MillerKnoll Inc (MLKN) 2006 Q3 法說會逐字稿

Good morning everyone and welcome to this Herman Miller Inc. third quarter fiscal 2006 earnings results conference call. This call is being recorded. This presentation will include forward-looking statements that involve risk 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. We will use the remaining time for your questions.

I'm glad to report that we are well on track to accomplish our strategic goal, including doubling the business by 2010. We posted our ninth consecutive quarter of year-over-year growth in earnings and once again experienced double-digit growth in both sales and orders.

I'm also proud of the recognition we recently received in Fortune Magazine as the most admired company in the contract furniture industry. Being ranked first in our industry in reputation of innovation, employee talent, social responsibility and quality of products is a great reflection on the efforts of all 7000 employee-owners of Herman Miller.

Herman Miller has also been recognized as the industry's leader in social responsibility by KLD Research and Analytics, who chose Herman Miller as one of only 16 companies to be included in both the Domini 400 Social Index as well as the Global Climate 100 index. This accomplishment truly reflects the many decades of focus we have had on environmental responsibility.

On the strategic front we continue to make strides in developing distribution and sales in the emerging markets of India and China, and we're looking forward to one of our most exciting years in the history of the Company for new product launches. I just returned from our annual dealer conference where I witnessed firsthand the excitement generated by our two new systems furniture platforms, a new seating product and a new lighting program.

Finally, as you saw in our results this quarter, we also made some more aggressive moves to repurchase stock and further adjust our capital structure. We have great confidence in the ability of our business model to generate significant cash flow from operations. As a result, we plan to work down our excess cash balance.

We raised our dividend 10% this quarter. We purchased over 7 million in stock and also made a $20 million voluntary contribution to our employee pension plan. In short, office furniture demand is solid. We have a powerful lineup of new product being released, and we're expecting continued progress in our business.

With that I will turn the call over to Beth and Joe for additional discussions of our third quarter results. Beth?

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 have not received the press release it's also available there.

First the highlights. As Brian mentioned, we continue to move forward on the commitments that we made. Despite the comps getting tougher as we cycle the industry recoveries we continue to grow the top line at double-digit rates. All of our key financial metrics -- sales, orders, backlog, margin, net earnings and earnings per share improved over the prior year.

In total our sales for the quarter were 424 million, an increase of almost 11% from the same period last year. And earnings-per-share were $0.33, an increase of almost 38% over the prior year. Our orders and ending backlog improved over the prior year third quarter with orders up almost 17%, and ending backlog up almost 12%.

Once again we had very strong cash generation with cash flow from operations of 37.3 million, which as Brian mentioned even includes the impact of the 20 million contributed to the employee pension plan. We ended the quarter with a cash balance of almost 107 million.

Now let's get into the specifics of sales and orders. On a consolidated basis, net sales for the quarter were [above] the middle of the guidance we provided of 410 to 430 million. On a year-over-year basis sales for the quarter were up almost 11% and consolidated new orders for the quarter were up 16.6% compared to the same quarter last year.

As we mentioned in the press release, for comparison purposes it is important to note that the prior year included 12.3 million in sales and 5.6 million in orders from three dealers that we no longer own or consolidate under FIN 46. After removing the sales and orders for those dealers, [cap] sales actually grew 14.6% and comparable orders grew 18.5%. On a sequential basis, meaning second quarter to third quarter, sales and orders were down about 3% and 8% respectively which reflects a more traditional seasonal sales decline.

Our domestic businesses posted a year-over-year gain in sales of approximately 8%, while domestic orders in the quarter grew almost 12% from the prior year. The three dealers that are no longer owned or consolidated are all located in North America, so the reported growth percentages do not represent comparable performance. If you remove these dealers from our results, domestic comp sales increased 12% year-over-year and domestic orders grew 14% year-over-year.

Our international business had great performances this quarter. In fact, we recorded our highest level of international sales in almost five years since the fourth quarter of fiscal '01. International sales jumped up over 26%, led by strong results and large projects in the UK, Canada and South America. And international orders were up even higher at 35%.

As we previously described in our 2010 goals, our intent is to significantly grow our international business. We just opened our new office building and showroom in the UK and it has been extremely well-received. We had more customers visit in the last month than we had in the entire last year at the prior facility. And we just signed a lease for our new showroom in Shanghai, with the opening planned for later this summer. We're moving quickly to take advantage of the potential in the emerging international markets.

Now regarding our backlog, ending consolidated backlog was almost 241 million, up 12% from last year's third quarter level. It has declined from the second quarter level but that is normal due to our seasonal ordering patterns. The good news is that the decline as a percentage from the second quarter to third quarter is much smaller than it was last year.

Now let's talk about gross margin. Gross margin as a percent of sales was up 0.4% from the prior year third quarter. Additional discounting erosion year-over-year was more than offset by the benefits from the price increase, resulting in a net price benefit again this quarter. The primary driver for the year-over-year increase in margin was the increased leverage of overhead from the additional volume this year, which was partially offset by higher freight costs.

Raw material cost commodity prices overall were basically flat this quarter as compared to the same quarter last year. Steel prices remain lower than last year although they did increase slightly compared to the second quarter. This was partially offset by higher plastics and aluminum costs. Overall, both material costs and direct labor costs increased slightly as a percentage of sales due to the mix of products we sold and the channels we sold through. Increased benefit costs also impacted our direct labor costs.

Transportation costs continue to be a challenge. Freight as a percentage of sales is up, both year-over-year and sequentially, as a result of higher fuel costs and shipping patterns this quarter into higher cost shipping regions like California and Florida. Sequentially gross margins declined 0.3, principally due to less leverage of overhead as a result of the lower seasonal volumes, combined with the increased freight costs.

Moving on now to operating expenses, for the quarter operating expenses were 101 million or 23.8% of sales compared to 94 million or 24.5% of sales last year. The prior year's quarter included 3 million of operating expenses related to the dealerships that are no longer owned or consolidated under FIN 46.

As a percentage of sales year-over-year, we again benefited from the leverage of operating expenses due to the additional volume. Overall dollar spending was higher, primarily due to increased selling and incentive compensations, pension and medical benefit expenses, and new product development and marketing costs associated with our upcoming product launches.

The effective tax rate for the quarter was 34% compared to 35.4% in the same quarter last year. The reduction in the tax rate was primarily the result of the manufacturing incentive contained in the American Jobs Creation Act of 2004, which became effective this year for Herman Miller.

When you roll this all up, net earnings for the quarter were 22.4 million or $0.33 per share. That represents a 37.5% increase over last year's EPS and an 11% increase in the cap line, once again demonstrating our ability to leverage our topline growth. 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. Cash flow from operations was 37.3 million for the quarter, and that is after deducting $20 million in voluntary pension contributions. That compares to 40.5 million in cash flow from operations for the same period last year. Higher net earnings, combined with lower working capital requirements, more than offset the pension contribution.

Working capital provided a source of funds of 20.7 million primarily due to lower inventory and accounts receivable balances, which was partially offset by lower accounts payable. Depreciation and amortization for the quarter was 11.1 million, which is about 0.5 million lower than the same quarter last year.

Capital expenditures for the quarter were 11.8 million, up from the 10 million in the prior year primarily due to new product development initiatives as well as the completion of the new office and showroom facility in the UK that Beth just mentioned.

Moving on to our liquidity and cash position, as Brian talked about earlier the big story this quarter was really around our capital structure and our aggressive [implementation] of the $150 million share repurchase authorization that the Board approved in January. We repurchased 70.7 million in stock, almost 2.4 million shares during the quarter. This compared to only 22.7 million for the same quarter last year.

In addition, we announced a 10% increase in the quarterly cash dividend beginning with the dividend payable this April. This should keep our dividend yield in the 1 to 1.5% range. Even with all of that our high cash flow from operations kept our ending cash balance at almost $107 million. Our confidence in the cash generating capabilities of our current business model, combined with the strength of office furniture demand, will allow us to continue to implement the capital structure changes that were previously announced -- approved by the Board.

Thanks Joe. Let's turn to the outlook for the fiscal '06. With three strong quarters behind us we are experiencing another outstanding year. As we look to the final quarter, the macroeconomic picture still looks strong and industry demand is stable. The number of customers visits to West Michigan continues to outpace last year, as does our list of active customer projects.

Based on our backlog and current orders, we anticipate sales for the fourth quarter to be in the range of 430 to 450 million. That is a 6 to 10% increase over prior year's fourth quarter reported sales. For comparability purposes, it is again important to note that the prior year's fourth quarter sales of 407.5 million included 11.4 million of sales from dealerships that are no longer consolidated. Expected growth in sales represents a 9 to 14% increase over the prior year's comp sales of 396 million excluding these dealers.

In terms of our earnings guidance, we expect earnings per share between $0.34 and $0.38, which represents a 10 to 23% increase over the earnings per share of the prior year fourth quarter. But keep in mind the prior year fourth quarter included a $13 million pre-tax benefit from the favorable outcome of the U.S. government (indiscernible) audit that had been previously reserved for, and an additional tax charge of 5.6 million primarily associated with the planned repatriation of cash under the American Jobs Creation Act. Both of these together were about a $0.04 per share favorable impact on last year's fourth quarter results.

We do anticipate a ramp-up of operating expenses in the current fourth quarter related to new product launches for NeoCon. We said it before but it's worth repeating. It is going to be a good year for new products at Herman Miller. That's it for our prepared comments. I will turn the call back to the operator now to open it up for your questions.

(Operator Instructions) Susan Maklari, UBS.

Good morning. Your backlog was up very significantly this quarter. Can you give us a sense for what drove that in terms of project business versus day-to-day business?

I think the project business as a percentage is up maybe a couple points from where it was last quarter; not a significant shift between projects versus day-to-day business from what we have seen.

And in terms of the timing of the delivery of that backlog, is there anything significant in there that could be delayed?

I think about $6 million worth of large projects that are not scheduled to be shipped in the fourth quarter.

And then just in terms of the kind of discounting that you have seen, has that changed much at all during the quarter?

It has not changed significantly. You cannot look at the level of discounting by itself. You have to often take into consideration the price increases. So while as an absolute number it has gone up, we still did see a net price benefit when you combine the two. And that has continued to increase sequentially.

And finally, [just] any sense for how much of the price increase that you put in place in September that you have realized so far?

Probably around 25 to 50%. Right about where we expected. We say if we can get about one-third of that to stick, and we think our experience is running right about where our expectations were.

Okay, thank you.

Matt McCall, BB&T.

Good morning. Beth you hit on the spending outlook for Q4. I think last call you guys talked about 5 to 6 million incremental spending second half versus first-half, and it looked like only about -- Q3 versus Q2 was only up about 1.3 million. Are you still looking for about 5 to 6 million total for the second half of the year versus the first-half?

Yes. It tends to hit in the fourth quarter because that is when the big spending happens for the new product launches that we get ready for NeoCon, and also the expenses related to NeoCon that happen in the fourth quarter.

Okay so most of the incremental spending is just associated around the new product launches at NeoCon. So does that imply that the first-half of '07 gets back to a more normal as level or are you going to start seeing some incremental spending from some of these other new initiatives?

Fourth quarter tends to be the highest. You will still see increased year-over-year spending and operating expense level due to some of the newer initiatives, but we're doing our best actually reallocate resources to fund most of those.

This is Brian. The launch will not end just with the fourth quarter, because really some of NeoCon hits fourth quarter, some hits first quarter. So you kind of see -- you remember NeoCon straddles year-end for us. As well as you can imagine, NeoCon as a big point in the launch but it is not the end of the launch. There is still a lot of activity after that.

As well as both Beth and I mentioned in our prepared comments, we do have a fair amount of other things beyond the core business product launches like the opening that we're going to do in China this year. So we will start to see the cost of the new showroom the first and second quarter. So there will be some other year-over-year things, so you will not necessarily see it go back to where we were earlier. Although as Beth said, we're doing our best that as one program ends we're trying to reallocate it rather than assuming it is all incremental.

You've given us an order of magnitude for the second half as of the first half of this year. Can you elaborate on the increases next year, where you expect those to be? Is it low single digit millions or --?

It is actually a little early for that, Matt, in terms of having it broken down by first half/second half. I think certainly as we get to the end of this year and we start to look at -- looking at the following year, once we get into June we will have a better idea for you [probably] broken down in that kind of granularity.

(multiple speakers) [We will] go back to our longer term goals that we laid out in the 2010 strategy documents that we've talked about previously, (multiple speakers) our longer-term goals of expanding operating income. And another thing to remember when you look at the first quarter is last year we had an extra week in there.

This year we had an extra week. (multiple speakers) So when you get to next year, you are going to see a lot of numbers look a little funny for that first quarter, right? (multiple speakers) The comps will look different, right?

Yes. You talked about the cash outlook and I think Joe alluded to it as well, working down your cash balance a little bit. Can you give us kind of an outlook of where you see that going? And then maybe rank your areas of focus -- [I mean] you increased the dividend. Joe talked about the yield or target yield, and I guess share repurchase will still be there as well --?

Our overall target right now is to try to get the cash balance down to around $60 million, give or take. Of course we will be smart about how we get there. And we will look at obviously what our ability is to pick the stock up at the right times and when we have other things due, like debt payments and that kind of stuff. As well as of course, we are hoping that part of the go forward plan is acquisitions, and so it will also depend really on how successful we are on that front. Because that is an area that we tried to add some focus to over the last couple of months with the belief that we will need to supplement to our internal development to get us into some of the new market areas we're interested in.

This is Joe. Just to add on that a bit, the other piece that is important to remember is in the current year also took advantage of the AJCA rules. We brought back about $44 million from the international entities. The (indiscernible) allows us the opportunity also to work the cash balance down as we brought a lot of that back that was kind of trapped in the international countries and put it back to work here in the U.S. for us.

Okay. And that cash target of 60 million, is there a timeframe? Is that by year end or opportunistically?

It is 50 to 75 million over the next -- within the next 12 months.

Okay. Then if you could talk about the [seat] -- I guess the month by month demand trends you saw. We just have industry data through January, but it looks like the industry was up on an average of 11.5%. I think February comps probably get a little bit tougher. But your 8% shipment increase is a little bit lower than that. Did you see any type of slowdown in February?

Remember the 8% is before you consider the three dealers.

What is that adjusted?

It was 12% of (multiple speakers) you have to look -- we always caution not to look at comparisons to the industry on a short-term basis. You have to go back 12 to 18 months. And [we feel] comfortable that we continue to exceed the industry growth rate.

But no slowdown in February?

I don't think there's any trend yet that we have seen emerge that is a clear directional change at all. This is always that period of time that you're still watching the numbers coming out of the seasonal effect. And traditionally you start to see that change. In fact if you go back and look at last year, we really saw a lot of the change is more toward the first and second week in March. So that is that period of time we you're still watching to see what the trendline is going to be from here.

But I think overall, as you could see from the gross numbers from the quarter, we really did not see a big directional change. In fact the seasonal effect was a little less than you've seen in some years. I think orders were up 3%, move from Q2 to Q3. That is a little less than you have seen in some years. I think that probably speaks as loud to the overall -- how solid the industry is, but I think like everybody we are continuing to just watch it. But we do not see any direction one way or the other yet. It will be interesting to see as other folks start to release their numbers we will get a better picture of what is going on.

Okay. Then quickly the tax rate, 34% -- what should we use going forward?

34 to 35 I think is good at least for the full-year this year and probably next year.

All right, thank you very much.

Chris Agnew, Goldman, Sachs & Co.

(indiscernible) I know you mentioned international sales were due to large projects, UK, Canada and South America. But if we were looking forward at international orders, and they strengthened year-over-year sequentially, could you just give us a little more color here maybe by geography, by product? Is there anything in particular driving this continued strength? Is it the continuation of the same large projects? Thanks.

First of all -- this is Brian. You know that -- I think when we've talked about this before that a big part of our strength in international generally is around seating. We do -- we have a higher mix of seating generally in international than we do otherwise. That is less true, by the way, when you get to places like Europe and particularly in some of the smaller -- markets where we have a smaller position and seating tends to be our lead.

Much of what you saw in the quarter though was those driven by large projects, primarily where we have continued to win. And I think that is not only evidence of strength in seating but our Abak environments product line has done really well in many markets, including some big projects in Latin America as well as in Australia. And it is kind of the anchor a product line of our new European and particularly UK group.

But it is very project driven. This business does move around a lot more than the domestic business where you have a much more uniform sort of coverage, if you will.

Okay, great. And I guess sticking on international, I know you talked about this Shanghai showroom, but can you expand a little bit more on your latest plans in both India and China? And are you considering acquisitions in these two regions, and where would you be looking? For distribution or manufacturing?

Well, first of all let me tell you -- I would tell you about India and then we will talk about China. Then I will come back to your question on acquisitions, okay? India last year we opened our first commercial office in Bangalore. I think we're up to around 7 folks down there, primarily sales, marketing, [state] planning type people. We opened a number of dealers. We would expect that sometime in the next 12 months or so we will open an additional office in Mumbai. And then we will start to figure out where we go from there.

For the most part our focus in India has been around servicing either our multinational customers or the BPO organizations that are down there doing a lot of business outsourcing, and that has been a reasonable mix for us. Of course as a percentage of our total sales it's still quite small. But as that region continues to grow in terms of white-collar employment, we do see that as a reasonable market for us to get into. Especially -- even in many cases the folks that they are hiring are fairly high-end people in terms of education, social status and those kinds of things. So that is it on India.

China, we have been in Hong Kong for many, many years and had a presence there, and that continues to be a big part of our -- today's commercial sales. This past year we began to hire sales people and build our commercial organization in mainland China and appoint dealers. This next year the plan is that we will obtain our status to be able to trade in the country, because today in many ways the dealers are actually buying from our international supply sources, meaning from Herman Miller in other locations and importing it themselves, so we have more of a representative structure.

Our hope is to build -- or plan it to build that legal entity structure which is not easy in China, if you know how that works. Getting the Shanghai showroom is the first step, because you have to have a legal address and a bunch of other little qualifications. So the showroom is meant to be sort of the beginning of the center of our commercial entry.

Our focus for the most part commercially will be on seating and our classic products where we had think we have a high degree of differentiation. That will be the first move. We will then follow on with that and start to look at more furniture products, or if you will systems furniture. That will probably take some level of new product investment to meet where the Chinese market is.

We also planned later next year, probably in the second half, to begin to have a manufacturing or operational presence there. We're working with our suppliers and we bought stuff from China for many, many years in terms of supply. But we have -- one of our more significant suppliers that we're working with to set up an operational capability on the ground, primarily beginning around seating assembly and then we will move from there. And our vision is that that will become our hub operationally for most of what we do in Asia as well as for China.

Excellent. Thanks. And actually one last question which is really a clarification point. Which quarter do the three dealers roll off for comparable purposes?

First quarter of next year we will still have them in there. So we're going to see them for the fourth quarter and for the first quarter next year. And then second quarter next year it will be clean.

Excellent, thank you.

I forgot one part of your question actually as I looked at my notes, Chris and that was about acquisitions.

Right, sorry. I thought you mentioned it on China.

I would say primarily our view is, especially in India I do not see us doing acquisitions in India. I don't see anybody down there that we would be particularly -- we did obviously look at that as an issue, do not think that is the case.

China, our existing plan is that we will go into the marketplace on our own. We believe that there is a reasonably good size market for us around our end of things and with our brand. On the other hand, as always, we will also look for whether or not we can find a good partner, whether that be alliance or acquisition, to try to accelerate our plans. We do not think that our strategy for China requires it. However we will be open and we will look around and see if we can find somebody that fits both culturally and brand-wise to get us where we want to be.

(Operator Instructions). Todd Schwartzman, Sidoti & Company.

Good morning. Could you talk about the product areas that you may look to, either enter or beef up through acquisitions?

This is Brian. Our [view right now] is that primarily on the acquisition side we have done some, we think, very important alliances in the last year, particularly around soft seating community areas with a company by the name of Bretford, which we think is going to a great partner for us and as well gives us some ability to do some co-development potentially in the future.

And we have also done an alliance with a company by the name of Brandrud on the health-care side, which really is giving us more of a presence in the health-care area for lobby, waiting room and to a lesser degree patient room, which is a big areas interest for us.

I would say going forward most of our acquisitions that we're interested in have less to do with office furniture product extensions as much as getting us into this new areas, such as health-care. In particular on the clinical side of health-care where we would like to have a bigger footprint. Certainly, as I mentioned in the last question, we will look around and see if we can find a partner that we think would accelerate our work in China. I don't know if there is one of those.

And beyond that we do think that there are other areas that are sort of a hybrid between some of the very new markets like health-care and what is happening in and around the workstation, but not necessarily furniture-related.

Great, thanks a lot.

(Operator Instructions) Mr. Walker, there appears to be no further questions. At this time I would like to turn the call back over to you sir.

Thank you all for joining us today. In closing, we appreciate you for joining us and we hope we've given you further insight into our results and the underlying drivers for our business going forward. If there are any additional questions following the call, please call Joe directly. We hope many of you will have the opportunity to visit us at NeoCon this June in Chicago. It promises to be a showcase for Herman Miller innovations, and we think you and our customers will like what you see. I hope to see you then and we look forward to talking to you again following this quarter. Have a great day.

This does conclude today's conference call at this time. You may disconnect.