MillerKnoll Inc (MLKN) 2006 Q2 法說會逐字稿

Good morning, everyone, and welcome to this Herman Miller, Inc. second 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. Nichols 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. 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. We'll use the remaining time for your questions.

Our story hasn't changed; we are still on track to do what we told you we were going to do -- double the business by 2010 and get to operating income of at least 11%. We made gains on both of these commitments this quarter. We had double-digit year-over-year growth in both orders and sales, and we grew our operating earnings to over 10%. We announced two alliances with Brandrud and Bretford, which will help us to grow our volume in the healthcare and education markets. We continued our investments in developing distribution and sales in the emerging markets of India and China. We have made great progress on our planned launches of two new systems furniture platforms, and the initial feedback from dealers and customers who have seen the products has been very positive.

And we have also received a great deal of external recognition this quarter -- a Best of Innovations award for Babble from the Consumer Electronics Show; a Michigan Minority Business Development Council Corporation of the Year award; HR Executive Magazine's top 50 most admired companies for human resources practice; and several other editor choice awards for Babble.

The economic environment also appears to have stabilized from where we were last quarter. At our last conference call in September, the potential impacts from Hurricanes Katrina and Rita were still unknown. There was a great deal of uncertainty as to what would happen to our material costs, specifically oil and plastics. While there still appears to be some volatility in the market today, the macro drivers that impact our business have remained positive. We did not witness any major fallout from the storms and our industry has continued to grow, in fact, even registering double-digit growth in orders. We will continue to watch cautiously as the economy unfolds in 2006.

Finally, I want to take a moment to thank all of the employee owners (ph) of Herman Miller for their efforts in making our accomplishments possible. We have been able to deliver outstanding short-term performance and continue to provide evidence that we are making real gains in profitable growth through a strategy of innovation and expanding markets.

With that, I will turn the call over to Beth and Joe for additional discussion of our second-quarter 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 Website at HermanMiller.com. And if you haven't received the press release, it is also available there.

First the highlights. As Brian mentioned, we continue to move forward on the commitments we made. All of our key financial metrics -- sales, orders, backlog, margin, net earnings and EPS -- improved over the prior year, and our estimates for the third quarter herald more good news to come.

In total, our sales for the quarter were 438 million, an increase of almost 19% from the same period last year, and EPS was $0.40, an increase of almost 82% over the prior year. Our orders and ending backlog improved over the prior year second quarter, with orders up by 11% and ending backlog up over 4%.

We demonstrated great leverage in our operating expenses, which as a percentage of sales declined by almost 3 full percentage points from last year. And as a result of strong second-quarter operating cash flows of over 44 million, we ended the quarter with a cash balance of almost 150 million.

Let's get into the specifics of sales and orders. On a consolidated basis, net sales for the quarter were about in the middle of the guidance we provided of 430 to 450 million. On a year-over-year basis, sales for the quarter were up 19%, which marks the eighth quarter in a row of year-over-year growth.

Consolidated new orders for the quarter totaled 434 million, up over 11% compared to the same quarter of last year. As we mentioned in the press release, for comparison purposes it is important to note that the prior year included 11.4 million in sales and 15.7 million in orders from three dealers that we no longer own or consolidate under FIN46.

On a sequential basis, sales for the quarter are up slightly less than 2%. But remember, the first quarter not only included an extra week of operations, it also included sales of approximately 11 million due to the three dealers that I just mentioned. Our sequential orders are down 12.1%. But again, for comparison purposes, you need to consider the extra week of operations in Q1, as well as approximately 14 million of orders in Q1 due to those same three dealers. In addition, we have seen in the past the seasonal slowing of orders at the end of Q2 as we head into the holidays. We don't see anything unusual with the recent order trends. In fact, it looks more like the cycles we know from the past.

Both our domestic and international businesses had strong performance this quarter. Domestic sales for the quarter increased 22% year-over-year and new orders improved more than 7% on a year-over-year basis. Again, remember those three dealers were in the domestic numbers last year.

Our second-quarter international results posted a gain in sales of almost 6% year-over-year, and orders exhibited the healthy increase of more than 29%. We saw great growth in Canada and Mexico again this quarter, along with great order growth in Japan, Australia and the UK.

Regarding backlog, our ending backlog was 267 million, which is up more than 4% from last year's second-quarter level. Europe experienced some significant wins during the second quarter, which increased the international backlog 37% year-over-year, setting up a strong 3Q forecast for our international operations.

Now let's talk about gross margins. We continued to see improvement in our gross margin this quarter. Gross margin was up 2/10 of a percentage point from the prior year second quarter, and down just slightly from last quarter. The additional volume drove great leverage in our overhead costs, and we even started to see some benefit from the list price increase that went into effect in early September. Price competition during the quarter drove some additional discounting which partially diluted the benefits of the price increases.

We felt some relief in material costs during the quarter due to improvements in the costs of steel. This was offset by increased costs in plastics and fuel, but overall, material as a percent of net sales was about the same as last year. We were able to lock in steel costs early in the quarter at a low point, and as a result, got some great benefit. As we look forward to the third quarter, we believe our steel costs will be going up, and we will see plastic costs continue to climb as well.

Our direct labor costs were pretty consistent with the past few quarters. Our freight out and product distribution costs for the quarter were slightly higher as a percentage of sales compared to the same quarter last year. The increase was all due to higher fuel costs, which amounted to over $1 million more than this same quarter last year. Fuel costs seem to have stabilized now and should have approximately the same impact in the third quarter.

Moving on now to operating expenses. For the quarter, operating expenses were just under 100 million, or 22.8% of sales, compared to 95 million, or 25.7% of sales last year, demonstrating the leverage we can achieve with additional volume. The increases in spending were driven by higher employee benefit costs like pension and healthcare, as well as increases for our EVA-based incentive comp.

It's important to mention that the second half of our fiscal year always has higher operating expenses than the first half, due to ramp-up in costs associated with the new product launches and Neocon. This will be the case again this year as we prepare to launch two brand-new systems furniture platforms. We'll talk about this more when we get to our third-quarter forecast.

In total we obtained operating income of 10.1%, up dramatically from 6.8% for the same period last year, and also up from 9.1% last quarter.

The effective tax rate for the quarter was 32.7%. Last quarter it was 34.4% and last year's second quarter it was 33.4%. The dip in the effective tax rate was primarily driven by the recognition of a deferred tax asset and refund from the most recently filed Japanese tax return. When you roll this all up, net earnings for the quarter were 27.9 million, or $0.40 per share, an increase of 82% over the EPS of $0.22 for the same period last year.

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

Thanks, Beth. We had another very strong quarter of operating cash flow. It amounted to 44.2 million compared to the 29.4 million for the same period last year. Taking a closer look at the components, a good portion of the year-over-year increase was a result of much higher net earnings.

Depreciation and amortization for the quarter was 10.6 million, which is about 1.1 million lower than the same quarter last year. Higher accruals for incentive comp and other payables were partially offset by higher accounts receivables inventory, and resulted in a working capital source of funds of 5.4 million.

Capital expenditures for the quarter were 11.6 million. This was up from the prior year's 7.3 million due largely to new product development initiatives, as well as investments in our new UK facility.

Moving on to our liquidity and cash position, our profitability and positive cash flow this quarter allowed us to maintain great financial flexibility once again. We ended the quarter with almost 150 million of cash, in addition to the 137 million available on our bank revolver.

Finally, in keeping with our capital structure policy, we again actively repurchased shares are during the second quarter. We bought back 0.9 (ph) million shares for $26.6 million at an average price of $28.87 per share.

Thanks, Joe. Let's turn to the outlook for the third quarter of fiscal '06.

As you all know, in the past we have experienced a seasonal decline in sales during the holiday period. As a result, we anticipate sales for the third quarter to be in the range of 410 to 430 million. That's a 7 to 13% increase over the over the prior year's third-quarter sales. For comparability purposes, it is again important to note that this estimate excludes the operations of the three dealerships that are no longer owned or consolidated. And we're up against a tough comp, as last year's 3Q sales were actually higher than the second quarter ones.

In terms of our earnings guidance, we expect earnings per share between $0.30 and $0.34, which represents a 25 to 42% increase over the EPS of the prior year third quarter. Because the volume is a little lower than last quarter, we won't get as much leverage to the bottom line. Raw material costs are expected to be a little higher due steel and plastic prices.

Also, as I mentioned earlier, our second half of the fiscal year always has higher operating expense levels than the first half. This year we expect to ramp up our spending 6 to $8 million in the second half of the year, related to new product launches and trade shows such as Neocon. In fact, this may be one of the biggest product launch years in our history. In addition to the two new systems platforms, there are two new seating products, new lighting products, new Herman Miller for the home plastics, and new products from both Sonare and Purple. It's going to be a big year for new products at Herman Miller.

That's it for our prepared comments. We'd like to turn the call back to the operator now to open it up for your questions.

(Operator Instructions). Susan Maklari, UBS.

Can you talk a little bit about the alliances with Brandrud and Bretford that you've done. Have they hit your dealers yet, and what are the initial responses to the products?

It is very early. We announced both of them in October at our national sales meeting. They are -- the dealers were informed immediately after that meeting that the alliances were there. Of course, Susan, there is kind of a normal ramp up time from when they hear about it and where it starts to hit the channel. I will tell you so far, all of the signs have been very, very positive. And in fact, from talking to the two companies individually, they are beginning to see dealers bring new business their way and connect them with new customers. So, it's early days. Not really much impact yet on an income basis, but we think we are getting really good signs from folks that these were good alliances and really help to build the capabilities we have to serve customers in those markets.

Will you be doing any new kind of new product introductions or anything kind of around them next year?

Around them? I don't if we have that detail yet. I think, Susan, we do believe that there is some opportunity to do some co-development and jointly develop additional products that complement what they have and what we have. In both of these cases, we not only saw that they were good alliances in terms of the product lines that they had today, but we thought that combining Herman Miller's ability around design and innovation with their internal capabilities could create some additional opportunities for both of us.

And then, turning a little bit to the international trends, it sounds like you're seeing some really positive things going on there. And given what we're hearing, that the Japanese economy may be strengthening, can you talk about projects that you're seeing over there and trends?

As you know, in Japan we are actually quite small. We are a fairly small business in terms of the overall size of the Japanese furniture market. We are doing well. I was actually just there two weeks ago, so I just got back from Japan. Considering our size, which, again, we're relatively modest, the team is uncovering lots of good business. The Japanese economy does feel very strong. It's very positive when you are there.

We are finding a way to not only serve our multinational customers, but we are getting to some good-sized Japanese customers as well, and doing a reasonable job with our Herman Miller for the Home products as well. So, it's kind of a multi-pronged approach. More I would say what's driving our international business, though, is large project wins that are not really contained in any one specific geography, but more related to us having what we think are great solutions for customers, a very, very well-tuned sales team in our international business that has the ability to look for those big opportunities to get the right resources around them, and the right distribution to go win the projects. So it's not a pattern of a particular market running forward. Even, I think, if you listened to Beth's comments, we've had some nice wins in Australia. We've had some decent wins in Japan. We had some big wins in the UK recently. And we have seen (multiple speakers) South America. We have seen relatively strong growth numbers in Canada, and we continue to do pretty well in Mexico. So the whole international group has done well. But if you look at each one individually, it doesn't look very material; it's when you add it all up that it looks to be somewhat significant.

And your price increases that you're doing would apply to your international markets as well.

That is actually market by market; it's not necessarily across the board that everybody does the same thing. It will depend, because of course there you not only have to deal with material cost changes, you've got to also deal with what is happening on the currency front as well. So it is market specific. I don't whether I would paint one broad brush across all of it. I think the UK -- we actually did a price increase, but -- which is, obviously, the most significant single market that we have. If you get outside of the UK, I think it is going to depend on the status of that individual market. Some may have been greater; some have been a little bit less.

And what about the pricing trends in those markets in general? Are they somewhat comparable to the U.S.? Do they vary greatly?

They vary greatly, of course. When you say pricing trends, Susan, are you talking about changes in the pricing environment or are you talking about price points?

In terms of like the discounting, the bidding and things like that.

The bidding is fairly similar for the most part of the business that we compete in, because often we're competing not only against local competitors, but in many cases against our large multinational competitors that you guys all know well. So, therefore, the pricing -- the character of the pricing is actually fairly similar, although price points do vary greatly from market to market. And it also gets impacted a little bit by the type of product. For instance, in Europe you see much more of a desking-based environment where people may be spending less on a work station, but you have to be more attentive to tools that go around the work station, is where a fair amount of the value is.

One last question. How should we be forecasting the tax rate going forward?

I'll kind of take a stab at that one. I think as we have talked about before, in the range of 34 to 35% is probably the best way to look at it on a long-term basis. Even for the full year that would be a good estimate to use.

Todd (technical difficulty) with Raymond James.

It's Budd Bugatch. I don't think I changed my name. Help me, Beth, if you could, put some percentages on the comparable order rates, taking out the non-consolidated dealers now. And what happened to those dealers? Are they still in operation and just now no longer consolidated?

They are still dealers of ours. They are no longer consolidated; they are independent dealers.

What is the percentage growth if you look at -- if you adjust for that domestically and internationally, how can we think about that growth rate?

I can tell you in total the sales growth, where we reported about a 19% increase, it would have been 23%. And orders we reported 11%; if you take out the impact of those dealers it's about 16%.

I did that math. I was just wondering if we got any better or any more granularity to do it. Were all those -- all of those are the domestic orders?

They're all domestic, yes.

I was just trying to get some feel. What will it look like in the third and fourth quarter for those dealers in terms of orders and sales, so we can probably adjust the model to get more comparable?

In the third quarter of last year, the sales were about $12 million and orders at about 6 million. In the fourth quarter sales were about 11 million, orders were about 15 million.

And you were still consolidating in Qs three and four, because you consolidated every quarter last year and the first quarter this year, right?

Yes.

Can you on the gross margin -- the gross margin change as reported looked fairly modest. You would have thought you would have gotten better leverage with the volume. Can we do a walk of -- percentage walk of gross margin, parsing out raw material impact, pricing impact, leverage impact, or whatever else you might put into those buckets?

We continued to break down the detailed cost of goods breakdown with labor material overhead as a percentage. To get into the level of granularity you are talking about is a little difficult, especially because the price impact -- we now have two of them.

That are overlapping.

That overlap. So to take that out netting the discounting impact is not an easy thing to do, and we haven't gotten through all of that math.

I'm sure you're trying to do it for your own internal analysis. True or no?

Yes, but we're not there yet.

How about the leverage? You said that you had great leverage on volume. Can you give us that percentage impact from -- how did you assess that?

Our leverage, I think, was about 19%. Or we said for every increased dollar of sales, we had about $0.19 of incremental net income.

But that is more than at the gross line. I'm just looking at the gross margin line right now.

I will take a stab at one piece of this. So if you look at the overhead costs as a percentage of our total sales, if you look a year ago, the overhead costs in cost of goods sold were running around 15.1% of sales. And in the quarter that just ended they ran 14.3% of sales.

So an 80 basis point improvement there.

Right.

How about material labor and then the transportation and the handling side?

The material and labor were pretty similar quarter-over-quarter. The other piece where you saw the offset was on kind of the freight out aspect of it.

What was that? What did it go to?

The freight out costs went from 3.5% of sales up to 3.9% of sales.

So you had a 40 basis point draw-down on that?

Right.

Those are two of the pieces, okay.

(multiple speakers) the two biggest elements when you look at it in total.

Those are the biggest elements? Okay. Any quantification (indiscernible) variable comp?

Variable comps, just in terms of the EVA incentive program -- and our EVS incentive is for all employees, but this does not include any sales comp. When we reported numbers in the past, we've always just talked about the EVA program that affects all of our employees selling and direct labor. And on a year-over-year basis, I think we are about 10 million in total. And a portion of that -- 45% in gross margin and about 55% of that's in OpEx.

And that is the delta?

Yes, that's the delta.

That's part of the offset that Joe was describing to those two numbers he gave you.

Finally, Brian, just characterize -- obviously your orders look pretty good, and the industry is experiencing some nice gains year-over-year. What do you see out there in the future, more than just for Herman Miller? And then you're, obviously, doing some things in some different areas as well than just office furniture with the Creative Office. Kind of bring that home if you would.

Everything that I can see looking at probably the same data that you all do, I think the industry looks like it's going to continue to have, I will call it reasonable -- it's not above trend level growth rates. For the balance of our fiscal year that appears to be the case. I think the estimates for the industry, if I look out to our next fiscal year, we see a number somewhere around 7 to 8% feels fairly reasonable to us. So I think the dynamics for the industry appear to be quite strong.

I think the good news is, as I mentioned in my overall comments, is we were probably more nervous three months ago when we were coming out of the other side of the storms and not what knowing what was going to happen with the big run-up in fuel prices and what that was going to mean to raw material costs and so on. That appears to have gotten through the economy with relatively modest impact. I think that is the good news. That could have been a real scare to corporate profits, which, as you know, is a big driver for us. We haven't seen that yet.

I will tell you the sales force continues to report that they are very confident about what they see in terms of activity with projects. They are very confident in terms of our ability to win, and I would say are even more buoyed by the fact that they see that we have a big pipeline of new products coming that they're going to get to see in the next six months and get their hands on. So everything I can see so far looks positive for us.

Of course, the other areas that we're getting started on, like for instance in healing; the healing business is doing quite well. The home business has had a decent first half. The real question for us, though, is those are fairly small still. So they're not going to have a huge impact on the numbers in probably the next year or so, but I think we are starting to lay the groundwork to have additional areas that can drive growth for us that won't make us as tied to just this month or the industry growth rates. It's too early to be in that spot yet, but I think the signs of the capabilities putting into place look really positive to us.

Net net, I would say we are -- I guess an overused phrase -- cautiously optimistic. We still watch, like everyone else, the economic data every day and say is it all going to continue to move in the right direction. So far it looks to be the case. And this is always a fun time of the year because everybody goes home. On the other hand, it's always that time of year where you just don't know it's going to look like when you get back. So you're positive (indiscernible) but people go away over the holidays it is always an interesting period of time. But everything we can see so far looks good.

I think one of the good things about how we're all feeling right now is that our strategy doesn't depend on the industry per se having several more above-normal years of growth. As long as we can get just some decent growth out of the industry while we are investing in some of these other areas, we think that we have a great future.

In your visit index or your available projects indexes year-over-year, how are they looking? Do they mirror your order rate forecast, or are they above that?

Customer visits were actually up 31% year-over-year and 28% from last quarter, so that was a very positive sign. Lots of activity.

And I'm sure you quantify the available projects out there. How does that look? What is the market on that side of the business?

We started talking about that based on your request a couple of calls ago, Budd, and we have continued to look at it as well, too. That percentage of project business is up again this quarter, so it's running roughly 43% of the total, which is up over last quarter and up over last year as well, too, same quarter. But the number of big projects still looks good.

Todd Schwartzman.

Could you quantify for 2Q the incentive compensation costs, and maybe break out options expense from other components, and maybe mention what those other components were, if any?

First the options expense. We're not expensing options yet. We do have a small portion of expense related to some restricted stock units, and that was about $160,000 this quarter. The actual incentive comp that was in the second quarter in operating expenses was about $9 million, and in overhead was about $7 million.

What's baked into your 3Q guidance as far as the comp costs?

I'm sorry; could you repeat that question?

Your guidance for the third quarter -- any kind of incremental change you would care to discuss in terms of the compensation costs?

Probably pretty similar. Incentive compensation in the second half of the year will probably be a little bit lower than it was in the first half because our comps -- our EVA incentive program is based on improvement year-over-year, and in the second half the comps get tougher, so the base gets tougher.

If you had expensed options in 2Q, what would that have been?

Hold on a minute.

A good answer to that question kind of also depends is how you define expensing in terms of how you calculate it. As you know, one of the ways that we're looking at right now, as we've started to look at 123R and how we implement it, which won't be until the first quarter next year, is what basis do you use? Do you continue to use the Black-Scholes approach, which we have done for footnote disclosures before, or do you really begin to use one of the lattice (indiscernible) models out there as well, too? So there's really a lot of different kind of questions -- ways to answer that question. We haven't determined an answer yet on how we'll expense it next year. We haven't settled in on the method yet.

Last year's pro forma expense was around $9 million pre-tax. So that gives you --

That's for the full year.

For the full year, yes.

But that was not spread evenly throughout the year?

No. Two things. One, that was a full-year number footnote disclosure, and it was also based on Black Scholes.

So can we assume Black Scholes for 2Q '06 and get some kind of ballpark, or is that not a fair way to approach it?

If we could maybe get back to you on that, because there are so many complexities now with the difference between FAS 123R rules versus the footnote disclosure that we've been doing in the past. So we are working through that, but we haven't concluded on the exact method of adoption and where we're going to land.

Fair enough. Last question. Did you mention the FX effect on net income in the quarter?

Did not, I don't think. The P&L impact was a gain of about 100,000 in the second quarter. That was driven mainly by the U.S. dollar movement against the Canadian dollar. Net sales had about a 1.7 million benefit on a year-over-year basis.

(Operator Instructions). Matt McCall (technical difficulty)

Beth, I think you talked about the incremental spending on the operating expense line, 6 to 8 million in the second half from new product launches and Neocon. You said this is going to be a bigger product introduction year. What does that 6 to 8 million look like compared to historical levels? And then if you can kind of look in your crystal ball a little bit, what do you think '07 is going to look like in addition to that?

If you look at the second half this year versus prior years, that increase is actually very consistent, I think, with what you would have seen in the prior years. We've done, I think, a better job through the downturn weeks, figured out new ways to come out with products that are lower cost than we had previously. So we're starting to do more product platforming and other ways to keep our costs down and get the introductions quicker. So I think you'd find that to be very similar. We have not come out with any guidance for next year. I think the only thing we can say is that we are continuing to be sure that we keep our expense levels in check, and our goal is to continue to expand the operating income line.

Okay. I think you said in the past that one of the things that is going to keep you from -- one of the reasons why you're being conservative on that 11% goal is because you're going to have some incremental spending on some newer projects. And I think some of those projects will come out at a lower gross margin, or overall operating margin. When we're looking out to '07, can you give any color on what type of pressure we're going to see there -- see from those items in '07, versus are they going to be further along towards your fiscal year 10 goal.

I think the issue is not so much that we think that things we're introducing are lower operating contributors in the long run. There is that ramp up base you often go through right when you've got a new product that is out there that you -- you have the depreciation on the past hard asset investment that you've made into it, you have marketing costs -- all those kind of things. So it takes a while to get to the ramp up. First I want to just clarify that.

I would tell you that next year for the most part, none of the new stuff is going to be so significant that it is going to overwhelm where we're at that we're worried about that, if you will. So by that I mean we think we continue to drive improvement at the operating income line; all we're trying to do is say but we also think that it is dampened a little bit by the fact that we have that stuff going on. But it's not as if we have given up on continuing to drive improvement in that number over the horizon. And I think you will see some variations from quarter to quarter, period to period. Like if you look at the third quarter, it may not be quite as strong as the second, partially because you've got a little bit lower volumes, and you have got some of those product introduction costs that Beth mentioned that are more of a timing issue because they hit very heavy in the second half of the year. So I think you have to think about that 11% goal over the long run and on an annual basis, and it will bounce around a bit quarter to quarter.

And you might have kind of answered this next one. You mentioned healing -- your healing business is doing quite well. I think you said home was decent in the first half. But both of those are not big enough to really make a difference yet. If you look out into '07, and industry growth is expected to slow, and you said in your fiscal year this year at least 7 to 8% -- next year I think industry growth is around 7%. In addition to the industry growth, what new initiatives are you expecting to help drive that near double-digit growth that I think you've spoken about in the past?

First of all, remember we have always said, too, that -- and even that is one of those things that that's the long-term goal, and we'll have -- we knew we had to be stronger when the industry was stronger, too, and if we can completely buck that trend. On the other hand I would say to you what will help us continue to grow at a premium to the industry is -- one, new product introductions in the core business, where we think we can continue to build share. And that is why we have such a focus in the second half of this year of getting those new products out, because we think we're doing quite well prior to them. So that gives us a lot of confidence that we can continue to do even better once those get to market. And we are really getting more and more confident of those products being there and ready at the beginning of the fiscal year.

Now keep in mind those are systems products, which often take a fair amount of time to get their installed base built. But we think it will make us more competitive and differentiated on many projects. So the first thing is to gain share in the core through new product introductions.

The second thing is while none of the individual ideas or new business initiatives, like healthcare, the home, getting in some of the emerging markets -- none of them individually will add up to a lot; it's the collection or the portfolio. What we're trying to do, Matt, is not try to make a single bet on one item, but have a portfolio of ideas that collectively begin to get us to a different place. And I think we're already seeing that today, it's just that if you look at each one individually they don't add up to a lot. But if you take the basket, we're beginning to see that they will have as a group more impact.

So next year the idea is to continue to expand our presence in healthcare with more -- with additional salespeople, as well as new extensions and enhancements to our current product portfolio. The connection with the alliances, we think, will give us a better, more complete picture with customers in that area. We are doing new introductions or reintroductions of plastic products in the home area, as well as we are building our sales and marketing presence in those emerging markets. And we'll begin to see some impact from the work of the Herman Miller Creative Office in the next year, although still quite modest. Certainly the style management business got launched this past year. We expect to get the other new idea we had, which is called Purple, out into the marketplace, although it will be fairly small next year. It's really the year after where we'll start to see more significant impact from that. That's a pretty long answer, but I hope that gets you (multiple speakers)

No, it helps. I just want to jump back to one thing you said. You were talking about new products in your core business and gaining share. If you could -- you mentioned systems, longer-term opportunity there. I know it takes, as you said, it takes a while to build up that base. Where do you see the most opportunity for share gains? You guys have a pretty strong share in seating already. Where do you see these products really helping you to gain share?

I think in the systems arena in particular we can claw some share back there. We have done quite well always. Historically systems is our home court. We invented the category. There might be some people that don't agree with that, but that's what we believe. I think there is some room there for us in two ways.

One is to differentiate and bring a new value proposition to customers, particularly those that have a high degree of folks that need space where they can do creative work, and be able to do that at a value proposition that is maybe more effective than a private office.

We also think there is some room at the lower end of the systems market, where we have not had as strong of an offering as we could have. And that is really our focal point there and how we can bring differentiation aesthetics and Herman Miller design capability to a lower price point. So we think both of those can add value to it.

Of course you've seen us do that already with seating, where what we tried to do with Celle and, quite frankly, with Mirra before that, is try to continue to move out the performance price curve, where we give additional performance along the whole price curve. And it's early days for Celle yet. Mirra is continuing to grow quite well. We're pleased with Caper. So we think there's still some room in that arena as well.

So those are the two biggies for us. Longer-term we think that there is some opportunity of reinvention in the storage arena and personal tools that really we have not spent as much energy on in the last couple of years. So that's kind of longer-term areas to start to explore.

Budd Bugatch.

A couple of other questions. Brian, you did mention discounting, but I don't think you quantified that as an impact on sales in the quarter, or what it might have had. Do you have that number and is it possible to be disclosed?

We didn't because of the complexity with the two price increases. There was a net benefit to our sales if you net out the increased discounting against the two price increases, but we did not quantify it.

If we have an 80 basis point improvement from overhead and a 40 basis point drag from the freight out issue, we had -- that is plus 40. We had a plus 20 basis point improvement in SG&A year-over-year (technical difficulty) gross margin -- I'm sorry -- year-over-year. We're looking for the other pieces of that. You said you had a net benefit between discounting and pricing. What was the other drag?

The one piece I don't think you picked in that is the incentive comp number which Beth gave earlier.

Incentive comp, okay.

You do get some of that as a percentage, right?

Yes. If the delta is $4.5 million to cost of sales (indiscernible) 45% of 10 million? We can figure that out as well. Okay. The other question -- two quickies. The new product introductions -- are you going to wait for Neocon to come out with everything, or are you going to come out with some stuff earlier? I thought -- maybe I thought I remembered that.

We're actually in some ways, Budd -- we're not trying to drive it all just around Neocon. We introduced one of the new systems products as kind of an early launch to the sales force in October, even though the product is not available yet. We'll do another round of that this winter with the dealer community. Our hope is that when we get to our plan is when we get to Neocon that both of the products are orderable, and that we have done advanced launch work with both our sales force and the dealers. We purposely this past year didn't try to target this around showing it early. When we show it publicly we want to be ready to take orders. A little bit different process than in the past.

Have you quantified for anybody yet what Babble or so far Creative Office is doing?

No, we have not. They're still quite small in terms of revenue. They really are not -- they're not significant. And in Purple actually, we have not even actually launched the product yet. We've got one customer that we've done work with that I would call zealous early on. And Babble is just very small and in the beginning stages. And I think you also have to keep Babble in perspective. And this is a difficult one to explain to folks. Babble is not what we're trying to create; we're trying to create a style management business, and Babble happens to be the first product. So in and of itself, if all we did was Babble, we won't get to where we want to be in the long run either.

I understand that. We in the investment community look at numbers and things like that. We get down to the real nitty-gritty kind of stuff. Lastly, before I wish you all a happy holiday -- seating -- can you talk a little bit about that? That's obviously been an important area for you for a long time.

We continue to see great strength in seating. Aeron continues to do well. Mirra is growing, and we're pleased with the growth. We are also seeing good growth in the Caper chair. That is doing well. Celle is of course early, but doing quite well. The international business. A lot of the growth in international is often driven by our strength in seating. So overall seating continues to be an area of real strength for us.

Can you quantify that compared year-over-year percentage of revs?

We don't tend to get into that kind of detail, because that gets into questions about -- leads to other types of disclosures that we would just as soon not make with all of our other friends and neighbors who are probably on the phone.

I just keep trying. Merry Christmas and happy new year to you all.

Same to you, Budd.

At this time we have no further questions. I would like to turn the call back over to Mr. Walker for any closing remarks or additional comments. Please go ahead sir.

We really appreciate you joining us for today's call. We hope that we have answered all of your questions and have given you further insight into our results and what is driving our business. If there are any additional questions following the call, please call Joe directly.

Finally, all of us in the Herman Miller family extend to you our warmest wishes for a joyous and meaningful holiday season. We are looking forward to some time away from our daily activities over the next couple of weeks, and we hope you, too, have the opportunity to enjoy your family and friends during the holiday season. We look forward to an exciting new year in 2006, and we look forward to connecting with all of you at our next quarter's call. Until then, you have our best wishes for the season and a very happy and prosperous new year.

Ladies and gentlemen, that does conclude our representation for today. We do appreciate your participation. You may disconnect.