% in the prior year. The year-over-year reduction is primarily the result of the incremental leverage from volume, combined with the continuing efforts of the Herman Miller production system initiatives across all of Herman Miller.

For those of you who track these specific numbers, you may notice the direct labor percentages are a little higher than we previously reported. This quarter, we began to include benefit cost in the direct labor line rather than in the overhead line, so you'll notice a difference in that line as well. We feel it gives us a better understanding of our total labor cost. The prior-year number I mentioned has been restated to account for the change. We will be using this reference point going forward. If you need any historical numbers restated, we have that information and Joe will be happy to supply it to you.

Overhead spending for the quarter, as a percentage of sales, is down substantially from 15.7% last year to 14.7% this year. The additional volume through our plants drove a significant leverage benefit. Our dollars of overhead spending for the quarter increased by 7.5 million over the prior year, mostly due to the extra week of compensation costs and higher pension and medical expenses.

Our freight-out and product distribution costs totaled 6% of net sales in the quarter compared to 5.7% during the same quarter last year. The increase was all due to the higher fuel costs. As you all know, we anticipate an increased level, at least for the short-term. That is the bad news.

Moving on now to operating expenses, for the quarter, operating expenses totaled 102 million, or 23.7% of sales, compared to 89 million, or 24.8% of sales, last year. The biggest reasons for the increase were the additional payroll costs due to the extra week in the quarter, which are about $4 million, and additional variable selling an incentive related expenses as a result of the increase in volume. But overall, we got a good deal of leverage out of our operating expenses. Our operating income percentage at 9.1% is a substantial improvement over last year's level and appears sustainable if conditions don't change dramatically.

Moving on down the income statement, other expenses for the quarter, net of interest income, were comparable to the prior year and totaled $2 million compared to 1.7 million last year in the first quarter. When you roll this all up, net income for the quarter was 23.7 million or $0.34 per share, an increase of 70% over the EPS of $0.20 for the same period last year.

Now, I will turn to 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.

Operating cash flow was strong again this quarter. It amounted to 20.9 million compared to 2.8 million we reported for the same period last year. The prior year, however, did have a $23 million voluntary pension contribution.

Going through the components, depreciation and amortization for the quarter was 10.4 million. Our net change in working capital for the quarter amounted to a use of funds of approximately 17.7 million due primarily to decreases in Accounts Payable and accruals. Capital expenditures for the quarter were 11.2 million. This is up from the prior year's 3.8 million due to investments in our new UK facility as well as new product (indiscernible). We anticipate capital expenditures in fiscal '06 to be approximately 50 to $55 million. Again, this is up from the prior year due to the new UK facility, as well as incremental investments for several new product introductions.

Moving onto our liquidity and cash position, we continue to have great financial flexibility due to our profitability and positive cash flow, combined with our 137.3 million available on our revolver and $147 million cash balance.

We continued this quarter with an increased level of share repurchase activity. We bought approximately 1.1 million shares for $36.3 million at an average price of 31.81 per share. We continue to see an increased level of stock option activity this past quarter as well, as the stock price remained at some of its highest levels in the past couple of years and a number of employees exercised their options. As a result, we issued approximately $20.9 million worth of new stock for the quarter under our benefit plans. Since many of our stock options have been underwater for a while, there just has not been much activity. We knew it would catch up. In addition, a few years back, we also issued some options in lieu of a cash bonus. These had a shorter life and are now in the money.

As discussed in prior years, we currently have listed for sale our Canton, Georgia building that we exited a little over a year ago. We do have an offer and are currently working through the due diligence process. If everything goes successfully, we may be able to close on that property this fiscal year.

Thanks, Joe.

Let's turn to the outlook for the second quarter of fiscal '06. As I mentioned already, our backlog is the largest in over four years and positions us well as we head into the second quarter, plus our second quarter is always pretty strong due to the higher amount of government year-end spending that takes place. So we're fairly optimistic about the upcoming quarter. We expect our second-quarter sales to be in a range of 430 to 450 million, representing growth of 17 to 22% over the prior year. This estimate excludes the operations of the two dealerships that were sold this quarter and it assumes no consolidation of any independent dealerships under the provisions of FIN 46.

In terms of our earnings guidance, we expect earnings per share between $0.37 and $0.41, which represents a 68 to 86% increase over EPS of the prior-year second quarter. We expect continued leverage from the additional volume so our operating income as a percentage should be even higher than the 9% earned in the first quarter.

Even though raw material prices will be a challenge, especially anything oil related, the pricing actions we have taken combined with our Herman Miller Production System lean manufacturing initiatives, should help offset the impact. So we believe gross margins could go up a little more. In operating expenses, we will get the benefit of no longer having the two dealers we sold nor the VIE that we were consolidating. Also, it will be a standard 13-week quarter in the second quarter. These decreases will be offset by the normal second-quarter increase in program costs and additional variable costs. Thus, in total, we expect our dollars of operating expense spending will be about the same despite the higher volumes.

Before we open it up for questions, I would like to share one more detail around our performance. As you know, we have worked hard at restructuring our business during the past few years. The results of that work are evident in our current profitability levels. Unfortunately, our efforts have been somewhat diluted by the increases in input costs like steel.

To give you additional insight into the productivity improvements we have generated, we compared the number of employees we had at fiscal year-end to the number of employees we had in the first half of fiscal '02, when we were at approximately the same sales level. At that time in fiscal '02, we employed approximately 9,000 people. At fiscal '05 year-end, we had just over 6,000 employees. This simple calculation would suggest a productivity improvement of over 30%. Of course, we know the calculation is not that simple. We have had pricing changes and sourcing changes that would need to get factored in to make it completely accurate. But I do think the statistic helps to illustrate the magnitude of the changes we have made.

Now, I will turn to call back to the operator to open it up for your questions.

(OPERATOR INSTRUCTIONS). Susan Maklari, UBS.

Good morning. Can you talk a little bit about your incremental margin in your guidance? It seems like there's actually a pretty wide range if we look from the kind of $0.37 range going up to $0.41?

We are at, I think, a point in our cycle right now, Susan, where the increase to volume has a pretty significant impact on the gross margin. The range is really probably somewhere between maybe 33 and 34%, depending on where the volume comes in and where we land in terms of things like freight cost.

Okay. Then in terms of your order flow, it was very strong this quarter and you are clearly seeing lots of improvement in demand. Were there any especially large projects that you have seen starting to come through that have helped that?

I don't think specific large projects -- we try not to talk about specific customers. We did see a pretty broad-based demand primarily in the work and the learning markets along with our international markets.

Susan Graham, Merrill Lynch.

It is Michelle Graham (ph). The first question -- can you talk about the level of discounting you're seeing this year or right now, relative to what you saw before the downturn? How is it different? It is improved or is it worse or what are you seeing out there?

This is Brian. I think, if you look, if you go all the way back to before the downturn, clearly, as we've talked about in several calls, I mean pricing – as discounting increased from, if you will, prior to downturn to after downturn. However, in more recent periods, we have seen discounting stabilize to the point that it is at least -- I think it was actually flat between Q4 and Q1. So, we have started to capture a fair amount of the price increase. I think the good news is while I would not say we have all of the pricing power we would like, certainly there's more pricing power today than there was a couple of years ago.

It is difficult when you look at just absolute dollar amounts of discounting because of the price increases. So we are talking about sort of the relative discounting levels versus where they were previously and we are feeling better about that. However, in terms of absolute dollars, as you do a price increase, naturally we get some of that back.

Right. Do you think, if petroleum and oil continue to go up, do you think we would be looking at another price increase this year?

Well, as you know, we just announced a price increase in May, which was effective a few weeks ago. I think that is always one of those questions that we tend to evaluate on an ongoing basis. Certainly, we are pretty happy right now that, if we can get the capture rate and the new price increase that we did on the past one, that we're in relatively good shape, assuming we don't see some runaway change in raw materials.

I think, as Beth said in her opening comments, we were seeing some positive signs out of steel until recently with some of the freight disruptions and other things. I think the question is are we seeing a short-term shock in petroleum prices or is this a long-term thing that we are going to have to live with and what the impact on plastic? So it is a little early to try to make that judgment. I think our first order of business is go capture the recent price increase. Price increases are, A, not only are they difficult to capture, they are expensive to implement and they are very disruptive to customer relationships. So, we are not going to make price increases just on a kind of real-often basis. We would like to make them sort of more strategically when we think we have to and keep the focus on our folks to say, hey, you know what? We've got to also allow these cost increases; it would be more efficient than coming out with products that hit designs that can get us to the price points we need to be.

Okay. I guess if I look at the last three months of BIFMA shipment and you're up 11 for domestic shipments this year that you are tracking ahead of BIFMA, are you sort of gaining share in any one category or what are you seeing more momentum in now?

First, the results for BIFMA, we only have two months' worth compared to our three months of performance, so you do have to wait one more month to get the actual comparison.

Right. I'm looking at the last three months.

We are always cautious about making any conclusions around market share based on one or two quarters. We think you have to look at it longer-term but overall, we are generally pleased with how we feel we're performing against the competition in the market.

To add to that, I don't know that we've never really given individual product line or category stuff. I don't know that we believe there is a particular product segment that we are either gaining or losing. Of course, we continue to be very strong in our seating offering. We are very happy there and we've got some great new products in the pipeline that we think will not only add to our seating offering but also to the strength we have in the systems arena. As Beth said in her opening comments, we have seen a good amount of growth not only in the domestic office business but also in learning environments, or if you will, particularly colleges and universities. So those two areas, from a customer buying perspective, have been particularly strong.

Okay. Can you just give us the impact on plastics and steel on gross margin this quarter, what you saw as the impact?

Sure. Steel, on a year-over-year basis, was up about $1 million. Sequentially from last quarter, it was pretty flat. Plastics, I think we are about $700,000 year-over-year for the first quarter. Sequentially, I'm not sure what the sequential number was on plastics.

And freight?

Freight is about $1 million, 1 million to 1.5 million year-over-year, sequentially -- probably about $0.5 million increase.

Thanks.

Plastics sequentially was pretty much flat from fourth quarter to first quarter.

Scott Heleniak, Ferris, Baker Watts.

Just a couple of quick things here -- you talked last call about Modus coming out toward the end of the year. Is that still scheduled to come out toward the end of the year? What is the timing as far as some of the other new significant offerings you have coming out?

Scott, this is Brian. Let me start -- maybe start with kind of core business products. We have -- we have released a new chair, I think many of you know, at NeoCon called Cella. We are very happy with the early reaction of customers to Cella. We have two new systems product lines that we will introduce over the next six months or so, one of them in November to December and the other one in February to March. Those products are moving quickly through the development queue. We are very happy where they are at and we're getting good reaction in kind of early presale from customers, particularly one of them that is fairly long. So this year will be a big year for new product introductions in the core business.

In June, we began the sale of our Babble technology through a new business we call Sonare, which is our sound management business. We actually just started to do shipments of that this quarter, fairly small in terms of dollars but we're really happy with the reaction to it. In addition, those folks are building a queue of additional derivatives not only off of the Babble platform but also additional sound management products. I don't know that we will see another new product from the Sonare team this year, but really we're in a big ramp up phase right now with Babble.

As far as motives, which is a little bit longer development queue, we have some product installed at a customer in New York, kind of an early adopter. Our goal right now is that we have the full business plan and stuff in-hand in January and February and then kind of we will figure out what the ramp-up schedule looks like from there. I will say we've begun to do some early investments in tooling on that product line so right now, we're pretty confident as we get to the end of this fiscal year that product line will start to move into launch.

Okay. Now, as far as marketing of Babble, what have you decided there? I know you talked about selling that at retail stores too. How exactly are you marketing that?

Babble will go through multiple channels. It is being sold by our -- I will call it our traditional contract office furniture dealers as kind of a first wave. But we also believe there will be a significant market for this in retail channels. I don't believe we've necessarily settled on yet who those retailers are but we've had several people call us with interest as well as, by the way, several international retailers. There is some product modification that has to be done for the international markets, but we do see this as having sort of a multiple distribution front and probably, by the way, not our traditional retail set either, which has primarily been retail furniture sellers. We are probably talking more either electronics retailers or specialty retailers, in particular e-tailers or catalog sellers.

Okay. As far as the retail business, have you seen any sort of slow-down the last few months? I know you said you grew 26% last quarter. Any sort of slow-down there in that channel?

I don't know if we have seen a slow-down. I mean that business is somewhat is a little seasonal. We did not see a lot of growth year-over-year in the first quarter but we saw a big -- in terms of sale, we did see a big surge in orders, though, towards the end of the quarter, which leaves us pretty confident we're going to continue to see some growth for the year. We really have not introduced Cella yet into that channel; that will happen later in the year. We think that will also give it a boost.

We are such a fairly small player on the retail side. Even when you get to the products that are more home-like, less than, you know, if you will, our work seating that we're selling into people for their home office, we are playing at the upper end of the market, which I think has much less -- is much less impacted by these changes in interest rates and homebuilding. Because you know, the homebuilding has been -- in many ways, the sector that has been the hottest is more of the average to lower-priced homes and we're going to play in the upper end.

Sure, okay. Then finally, did you give a number of how many dealers were impacted by the hurricane in that area?

No, we did not give a specific number. We have a few small independent dealers down there and I think two or three of them were impacted.

The majority of our dealers down there -- in fact, I think all of the dealers down there are actually multilocation dealers, so while they may have been disrupted, for instance in the particular -- one of the particular cities, almost all of them, to my understanding ,have been able to essentially re set-up their operations in their other satellite offices. So the impact has been -- we are not without distribution as the market comes back to play. We are not worried about that overall. We're trying to do the best we can to help them with cash flow issues, which obviously will be the number one concern.

So you are pretty well positioned then once the rebuilding starts I guess?

Yes, we feel pretty confident with that. You know, as Beth said, we had a few orders get delayed from larger customers that were in the city but even though we think we will come back over time, it is a matter of how long.

Todd Schwartzman, Sidoti & Company.

You have answered my questions. Thanks a lot.

Matt McCall, BB&T Capital Markets.

First of all, you threw me off with that direct labor. I missed the -- I got shocked by the number. What was the Q1 comp from last year?

It was --

7.5% was last year for the first quarter. For this year, it was 7.3%.

Okay, I think I got the rest of them. In the past, you've provided some kind of outlook where you see each one of those parts of the line item. Can you talk about, I guess with and without inflation, where you see direct labor overhead, well, freight and materials going forward? Where do you see steel impacts year-over-year as well, along with plastics and fuel?

We would rather not give specific guidance on the individual components of cost of goods. We decided to be a little bit more cautious about the level of the detailed information we convey, considering all of the competition is always on the line listening. But in terms of steel specifically, we think that, next quarter, it will be about flat to where we are today, maybe even a little bit of savings. Then there is an expectation that it could go up a little bit again after that. Plastics we expect continued increased costs and the same thing with freight, freight probably another 0.5 million to 1 million or so next quarter.

For both, okay. You said the discounting -- let me make sure I wrote this right -- the price competition cost you about 7 million in the quarter. Is that year-over-year?

No, it was about 700,000 year-over-year.

Oh man, I thought --.

I think what Brian referred to, Matt -- this is Joe. What Brian was referring to was that net impact to pricing is actually a favorable impact of around $7 million. So you've got -- (multiple speakers) -- offsetting. We had a gain because of the price increase that we did last year. That was offset slightly by the price discounting, which Beth mentioned was 700,000. But net of those two was a gain of about $700 million. (multiple speakers). That would have been nice. (multiple speakers).

Sorry about that. Well, okay. Then on the guidance, I think Beth said 33 to 34% gross margin is a good range and should SG&A dollars flat, if I plug that in, it looks like -- maybe I'm plugging in the wrong number, but it looks like on kind of the midrange of that volume guidance, EPS could be a little bit better. Am I missing something in what you said?

No. If you look at the gross margin where we were right now and assume it is similar to up a little bit, operating expenses similar to where we were -- we were at 102 million, so somewhere in that 100 to $105 million. Then you look at our other expense, which has been running I think about 2.5 million, somewhere in there.

Okay and --

It would be close and about a 35% tax rate.

Okay, all right. I will get it close. The 11% longer-term target you've talked about a lot and given that you hit 9% this quarter and you hit 10% - or my estimates show that you're going to be around the 10% mark or maybe a little below next quarter. You know, volume becomes your friend at some point and you mentioned that. Do you still see 11% as a reasonable target to put out there or do you think that, at this point, you're starting to see some things that would cause you to start to look to increase that a little bit?

One thing you have to remember about our business is the third quarter tends to be seasonally a little bit lower, so we get some of it back then. We also had that benefit of that extra week this first quarter. So a few things that -- so much just really depends on what happens over the next few months with the economy I think. At this point, we're very comfortable with next quarter. Looking out beyond that gets a little less sure.

Sure.

-- how we are thinking about it, but we said that our goal was, by 2010, to have an operating income of at least 11%. I think we are still comfortable with that and our hope is, if we can do better, we are going to keep trying. We are not going to be satisfied with 11 if we can do better than that.

I think Matt -- this is Brian. The other thing I think you have to keep in mind is, as you say, volume is your friend. It is particularly your friend when you get a large percentage increase over a very short period of time. So when you see the kind of increase that we had in this past quarter in revenue and what we're expecting next quarter, when it is over a short time frame -- I will call it short time frame a two to three-month time frame -- you get a much better leveraging then when you do over the long run in the sense that your other input costs tend to creep up on you as well. So you know, I think we're trying not to get ahead of ourselves. At the same time we're going to continue to work diligently on efficiencies but at the same time find the money that we need to invest in the strategy because as I said to you in the opening, one of our key goals is that knowing we want to improve profitability but we want a spread our revenue base to new markets to enable us to have a broader set of things to go after. That will also continue to take some investment to be able to get there. Some of those programs, like you I think earlier or someone asked earlier around Modus, we have not ramped to up to the degree that we may need to. So we are trying to be balanced on this thing and say, yes, we want the profitability but the other thing we want is we want to make sure we've got a portfolio of investment that gives us a sustained ability to grow rather than have to just ride with the market.

Okay, that is fair. All right, thanks a lot. Good luck.

(OPERATOR INSTRUCTIONS). Budd Bugatch of Raymond James.

This is Chris Thornsberry on behalf of Budd. Congrats on a good quarter, everybody.

Thanks. Good morning, Chris.

I just had a couple of quick questions. Most of my major ones have been answered already, but I know you said the pricing impact, the net pricing impact in this quarter was about 7 million. Seeing that you had a little bit of gain last from last year's price increase in August plus the newly instituted one a couple of weeks ago in this quarter, what are you looking for in the second quarter and moving on?

On the new price increase, we did not get any benefit in our sales number from that. We saw probably an acceleration of orders by a few weeks because of that. But the actual price increase did not take effect until the second quarter. That will get sort of feathered in over the year as contracts run out, customer contracts run out and government pricing and things get changed, but you won't see that full impact until probably a year from now.

Okay, so looking forward, it's going to be something less than that 7 million then because you have last year's impact somewhat anniversarying now?

Correct, and a year-over-year impact, Chris. It was the second quarter of last year that we really started to see the benefit of the old price increase as I refer to it. So -- (multiple speakers).

A real ramp up in the third quarter, right, was when we started -- (multiple speakers).

That's right.

So you really do have somewhere between a three and five-month lag before you start to see it take effect.

Okay. All right, thanks. I just wanted to get an idea for kind of your mix of project business, what you have going on there. I know you had a little bit higher discounting. Was that as a result of some larger projects coming through?

The mix of project business stayed very similar to where it was last quarter. I think it was in the low 40s%, which is up from where it was during the downturn, but not -- the mix has not changed significantly from where it has been running in the last quarter or two.

Okay. On a longer-term basis, I just wanted to know -- you have the slide where you talk about your sales growth target to about 2.6 billion by fiscal year 2010. I think, Brian, you mentioned that was a five-year CAGR of about 12%. Looking at that, could you maybe parse that out to what you think might be just the overall industry growth that, you know, the rising tide lifts all boats versus your new products, new markets and the geographic expansion that is going to be specific to Herman Miller?

Well, first, Chris, we did really predict this year. We continue to be I will call it above-trend for the industry. Of course, last year was as well, or our last fiscal year. You know, the question is how long does that tale go on? Our belief is, longer-term, we're looking at kind of a 3 to 4% sort of normalized rate for the industry. We think we have been able to grow at 1.5 points above that or so. So if you take 4% for the industry -- I'm not actually talking for the rest of this year -- I'm talking longer-term for the industry. If you take 4% for the industry, we think we can grow 1.5 to 2 times the industry. That gets us 6 to 8% and then the remainder will come from us getting to some of the new markets that we have had targeted like some of the emerging international markets as well as some of the new business efforts we have, like Sonare or the work with Modus or getting deeper into healthcare in the home. So, it's going to come from a combination of things.

So in the long run, we're not counting on BIFMA continuing at the current rate, which the current year. I guess their expectation is around 7%. Certainly, we are using that right now to fuel our growth or to play off from that as we begin to make those investments in those new areas. So it is kind of a combination of things. In the short run, it will be big growth off of the BIFMA number and then as BIFMA slows down, we hope we've got those resources of revenue in place that enables us to continue to keep up at a double-digit or better growth rate.

On those new sources of revenues, where do you see the biggest opportunity?

You know, Chris, this is an interesting one. We have often talked to our Board in the same way. I don't think it is about one or two big things. I think it is going to be a combination of a portfolio of investments and ideas that are spread not only in terms of time, how long it takes them, as well as the size of the investment and how close they are to the core. So for instance, the home business and the learning business today have not taken a lot of incremental investment, but there getting us to a new set of customers we have not typically focused on and largely, it's been a sales and marketing investment. Now, contrast -- and those are obviously relatively available to us. We have to build more distribution and sales capacity. I will contrast that with something like Modus or Sonare that are pretty far away from the core that take a fair amount of upfront investment and while we think they are reasonably good-sized opportunities, they take a fair amount of time for them to play out because we have to build an entire business, not just product; we have to build distribution, supply chain and all of those things, so those will take longer in the cycle.

So what you're going to see is a mix from us and our plan is not to make one or two big, large, bets outside but to find several that we think we can grow at a reasonable rate. Sort of our internal model on this is that we're going to be patient for growth in those areas but we are going to be impatient for profitability. So we want to make sure that we don't have a lot of big drains on us but we want to get there over time.

Do you think that is possibly supplemented by acquisitions at all?

Yes, we do. Our hope is that each of these areas will lead us to new ideas for acquisitions that enable us to get further into those markets. It does not mean we won't do anything in terms of alliance or acquisitions in kind of the core business, but in particular, we think the work we're doing in those new areas will lead us to additional avenues of things that we will want to add onto those businesses.

Okay. Just one more real quick kind of a housekeeping question. How much do you have left on the current stock buyback authorization?

We have 22 million available right now at the end of the quarter. And we do have an upcoming Board meeting this month that will be addressing that again.

Do you expect that to be increased again?

Our Board has had a history of doing that, but we always talk about it in the context of the overall capital structure and the goals for the other investments we have.

(OPERATOR INSTRUCTIONS) Mr. Walker, we have no other questions left in the queue. I would like to turn the conference back over to you for any additional or closing remarks.

Thank you.

In closing, we really appreciate you joining us for today's call. We hope we've answered all of your questions and given you further insights into our results and what is driving our business. As you can tell, we're pretty excited about our financial performance this quarter and by the opportunities that we see in front of us.

If you have any additional questions that we may not have had an opportunity to answer, please contact Joe directly and we look forward to seeing you next quarter.

Thank you. That does conclude this Herman Miller first-quarter 2006 results conference call. We do thank you for your participation. You may disconnect at this time.