MillerKnoll Inc (MLKN) 2007 Q4 法說會逐字稿

Good morning, everyone, and welcome to this Herman Miller, Inc. fourth quarter fiscal 2007 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 Forms 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 participants 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 always, I'll open our presentation with a few introductory remarks, then turn the call over to Beth and Joe for a more detailed review of our results. We'll keep our prepared comments brief so that we have time for any questions you may have.

I would like to acknowledge that Curt Pullen, Beth's successor to the CFO role, is here with us today. Some of you had a chance to meet Curt at NeoCon, and he will be getting out to meet many of you over the next six months.

We are pleased with the results for fiscal 2007 and the fourth quarter. We had a strong year of financial performance and set the stage for further strategic growth. The new systems products we introduced at the beginning of this year have exceeded our expectations. As we noted in the press release, we have some work to do on their profitability, and that will be a key focus in 2008.

Our international business had a terrific year in 2007. Our investments in distribution, new products and local operations have enabled us to capitalize on strong demand in these markets.

As we head into fiscal 2008, we are optimistic about next year and confident in our long-term strategic plan. While the macroeconomic picture is mixed, we believe the North American office furniture market will continue to grow, albeit at a moderate rate. We continue to believe international growth will be stronger than the domestic market. We also expect solid growth in our healthcare business in 2008. All together, we expect to see topline growth in the mid single-digits for fiscal 2008. This should enable us to continue to drive reasonable leverage to the bottom line, good cash flow, and improving EVA. Of course, this is based on what we have visibility to today. If conditions change, we have the agility to respond.

Many of you have asked, does this moderating growth rate represent a turning point for industry demand? As I said in the press release, while we believe domestic growth is moderating, the overall dynamics still appear to be positive. Project activity and customer visits remain solid, and we're coming off a great NeoCon. Industry observers suggest there was a record attendance for the show overall, and we saw more than our share in our showroom. We enjoyed a strong response to our new product and market introductions, including Convia, our Be Collection of personal accessories, our healthcare display, and several new introductions in that space, and our display of recent international product introductions.

We received four major product awards, including two gold awards for key alliance partner design, and were recognized by the industry's dealer association for best products and best technology support. These new designs, vertical market displays and the awards speak to our progress in diversifying our business. As you know, our intent is to have at least 50% of our growth come from new and emerging markets by 2010, and we've seen clear progress towards that goal.

Convia has launched and is receiving great response in their marketplace. We've launched an important new accessories business, and our international group has continued to outperform expectations. Over the next 12 to 18 months, we expect to launch several new products in the office furniture segment, and we have some important developments in the queue for international and healthcare.

In summary, we had a very good fiscal 2007. We have delivered on the goals we established three years ago. We are optimistic about 2008, but realistic about the domestic growth expectations. And we believe the investments we are and will make to grow share and differentiation in the core business, combined with a portfolio of investments to expand our market opportunity, will enable us to achieve our long-term strategic goals. We are committed to delivering great performance for our customers, shareholders, and employees in both the short and long-term.

With that, I'll turn the call over to Beth and Joe for additional discussion of our fourth-quarter results.

Thanks, Brian. We had another solid quarter, with over a 9% increase in sales, an 8% increase in orders, a 21% increase in backlog, and a 32% increase in earnings per share. It was a good ending to a year that represents our third year in a row of double-digit annual growth in sales and orders, as well as a record-setting year for earnings per share -- our highest year ever, at $1.98 per share.

Let's get right into the specifics of sales and orders. Sales of 485 million represented our 14th quarter in a row of year-over-year revenue growth, and orders of 477 million represent the 15th quarter in a row of year-over-year order growth. On a sequential basis, fourth-quarter sales were consistent with the third quarter and orders increased 4%.

Orders in the first half of the quarter were a little slower than anticipated, averaging approximately 35 million per week. We believe this was due to the February price increase that pulled orders forward into our third quarter. In the second half of the quarter, order rates picked up nicely, and the weekly average was closer to 39 million.

The timing of the orders in the quarter made it a little challenging to hit our revenue estimates. We did get there, but at the low end of the range we established. As I'll talk about shortly, the good news is that we have a solid backlog as we head into the first quarter.

North American sales of 389 million increased 7.5% year over year, but were down slightly from the third quarter. Our vertical markets of healing and home both posted continued year-over-year revenue growth. Non-North American sales were up over 19% year over year, aided partially by a weakening U.S. dollar, which favorably impacted sales for the quarter by 3.4 million.

European sales were great, with broad over-performance across most of the region. We've experienced particularly strong growth in Italy, where last week we just opened a new showroom in downtown Milan. Moreover, we were recently recognized in the UK with the prestigious Queen's Award for Enterprise in International Trade.

Asia and South America also had exceptional quarters.

Now let me shift gears and talk about our backlog. Ending consolidated backlog remained robust at 288 million. Backlog grew almost 21% from the prior-year fourth quarter. In fact, ending backlog is the highest it's ever been in company history heading into the first quarter, which bodes well for the first-quarter shipments. It's consistently strong in both North American and non-North American regions -- a well-balanced backlog.

Sequentially, the backlog balance is down 3.1% from last quarter's 297 million. However, remember last quarter we had a significant amount of government business in the backlog that was shipped but waiting to be recognized. A good portion of that did get recognized in the quarter, which helped to reduce our backlog, but we also had considerable new government business during the quarter. As a result, our fourth-quarter ending backlog also has approximately 6.4 million more than the prior-year fourth quarter, due to government-related shipments that haven't yet been recognized as revenue. Most of these new orders will be recognized during the first quarter.

Now let's talk about gross margin. Gross margin at 33.6% of sales decreased 40 basis points from the prior-year fourth-quarter level of 34%. The decline was due to the unfavorable startup costs associated with the new systems products we introduced during the year. The demand for our new products has been outstanding, but that better-than-anticipated demand presents its own challenges as we manage the higher volumes at the same time we are establishing the new manufacturing processes. Importantly, quality and leadtimes didn't suffer. The good news is product margins increased throughout the quarter and we have a plan for continued improvement. Overall we're delighted to have to deal with this problem. The lower new product margins were partially offset by a strong benefit in the quarter from the price increase just implemented in February and from the leverage gained on the incremental volume.

On a sequential basis, gross margin improved 60 basis points from the 33% recorded in the third quarter. The benefits of the price increase, along with improvements in commodity prices, more than offset the manufacturing startup costs of our new systems products.

Raw material commodity prices overall had only a small unfavorable impact on gross margin this quarter compared to the prior year, and improved sequentially from the previous quarter. The biggest improvements were in steel and aluminum. We expect slight year-over-year benefits from steel prices in the first quarter, as they have continued to decline. Aluminum costs are now relatively stable and should have only a small unfavorable impact in the first quarter.

Our transportation and distribution costs this quarter declined as a percent of sales from the prior-year fourth quarter. Fuel costs were comparable, and our shipping patterns were consistent. The primary reason for the decline in the current quarter was due to the team's focus on improving the utilizations on outbound truckloads. We implemented a system change that allowed us to consolidate a much larger proportion of shipments.

On another note, our distribution team was just recognized by the Michigan Department of Labor and Economic Growth with Star Award, the State's highest workplace safety and health award, a significant honor.

Let's move on now to operating expenses. For the quarter, operating expenses were approximately 119 million, or 24.4% of sales, compared to 114 million, or 25.6% of sales last year. Most of the increased spending in the current year was the result of variable selling costs driven by the higher sales levels, and incremental employee compensation and benefit costs. We also were impacted year-over-year by FAS 123R, the stock-based compensation accounting standard.

When you roll this all up, operating income rose to 9.2% of sales, up from the 8.4% recorded in the fourth quarter of last year, but down sequentially from the 10.1% recorded in the third quarter of this year. We said last year we weren't yet ready to increase our minimum operating income target. We knew we would face some challenges associated with the manufacturing startup of our new products, and we did. We do plan to continue to make strides towards our goal of consistently providing at least 11% operating income, and you should see some gains in the first quarter.

We're also pleased that our international operating margins continue at the same level as our North American business.

Moving on to taxes. I'm sure you noticed a lot going on within our tax line this quarter. Our effective tax rate for the quarter was only 24.4%, significantly lower than our previously forecasted rate of 32%. The decrease from our forecast was predominantly due to increased foreign tax credit utilization. The recently filed 2006 U.S. tax returns had 1.4 million higher-than-anticipated foreign tax credits as a result of our improved foreign source income and some additional tax planning work.

Based on those 2006 results and our anticipated future foreign source income, we determined that our existing foreign tax credit carryforward no longer required a $2 million valuation allowance. This was the biggest factor driving our improvement from the forecast.

In total, the lower tax rate impacted EPS by approximately $0.03 for the quarter after adjusting for the incentive impact. On a full-year basis, the effective tax rate was 31%, down significantly from the U.S. statutory rate of 35%. In addition to the increased foreign tax credit, we achieved considerable tax savings during the year from the new domestic manufacturing deduction, the research and experimental tax credit, and our increased foreign sales helped improve our export sales tax incentive. While much of these savings will continue into next year, we will not again experience the $2 million adjustment to the foreign tax credit valuation allowance. In addition, we anticipate higher state income taxes, as more states move to a sales-based apportionment. Going forward, we expect our effective rate to moderate up to between 32 and 34%.

Consolidated net earnings for the quarter were 31.7 million, or $0.50 per share. As we mentioned in our press release and as Joe will talk about next, we've continued with substantial share repurchases this quarter. Our reduced share count as compared to last year added $0.02 to our fourth-quarter EPS.

Now I'll 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 drove source of funds of 46.3 million this quarter as compared to 48 million in the prior year. The small year-over-year change was primarily due to increase in working capital requirements. On a full-year basis we generated over 137 million in cash flow from operations, another really strong year of cash flow.

Capital expenditures for the quarter were 12.8 million as compared to 16.2 million in the prior year. For the full year, our CapEx was only 41.3 million compared to 50.8 million in the prior year. We continue to rationalize our capital spending across the business.

We had some good news in the fourth quarter around our facility in Canton, Georgia. As you may recall, we have had it up for sale since we consolidated that facility into our Spring Lake, Michigan campus. We received an offer during the quarter and moved quickly through the closing process.

We collected 7.5 million in proceeds during the quarter. From an income statement perspective, that was just about in line with the amount we had on the books. There was no significant gain or loss recorded.

Moving on to liquidity and cash position, early this quarter we received forward authorization for an additional 100 million in share repurchases. We took advantage of the low stock price during the quarter to aggressively buy back stocks. In total for the quarter, we bought back almost 2.1 million shares at an average price of $34.43 per share, for a total cost of 71.5 million. As of the end of the quarter, given the additional proven amount, we still have approximately 139 million remaining on our board authorization. Given the current stock price, combined with our available cash balance, we plan to -- we plan to remain aggressive in the marketplace during the first quarter.

As a result of the significant share repurchases, we were able to work down our excess cash balance and ended the quarter with a balance of 76.4 million, down from the 103.5 million we had at the end of the third quarter. Our intent is to continue to work down the excess cash balance to approximately 40 million, which represents our international cash balances.

We continue to have adequate financial flexibility in our balance sheet. We made a $3 million scheduled paydown on our private placement notes this quarter. As a result, our debt levels are down to 173.2 million, and we have approximately 136.9 million available capacity on our bank revolver.

Thanks, Joe. Let's turn to the outlook for the first quarter of fiscal '08. Given our high ending backlog, we anticipate another strong quarter for sales. We expect first-quarter sales to be in the range of 480 million to 505 million, representing an increase of 7 to 12% over the prior year. This assumes weekly order entry rates of approximately 34 to 38 million per week for the first half of the quarter, which reflects an anticipated summer and holiday slowdown. Keep in mind we have a difficult comp because last year's first quarter represented a 12.4% increase after adjusting for the extra week in the first quarter of fiscal '06.

In terms of earnings guidance, we expect earnings per share between $0.47 and $0.53, which represents an increase of 9 to 23% over the prior year. Higher production volumes will provide increased leverage that will benefit both gross margin and operating margins.

While we plan to make progress on the efficiencies in the manufacture of our new products, we still anticipate an unfavorable impact on gross margins in the quarter. Overall, we expect an improvement in our total operating income percentage. Our effective tax rate for the quarter will increase from the low level we saw in the fourth quarter and be more in line with our historical average rate of 32 to 34%.

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

(OPERATOR INSTRUCTIONS). Chris Agnew, Goldman Sachs.

First of all, maybe thinking about gross margin. Is it fair to assume that the new product startup -- the declining gross margin due to the new product startups -- that's offsetting the volume growth, the volume benefits you're getting. Would it be fair to assume that that will continue right through the end of this year? Maybe sort of can you explain how long these product inefficiencies -- you expect them to continue.

I think we normally say that it takes two to three years for new products to get to their average gross margin that we would anticipate going forward. So we're coming into the second year now. We expect to make progress throughout the year. And by the end of the fourth quarter, hopefully, we'll be at a run rate which is much closer to our other systems products.

The first part of the question, the sort of negative gross -- the decline in gross margin as a result of the new product startups. That's offsetting the benefits you get from volume?

Correct.

(multiple speakers)

Would that be fair to assume for the rest of the year? So effectively, gross margins will be a little bit lighter on a year-over-year basis.

For the first quarter, I think, we're anticipating a 33.5 to a 34.5 gross margin, somewhere in that range.

Actually, Chris, I think, in total we think we'll see at least a slight improvement in gross margins next year. Probably we'll see it more towards the second half of the year, as Beth said, as we make up some of that ground. We're also likely to have less variable compensation in the overhead level, so that will give us some offset to the higher cost of those individual product lines.

Along with the increase, the price increase that is also coming into play now.

The other thing I would add, Chris, is the wild-card, of course, is the commodity costs for raw materials that we continue to pay attention to. In the short-term it looks reasonably favorable for the first quarter, but we're going to watch that one as we go through the year as well.

Okay. A question on competitive environment. [With a] moderating growth rate for the industry, what's the competitive environment seem like? You made some comments -- your ability to get some price. Can you (inaudible) some comments there, please?

So far I would say to you that, again, while growth rates are moderating a bit, demand still is pretty strong, at least compared to what we've seen the last four or five years. So I think so far, the pricing environment still seems reasonable, I guess, is a way to put it. Our business, as you know, we compete every day of the week on a bid basis with new projects. Those, of course, are always a challenge, and I don't think that ever changes from one cycle to another. But overall, I don't think we've seen a change in tone around pricing generally. Certainly you see time to time when particular customers or a particular region gets more competitive than another, but overall I would say we don't see any great change.

Maybe one more question before I'll let some others get on the call. With Convia and other investments you're making, how should we be thinking about operating expense lines through the rest of this year? Are there any particular quarters or any particular investments we should be reflecting? Thanks.

There's nothing particularly related to those investments that will drive a substantial increase or variation in any one particular quarter, at least not in the next year that we can see. So I don't think there's anything in there that would cause you to change a forecast for a quarter. The only question really will be ramp-up on the topline of some of those towards the second half of the year, would probably be the bigger question. (multiple speakers) operating expense side whether or not the revenue number starts to pick up.

Todd Schwartzman, Sidoti & Co.

Just trying to reconcile -- I hope you could do so for us -- the strong finish to the fourth quarter, with what might be construed as lowered expectations for Q1. In other words, what are you seeing in the month of June thus far, or maybe not in -- very late in Q4 that's causing North American order growth to maybe decelerate a little faster than some of us had expected?

When we look at our forecast for the first quarter, we take into consideration the ending backlog, and assume that the majority of that is going to ship next quarter. And then we take what we expect for average orders for the first seven weeks of the new quarter. And while we've had strong orders for the first three weeks of this quarter, we know that summertime is normally impacted by vacations and holidays. So in fact, next week, with the July 4th holiday in the middle of the week, we're anticipating a much slower week of orders.

The other thing I would add to that is I do think this also reflects the fact that one of the things that we have become more aware of in the last couple of quarters is that we have a fair amount of business where we're involved these days all the way down through installation, which in fact makes revenue recognition a little harder to predict than just when it's going to be manufactured. So one of the reasons you've seen us broaden the range out a little bit is recognition that we're not in control to the extent that we can just ship it; we've got to ship it; get it installed; get the customer to sign off on it. That is giving us a little bit broader range in what we think we we'll actually see captured in terms of revenue from new orders.

The other thing is, I think, you're also seeing us be realistic, if you will, in that as growth rates moderate, it gets just a little harder to predict what we're going to see. As we talked about in the beginning of this quarter, it was a little bit lighter; it picked up; it's been fairly stable since then. We feel really confident about the range for the first quarter. And I think the thing we're beginning to ask is what do we see happen late in this quarter, i.e. the first quarter, in terms of setting us up for the second quarter and beyond? That's more where the question is.

So, I think, when you look at it, it's best that it's the holiday effect that does hit us in that kind of July timeframe. You also have to remember that Europe always has a bit of a down cycle in August as the vacation period hits over there. So all those things combined have just led us to say we've got to broaden the range out a bit as we look to what we've experienced in the last couple of quarters.

But it's still a strong 7 to 12% increase.

Is it safe to say that for the remaining quarters this year that we should expect to see the continued wider, broader range in terms of guidance?

I think yes, based on what we can see today. But that's one of those -- I would tell you we're giving you guys our best information and estimates based on the visibility we have today. I think as we get through this quarter, we'll have a better picture as to what the rest of the year looks like, and we'll update you accordingly.

Matt McCall, BB&T Capital Markets.

Brian, I think you mentioned it in the last comment or last question again, but in the previous question you had commented about a pickup in the second half, or an expected pickup in the second half. I just want to make sure I heard that right. If I did hear it right, what leads you to believe or forecast that things could get a little bit better as we approach the second half of the calendar year?

I wasn't referring to a general pickup in the second half, in terms of growth rates, anyway. Obviously, we would -- if we're continuing to grow, the second half would probably be a little bit bigger than the first in terms of actual dollars. But it's not necessarily because we expect growth rates to pick up. What I was referring to particularly is the question was do you expect operating expenses to vary for some of these new investments like Convia? And my answer was no; I don't expect operating expenses to vary. But the revenue side of some of those programs are sort of back-end loaded. So where you might see more variation is if we see one of those begin to actually hit its stride in the second half of the year.

Now in terms of the total business, as you know, those things are all still very small. But if we get to some of the goals for the year, it could move a particular quarter around by a point or so just because they're going from virtually nothing to something in revenue, if you follow me. But that wasn't a comment about the general tenor of the business.

Thanks for the clarification there. Let's see -- I think there's a lot of concern -- obviously, we've seen -- I think you heard Leggett & Platt (inaudible) and one of the things they commented on was their commercial business had weakened, obviously, the results. And I understand there are a lot of ins and outs to the results from Steelcase yesterday and from you guys, but are there any similarities to what we're seeing in the current -- and maybe you could comment on the differences between the North American environment and the international environment. Any similarities in what you're seeing now and what you saw prior to the onset of the previous downturn, just to maybe ease some minds further?

First of all, I think, what you are seeing -- and this really follows the macroeconomic trends that we all watch, that certainly the international markets had been stronger, because I think their general economic prospects in those countries has been stronger than the U.S. And in fact, there's been a fair amount of movement of things to some of those places (inaudible) that's in the case of Asia.

In the case of Europe -- and Europe's been in a very slow economic cycle for as long as most of us can remember. So having the last 18 months or so start to see Europe turn around, obviously, has helped everybody. And I think you can see folks talking about Europe being strong, as well as Asia. So I think it's really driven by -- as we've always said, in the short run our business is often driven by corporate profits followed by employment growth. And that's what's happening in those sectors, I think, and in particular in Asia, where you're seeing lots of employment growth.

I don't know that we've seen anything that would tell us we're seeing similarities to what happened before the last downturn. I think maybe the biggest difference is we never saw the peak either the way that we did back in 2000 or 2001. But I don't think there's any sign yet of demand dropping off; in fact I would say from what we hear from the architectural design community, they're still quite busy and, in fact, seeing new projects come on the board for them. Customer visits are still quite strong. And certainly we haven't seen the kind of general economic condition that we saw preceding the last downturn for the U.S. economy. So overall, I would say, I don't think we see a weakness; we just don't -- we see moderating growth versus a weakness in demand, if you follow what I mean. I think those are (multiple speakers) but importantly different.

I think there's a definite difference in the business today compared to what it was before the last downturn. Companies in general over the last few years have been much more cautious in how they are spending their dollars, and there isn't that exuberance or overspending that we used to see. And the projects seem very well thought out. Corporate profitability is definitely stronger than it was at that point.

That's all helpful. Joe, I know one of your metrics you've cited before is any delayed (inaudible) canceled projects. Can you give us an update on anything you're seeing or hearing from the sales force?

Actually I've got Curt in the room as well, too. There's nothing that I've heard of in terms of significant delays or cancellation in orders. Curt, from the dealer distribution side, has any of that shown up?

This is Curt Pullen. Having been responsible for the dealer channel for the last couple of years, we've got a great channel. And they are continuing to be very active in their marketplaces, and they are hiring folks after the projects, chasing everything they can, and are very busy. As Beth was saying, the last time around -- back to this question around the conditions prior to the turndown, the clients we're seeing now are much more deliberate about what they're doing and what they're asking for. So there isn't the haste of activity associated with this the last time around, and it's elongating some of the project activity at the front end, but the dealers are very confident about what they're seeing. They're busy, adding staff, and they're in great financial shape.

Curt, that elongating of the decision cycle around new projects, that's part of what makes the visibility even more tricky, as I was talking to Todd's question about, Mart, in that when you have people elongating, and the salespeople are trying to predict not only when is that project going to get approved, but when is it going to get installed. And as the customer is more deliberate, of course, the salesperson's ability to predict exactly when we're going to see an order gets a little bit more complicated.

My final question -- that kind of leads into it -- the visibility. I just want to try to reconcile the guidance from last quarter, what you saw during the quarter, and what you said in -- or at least what you said in the press release. Last quarter when you gave the guidance, we were about a month into the quarter. And from what you said in the press release and, I think, on this call, that started out slow but picked up. But yet -- I guess what I'm missing is we were halfway through the first part of the quarter when you gave the guidance; you ended up at the low-end of the range despite a picking up of the pace at the back half. Should I look at it as just that's the reason backlog was so much stronger, because most of that pickup in orders stayed in the backlog?

I would say yes.

That's correct.

When you look at what we can ship in the quarter, it normally represents the first six to eight weeks of orders. And at the time of the call, we always only have usually the first two or maybe three weeks since the end of the quarter. So you still have four to three or four to five more weeks worth that happen after this call [that] the orders come in and get shipped out. And that was where there was a lower rate.

Matt, again, I'll just keep beating this thing. The other issue with the visibility is, even though we have it in the backlog and we can manufacture and ship it doesn't mean we get revenue recognition on parts of it. So what you also saw happen with a fair amount of business this quarter, I would say even down to the last couple of weeks, we didn't know whether a few projects -- if they would have come through, we could have been in the middle of the range. So you get into this thing of saying, well, we had some of that stuff happen to us in the third; we (inaudible) in the fourth; let's make sure that we're being real about the visibility we do have in terms of predictability.

It's very easy to have a 3 to $10 million shift in the last week of the quarter in terms of how much we're invoicing versus our expectations.

And our credibility with you guys is often based on us being as transparent and as open as we can about what we actually see. And while sometimes that causes a little bit of short-term pain, that's been our policy for many, many years. And we're going to stick with that. We'll tell you what we can see as best we can tell, and you'll get the good, the bad and the ugly.

I apologize to those after me, but that leads to one more question, and I want to make sure I understand. I think the previous quarter you had some impact on the margin lines from just that, from some projects that didn't ship. I think it was a snowstorm and/or government-related issues. And you said there was an impact, or there's, I think, $6.4 million of government business still on the books. Is there a potential margin impact next quarter from the disconnect between the shipment and recognition? And I'll hop off. Thank you, all.

I don't think we have anything that we think of that size in there next quarter, Matt, that we're aware of. I think you're referring to the fact, I think, last quarter we had an issue with absorption where we absorbed some overhead (multiple speakers) second quarter (multiple speakers) and it went into inventory, so we didn't see quite the same kind of leverage.

So the 6.4 million is not the same thing?

No.

(OPERATOR INSTRUCTIONS). Chad Bolen, Raymond James.

This is Chad filling in for Budd, who is traveling. If I could, could you give me a little bit of color on the performance within the product categories? Are you seeing any notable trends or any notable changes in performance among, say, seating, versus systems or freestanding?

I don't think there have been any significant shifts in our product lines. As we've said before, seating tends to be a little bit more profitable than systems. And with the new products coming online in the systems category, that gets exacerbated a little bit. But other than that, no; nothing that is out of the ordinary.

The biggest notable change, the one we already talked about, was the kind of great pickup from the new products. So when we look at the Vivos and the My Studios and the new systems products that we launched, that's probably the biggest thing that I would talk about in terms of impact from a product perspective.

And Joe, will those have started to impact overall margins, at this point they're not significant enough in the short run that they would move the percentages in terms of mix around greatly. Although as we look to next year, we might begin to see some of that shift happening, which is why, back to one of the earlier questions, I think, from Chris Agnew, that we do have a sort of, if you will, dampened ability to generate margin leverage next year because we're expecting those things to become a little bit bigger mix.

Sure. If you would, you mentioned the strength in Europe in the non-North American category. Could you give us an update on the China business?

Sure. The manufacturing operation is up and running, producing product. Most of what they're producing today is seating. We'll begin to produce what the international folks call furniture, and in the U.S. vernacular that's systems, if you will, although not panel-based systems, more desk-based systems, as we move throughout the summer.

The margin levels are equal to or maybe slightly better than what we originally forecasted for the first year of its operation. We're really happy with the fact that it's up and running, we're gaining traction. I would tell you that the volume right now coming out of that manufacturing site is feeding both China as well as greater Asia. In fact, I would guess the majority of the volume today is going to greater Asia. But we're very happy that we're starting to build some distribution capability in Mainland China, and adding people on the sales side and marketing. So it's up and running. Again, it's a small part of the total business today, but one that we think has great potential, and certainly is an anchor point to being in the general Asia region.

One kind of quick housekeeping. Any expectations for CapEx and D&A for the next year?

We expect a slight uptick in our capital expenditures next year, due to just some capacity in machinery and equipment and in facility upgrades that we need to do. So our range for CapEx for next year is in that 60 to $75 million range.

The other thing that will drive some of it up is new products. As I said to you, we've got a fair amount of new products coming out over the next 18 months, both in the storage arena as well as in seating. As those begin to go -- several of those are actually in the tooling phase right now as we hit pre-production type of stuff. So those tend to drive a fair amount of capital just on the tooling side.

Depreciation and amortization, about the same levels they've been running, around that $10 million a quarter.

Which actually relates to what I just said about the new products. A lot of those, while we'll invest the cash, they won't actually be in service until the following fiscal year. So they'll have very little impact on depreciation next year; they'll really hit it the following year.

At this time we have no further questions in the queue. I would like to turn the call back over to Mr. Brian Walker.

Thank you for joining us today. We're pleased with our overall results this past year, but we also know we're far from done. We've got a strategy in place that is already creating diversification and new revenue, with greater opportunities still in front of us. We'll continue to execute on our strategy while minding the core business and the economic landscape, and we hope you'll continue to share in our success.

Before signing off, I also want to acknowledge Beth Nickels as one of Herman Miller's key leaders over the past years as we managed through the earlier downturn and these past few years of renewed growth. As you know Beth will be taking leadership of our healthcare business beginning this quarter, a role she sought, and a vital market in our strategy going forward. Beth, we're grateful for your contribution, and I am personally excited about the passion you're bringing to healthcare. Thanks to you for all you bring to my team. Maybe you would like to offer a few remarks before we sign off.

Thanks, Brian. I've truly enjoyed my time as CFO of Herman Miller, including the relationships I've developed with many of you in the investment community, but I'm eager to begin leading our healthcare business.

As many of you on the line know, I have a personal passion for this market and what Herman Miller offers to it today, and even more for what we'll be introducing in the future. And I have no doubt Curt will bring new energy and positive changes to the finance department and the executive leadership team. I expect a smooth transition of my current responsibilities to Curt. I know he's looking forward to leading the call with all of you in September.

Again, thanks for your time and interest this morning.

That does conclude today's presentation. We thank you for joining. Have a wonderful day.