MillerKnoll Inc (MLKN) 2008 Q2 法說會逐字稿

Good morning, everyone, and welcome to this Herman Miller Inc. second-quarter fiscal 2008 earnings results conference call. Today's 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 the other reports filed with the Securities and Exchange Commission.

Today's presentation will be hosted by Mr. Brian Walker, President and Chief Executive Officer, and Mr. Curt Pullen, Executive Vice President and Chief Financial Officer. Mr. Walker and Mr. Pullen are joined by Mr. Joe Nowicki, Treasurer and Vice President of Investor Relations. Mr. Walker and Mr. Pullen 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.

Good morning, everyone. As always, I will open our presentation with a few introductory remarks, then turn the call over to Curt and Joe for a more detailed review of our results.

As you can tell from our press release, we have been busy this quarter. Our business performance has been strong, and we have made substantial progress in furthering our mission around performance innovation. We previously shared our intention to improve our underlying business performance and to accelerate our investment in our growth initiatives. We said we would move quickly and we have. We have made significant steps forward in both areas this quarter.

First, let's talk about improving our business performance. We told you there were two areas we were looking to improve upon -- increasing our operating income and utilizing our balance sheet more effectively. At the end of November, we described a plan and took specific actions toward a goal of increasing operating income to 13% of sales. These actions are always difficult, but we recognize they were necessary to maintain our competitiveness and to enable greater and faster investment in our growth initiatives.

Then yesterday we outlined a series of actions we are taking to utilize our balance sheet more effectively. We have taken advantage of the current favorable interest rate environment to change our capital structure. We issued $200 million in private placement notes, and we utilized these proceeds to repurchase our stock through an accelerated share repurchase agreement.

We are also increasing our syndicated revolver to $250 million, providing a further financial flexibility to continue to invest in our strategic growth initiatives.

Some have asked, why now? We, management and the board, are confident that we have a compelling strategy and business model that will create long-term value for our shareholders and employee owners. We have capacity in our balance sheet, and we believe the valuation is at a compelling point to invest.

One of these strategic growth initiatives is the acquisition of Brandrud, a great strategic fit that will expand our health care product offer and add management talent and depth to our efforts. Brandrud is a quality manufacturer of health care furnishings with an emphasis on seating products for patient rooms, patient treatment areas and public spaces such as lobbies and waiting areas. We have shared a successful marketing alliance with them since 2005 and look forward to further gains going forward.

I would like to take a moment to recognize the great work of our employee owners over this past quarter. Not only did we move quickly to get traction on some big initiatives, everyone continued to deliver on our day to day objectives. This work, not the big initiative, is what enabled us to drive solid earnings and EVA growth on a very modest topline improvement.

Our commercial teams have done a terrific job of finding and closing opportunities. The organization responded to our call to more closely manage costs and eliminate waste, and our manufacturing teams continued to improve productivity and deliver solutions to our customers on time with impeccable quality.

While we accomplished a lot this past quarter, our agenda remains very full. First, our people will be focused on completing the implementation of the changes we recently announced. While the people changes were announced, we still have work to do.

Second, we have a very full queue of new products for the core business, international and health care. Many of these products will be introduced over the next 18 months.

Third, we will continue to expand our international business, which is growing at a very good pace.

Last, we will be ramping up our Convia business. This past quarter we opened a showcase facility for Convia in Buffalo Grove, Illinois just outside of Chicago. This space has really enabled prospective customers to experience the full potential and benefits of Convia. As a result, we have a growing funnel of prospective customers and have begun to supply some inventory into the distribution network.

We also continued to get external confirmation that Convia is a big idea with real and compelling customer benefits. Just this past month, Architectural Record Magazine recognized Convia as one of the most innovative new products of 2007.

I'm sure we will talk more about this during the Q&A, but our outlook has not changed. Given the current economic environment, we remain conservative in our assessment of the US markets near-term growth potential. The actions we took this past quarter were in part a response to this assessment.

Having said that, they were primarily driven by our long-term goals. We are very bullish on the long-term potential for Herman Miller and the US office furniture industry. We simply are concerned that the economy faces several headwinds that may result in slower growth. If the short-term proves to be more robust than anticipated, we are well positioned to serve our customers' needs.

In summary, while we are watchful of the mixed economic climate in the near-term, we are very confident in our long-term strategy, and we are taking the necessary steps to secure our future.

Now let Curt and Joe take you through the details of our second-quarter financial results.

Thanks, Brian. Good morning, everyone, and thanks for joining us. There is a lot to talk about this quarter, so let me briefly hit the highlights. As we entered the quarter, we experienced an increase in order rates which proved to be sustainable throughout the quarter. Overall we ended our second-quarter with order rates having increased by more than 18% from first four levels. This increased order activity allowed us to end the quarter with sales above our guidance and also drove a significant increase to our ending backlog.

Gross margin improved by 150 basis points above our first quarter as a result of improved pricing as well as material cost improvements. Reduced program spending and overall great cost control reduced operating expenses by 140 basis points from Q1. These elements combined to result in operating income of 12.9% for the quarter and drove our earnings per share to a record of $0.67, up 20% from our previous record of $0.56 one year ago. Included in these results is a $5 million restructuring charge, which if removed would have resulted in operating income of 13.9% and EPS of $0.72, an increase of 29% over the prior year. We also produced solid cash flow from operations, increasing over 80% to $56 million for the quarter.

Let's look at sales and orders. Second-quarter sales of $506 million represented our 16th quarter in a row of year-over-year revenue growth. Although our growth was modest at 1.4%, we exceeded the top of our previously provided guidance of 475 to $500 million. This is due both to an increase in weekly order rates, which we begin to experience at the beginning of the quarter, as well as continued strong growth from our non-North American segment.

Last quarter we described that our order rates were down year-over-year, which prompted caution in our forecast for our second quarter. As we entered the quarter, we experienced an uplift in activity levels that was greater than our normal seasonal pattern. This improved order pacing contributed to our ability to exceed our revenue expectation since we were able to translate a portion of these orders into shipments during the quarter. On a sequential basis, second-quarter sales were up 3% from our first quarter.

North American sales were flat year-over-year as well as sequentially from the first quarter. This was primarily the result of slower first-quarter order rates. Non North American sales continued to experience double-digit growth over the prior year, showing growth of 18%. This strong performance was led by the UK and China, both of which grew at more than 60% for the quarter.

We should note that we experienced the benefit to our international sales of approximately $7 million due to the foreign exchange impact of the weakening US dollar. The weak dollar also increased the operating income of our international businesses by approximately $1.6 million.

Orders for the second quarter were the highest level we have seen in seven years, ending the quarter at $573 million, an increase of over 8% compared to year ago levels. In fact, throughout our second quarter as I mentioned, we experienced overall weekly average order rates that were 18% above our first-quarter levels.

Let's unpack this a little. Orders in North America rose 10% over the prior year and 20% sequentially compared to our first quarter. We realized the biggest year-over-year gains in our Eastern and Northern regions of the United States, as well as outstanding increases in Canada and Mexico. Some of this is attributed to seasonal increases in order activity partially due to the federal government, but we also experienced an increase in the volume of nongovernment large project business.

Sequentially it is not unusual for us to experience a 7% to 8% increase in order rates in our second quarter versus our first quarter due to these seasonal factors. This year our uplift of 20% nicely exceeded that trend.

Orders for the non North American component of our business increased over 12% with the strongest gains in China, Japan and the UK. The growth in order levels throughout the second quarter resulted in a healthy ending backlog of $347 million. This is a 7% improvement from year ago levels and a 24% improvement from the end of our first quarter.

Going to gross margin, we are very pleased with our gross margin performance for the quarter, which ended at 35.6% and represents an improvement of 150 basis points over the prior year of 34.1%. The strong performance was primarily the result of our ability to capture price improvements as a result of the previously enacted price increase as well as favorable material pricing during the quarter.

On a sequential basis, gross margin equally improved by 150 basis points from the 34.1% recorded in our first quarter. The sequential gains were driven by high production volumes and a mixed shift towards more profitable products and service lines.

Looking forward, we are mindful of recent increases in crude oil prices and the effect that this could have on diesel and other commodities.

Operating expenses for the quarter totaled $110 million or 21.7% of sales compared to $112 million or 22.4% of sales last year. This represents a year-over-year decrease of $2 million or 70 basis points with only a modest increase in sales. We experienced year-over-year increases in compensation costs, FAS 123 stock-based comp costs and tax-related accruals. These increases were more than offset by lower program spending and overall cost control.

The cost reductions announced at the end of November resulted in our recording of a $5 million restructuring charge during the quarter. These onetime costs were all related to employee severance. Gains in gross margins and operating expenses drove operating income as a percentage of sales to 12.9% for the quarter, the highest level we have reported since May of 1999. Excluding the restructuring charges, operating income was 13.9%, a quarterly record for the Company.

Our effective tax rate for the quarter was 34%, which was at the top of the range of 32 to 34% that we were forecasting and was driven higher by our increased net earnings in the quarter. Consolidated net income for the quarter was $41 million, a 12% increase over the prior year. And we are extremely pleased with our all-time record earnings per share for the quarter of $0.67. Again, this includes a $0.05 per share charge from the restructuring activities which when excluded would result in EPS for the quarter of $0.72, a 29% increase over the previous record of $0.56 that we reported at this time last year.

I will now turn the call over to Joe Nowicki, our Treasurer and VP of Investor Relations. Joe has been extremely busy this quarter as we have worked to realign the capital structures. So, Joe, take us through your work.

Thanks, Curt. Before I jump into the current quarter metrics, I want to start with the big news in our capital structure.

We have completed the analysis and implemented the results of the work that we launched with last quarter's press release. We have announced a series of changes designed to increase the utilization of our balance sheet to support the acceleration of our strategic investments and value enhancement for shareholders.

First, we have taken advantage of the favorable interest rate environment and have agreed to issue 200 million in senior unsecured private placement notes, 50 million senior notes at 5.94% due in January 2015 and 150 million in senior notes at 6.42% due in January of 2018. The proceeds will primarily be used to execute an accelerated share purchase program to repurchase $200 million of our stock. We plan to begin the transaction in January of 2008.

As most of you probably know, an ASR is a tool used by companies to quickly repurchase a large amount of stock. The Company buys a large block of stock from an investment bank that has borrowed the stock from third parties. The bank closes on a stock loan position over time in a purchase price to the Company similar to open market purchases. The exact number of repurchase shares will be determined at the conclusion of the agreement, although the majority of the impact will be included in our share count by the end of the Company's fiscal third quarter. This approach provides for a degree of certainty in terms of the details of the repurchase by enabling upfront share count reduction for most of the shares which increases our EPS sooner than the purchase of shares over time.

In addition, we have also replaced our existing $150 million credit facility with a new $250 million unsecured revolving credit facility. The new facility will be used to refinance existing debt or provide working capital and will allow for a higher level of overall financial flexibility as we continue to invest in our strategic growth initiatives. These actions demonstrate the confidence we have both in our strategic growth initiatives and the long-term strength of our business.

They are also designed to complement our newly authorized $300 million share repurchase and complete the capital structure changes we discussed in our first-quarter financial release.

As for the results of this quarter, cash flow from operations was $56 million in Q2 compared to $31 million in the prior year. Higher net income and lower working capital requirements in the current quarter were the main drivers of the year-to-year change. Working capital requirements drove a use of funds of $3 million in the current year as compared to $17 million in the prior year. Capital expenditures of $10 million for the quarter are even with the prior year and well within our planned levels.

We returned $5.3 million to shareholders this quarter in the form of stock repurchases and another 5.4 million in dividends. In total for the quarter we bought back approximately 200,000 shares at the average price of about $27 per share.

It is important to note that we executed very few share repurchases during the quarter because of a self-imposed blackout due to our operating income and capital structure review work that was underway. As at the end of the quarter, we still have approximately $368 million remaining on our board authorization. We ended the quarter with a cash balance of $74.2 million. Of this amount, approximately $64.2 million is currently located in our international entities.

Now I will hand it back to Curt.

Thanks, Joe. Let's turn to the outlook for the third quarter of our fiscal year. We have discussed our strong order entry during the second quarter, and we're starting the third quarter with a solid backlog. However, we are remaining somewhat cautious with our mid-term forecast due to the continued mix macroeconomic factors, some of which could affect near-term demand in our industry.

Also our sales teams have done an excellent job of winning certain projects that are currently in our backlog but which are not scheduled to ship until after our third quarter. Additionally we're scheduled for a full week planned shutdown over the holidays. And although we are expecting to close the Brandrud acquisition sometime in February, it will only have a minor impact on revenues this quarter.

When all of this is combined, we anticipate third-quarter sales to be in the range of 475 to $500 million. We anticipate continued favorable impact on gross margins from pricing and continued improvements in the margins of our new products. Commodity prices could become a bit more challenging during the quarter, and we will also likely lose some leverage due to reduced production volume during the holiday season. Operating expenses are expected to remain relatively flat as cost reductions will be slightly offset by higher planned program spending. The effective tax rate should again be in the range of 32 to 34%.

Additionally, as a result of our accelerated share repurchase program, our forecast for the quarter also includes a reduction in our weighted average shares outstanding of approximately 3 million shares. In terms of earnings guidance, we expect earnings per share to be in a range of $0.55 to $0.62 per share for the third quarter, which would represent an increase of 10 to 24% over the prior year.

I will now turn the call back to the operator, and we will take your questions.

(OPERATOR INSTRUCTIONS). Matt McCall, BB&T Capital Markets.

First, a question, a clarification on the authorization. And I think you just mentioned that you have got $368 million left on the other authorization. Is the accelerated buyback, is that separate from the 368, or is that going to reduce that 368 by 200?

No, it is not separate. It will actually reduce the 368 when it is completed.

Thank you.

This is the vehicle by which we do some of that.

Okay. Just wanted to make sure I was not double counting. Help me reconcile the orders comments I think you broke down the North American and the non-North American numbers, and I think they were both North of 10%. But orders overall were only up 8%. Help me understand what I'm missing?

Yes, sure. I will give you a couple -- this is Joe -- I will give you a couple of pieces of that puzzle for you.

One of them in looking at some of the components are you know we have a Herman Miller for the Home business. That business was slightly down from where we were a year ago. So our Herman Miller for the Home component was down.

We also in prior years had some OEM business and some OEM sales that we did, and we are no longer doing those, and that was the second component that kind of went away and also decreased the number from the components to that 8% in total.

Okay. So when you break out North American, non North American, you are excluding those, but you're not excluding the impact of that when you talk about the overall order rates?

If you look at our total order rates of the 8% increase, there's really three elements to it. The North American that is up 10%, the non North American that is up 12%, and the other component of it, which actually is down year-over-year.

Okay. Thank you.

Does that help?

Yes, it does. And Curt, I think you just talked about it and I did not hear if you quantified it, some of the products that or some of the orders that won't ship until the out quarter. Did you give us a number on that?

No, I did not give you a number on that. We just have been very successful in picking up some jobs that have a pretty long cycle time on them. So they are in the orders, they are in the backlog, but they are not scheduled to go out until into the third. So as we rolled up our estimates, we have taken that into consideration.

Okay. And then finally, you talked about shares moving down 3 million in the out quarter. I guess just looking at the number and dividing the share price by the $200 million, I know it is a rough estimate, but it looks like it would be probably double that in a reduction of the share count when everything is finished.

(multiple speakers) -- somewhere in the region. I mean we are not sure what the share price is going to do, and it will all settle out at the end. But we will take the $200 million, and we will get a big portion of that upfront just by the way the ASR works. But and then, of course, it's all about how that weighs out during the timing of things.

Yes, the $3 million number is the impact on the weighted average shares outstanding for the quarter.

Which means you will not even kickoff the agreement until one month is completely done, and by the time you get the agreement activated, you're probably more than halfway through the quarter if you look at it roughly.

Right, right. So I'm looking at it the right way when I say $200 million divided by whatever the price is, and I can get a rough impact.

(multiple speakers). By the time it is all the way done, you are right. Now how it lays in will depend on the timing of things.

So the 3 million is for the third quarter. We will see more obviously in the fourth quarter, and then when it is all wrapped up, we will see the remaining portion come through.

Okay, thank you. And then the final question, any update -- we have talked a lot about the new square footage environment, how a lot of new offices are going to be opening. Can you say if that is really what is providing some renewed strength in the order patterns, or are you seeing an improving pipeline from where we were -- it sounds like you are -- from where we were earlier in the year?

I don't know if I would relay it to that specifically. First of all, as Curt said in his comments, it is typical for us to see a bit of a seasonal uptick from Q1 to Q2. That is pretty typical. I think if you look under it, it was better than what we expected. We normally see some of that uptick because of the federal government in particular is stronger in the second quarter. This year we had not only the federal government pick up, but we also had really strong activity in terms of some new corporate business that we won. And I do not think those are necessarily related just to new square footage as much as they were due to competitive situations where we had some projects pop into the second quarter.

So overall I would say our center is still relatively the same as what we have been talking from the beginning. We have the salesforce still sees reasonable activity in terms of client visits, in terms of projects that are coming up on the board. But I would still say overall we are just a little cautious with what we see going forward given the macroeconomic picture, and I think our bigger concern is going to be more around employment and profitability than it is square footage driven.

Okay. And then I'm sorry you just described it as reasonable the activity. Is that kind of the way you are saying you have been describing it for the last couple of quarters?

Yes, I don't think -- you know, I think coming out of the first quarter because of where orders were and especially growth rates on orders, we were a little unsure what we would see in the second quarter. Again, it picked up more than we thought, but if you go look at it, we're still running at about the kind of year-over-year growth rates in total to get to the six months than we expected. Was it a little better this quarter? Yes, it was. Are we happy that we are going with a little stronger backlog into the third quarter than we originally would have thought if you went back into September? That is true.

And personally I think we will know a lot as we get through this third quarter about what the direction is. Often as companies are resetting budgets and those kind of things as they head into what are mostly calendar year-end companies, we will get a much better feel as we see what happens with capital spending plans in the new year.

Chris Agnew, Goldman Sachs.

The first question on margin. Is it possible to break out the contribution to the uplift you got in this quarter by mix, volume, price and commodity pressures?

I can give you a rough feel for it in detail by number. I can give you a rough kind of breakdown of it. We did get a benefit from the pricing piece of it. Clearly that kind of helped us out year-over-year, and the material performance piece of it from the commodity costs also was one of the big drivers that helped us out as well. So from a year-over-year perspective, those were the two big drivers to it.

And then maybe as a follow-up to that I'm thinking going forward, when are you anniversarying the price increase? Are you slamming another coming out? And you talked about a lot of new products in the pipeline. Is it fair to assume that there is a slightly sort of dilutive effect on gross margins initially until you pick up the volume runs?

Price increase, the last one was done in February of '07. So that will anniversary in this next quarter, Chris. This is Brian.

As far as an additional price increase, we are certainly in that mode of evaluating when and to what degree. We do not have any specific plans at this point in terms of the timing.

So we don't have anything nailed down. We are looking at it, of course. You know, that's one of those questions you are also trying to figure out where the industry in general is going around those issues. So that is not one that we have made a final determination about yet.

As far as new products, I would tell you that somewhat depends on what category the new product is in, and it also depends what is the nature of the new product. By that I mean in some cases the new products are derivatives off of current platforms where you are not only trying to increase customer value, but of course, we are also looking at how can we redesign some of the products for manufacture to help how they move through the plants to actually improve margins.

So I would not necessarily say that's a general thing that new products dampen them. Also, they tend to be a little bit smaller part of the mix in the early life.

The products we have in the pipeline in the near-term are primarily in the area of storage and seating, which on the seating side we tend to get ramped up on margins faster than we do in some areas like systems products, which are way more complex in terms of the whole manufacturing and logistics side.

So I don't -- at this point we do not expect a significant dampening. And they will come in and wait, so you will not see them all hit at one time. They will happen over -- they will be spaced out throughout that 18 months. I'm actually fairly confident that we're in pretty good shape there.

And then two sort of quick questions. I will ask both together. The $250 million facility, I mean will you use that primarily for, say, long-term strategic objectives? Am I thinking right in terms of acquisitions, or would you also consider using some of that facility for additional share buybacks over time?

And then the other question was, you provided some color in terms of (inaudible) distribution and pockets of strength. Is there any buy maybe like business lines, financial services, health care, legal; is there any differentiation in activity that you are seeing in the quarter?

Great question. First of all, the $250 million, will we use it for acquisitions? Sure. I do not think it will be one of those items we would use for share repurchases, but we should generate some free cash flow as well, in fact as we get through the ASR period.

So primarily we use it for acquisitions where we need to invest in capital to grow the business, those kind of things more than it would be for the share repurchase side.

On the other hand again, we will generate reasonable cash flow as you saw this past quarter. So we should actually have some cash for repurchases beyond where we are at when we get outside of the ASR period.

I would think of the revolver as more of the financial flexibility tool. So that as opportunities come up, we can use it to go in and go out to pay off as we did with the cash flow. Brandrud is a great example of one that, as that one gets kind of closed, we would use the revolver to temporarily fund it and through cash from operations be able to come right out of it again.

As far as pockets of strength in terms of business sectors, you know the business has been pretty even in terms of the sectors. I do not think there has been any one area that has been a particular standout. We have had some good wins in the insurance area, which has been positive for us. Again, this is a heavier period in particular for government business. But it has been pretty well spread so far from what we have seen. And that is talking domestically primarily. I do not know if you were asking that question specifically about international.

Well, it was yes, principally domestically, but I mean either. Thanks very much.

Budd Bugatch, Raymond James.

Just on the order -- on the composition of business, can you talk a little bit about project versus non-project? You said you had said some good project wins. I usually ask what is the composition percentagewise of orders or sales this quarter?

Yes, the project business was down slightly. It ran around 41% of the total. So it was a little bit less than what we saw last quarter and the prior quarter. But it is still in the 40s, upper 40s, which is still a pretty good place to be, so that was pretty good.

Upper 40s or 41?

41, I'm sorry. But still at a pretty good number being in the 40s. I think we also did see do though from a composition perspective a lot more big projects. So we define them by different size. There are a lot more million dollar plus kind of projects coming in than we had seen in the past. So that was another interesting note that was different from the past few quarters.

And when you are winning those projects, I take what is the composition of product, seating, systems or all over?

It is all over. But it would be a pretty normalized mix generally, especially the larger ones, and of course, those often are -- there's a project, and then it plays out over time in terms of what you have as an ongoing relationship with that customer.

Understood. When you look at profitability by geography, I think you normally give us op margin North American, non North American. How does that look?

I do not know that we normally give that. I would tell you that our international profitability is very good and maybe slightly higher this quarter internationally than domestically.

Okay. And if we do the math on your composition of order growth, it looks like other is down about $5 million year-over-year. Is that about right? And is Convia in there?

Yes, Convia is in there, but that is not a driver to the decrease. A decrease is largely driven by this OEM business that we had before. We were doing some business for one of the white goods manufacturers where we did some metal casework that we decided to exit that business. That is the biggest drop-off.

And that was by the way about $6 million for the quarter, that in and of itself. It was 6 million in last quarter and last year and zero in this year.

And next quarter what will that business have been, and when will you anniversary the reduction of that? I know it was -- I remember that business now, which -- how much of it -- did it run $6 million a quarter for the next couple of quarters and when (multiple speakers)

Yes, it was about $6 million of quarter. Last quarter we would have seen that. This quarter I think there's two more quarters.

Yes, I think the contract ended right around the end of our fiscal year (technical difficulty)--

Okay. And Convia, can you talk a little bit about revenues? Can we get some numbers?

I think last quarter Curt said to me, yes, there were revenues. I think that was the quantification -- (multiple speakers)

The comment will be fairly similar this quarter, but it is still very, very small in terms of actual book revenue. What we had started to see, we will see some more in the third quarter because -- and I think you know this business runs a little different than our core business where when the dealer gets an order from a customer, they send it to us and we ship it at the time that they are looking for the product to be installed, if you will.

This business, because a lot of it is going through the electrical contractor deal, you actually fill the inventory pipeline into the -- it is a two-step distribution model. So you put it in the master distributor who then is having the local VARs pick from that inventory, if you will. Based on the strength of some of the forward activity we see in our third and fourth quarter, we know that the distributor was going to build a little bit of inventory as we go into the third quarter based on the project funnel that they can see out there.

What I would say to you at this point is we came out of the year assuming the revenue number would be not really all that material. I mean it's a good sign that we're starting to see it. The pipeline is getting there in terms of projects, and I think as we get out of the third quarter, we will have a really better ability to come back and quantify for you how much of that stuff we're actually being able to get over the transom. It is going to be an important coming three or four months for us.

Do you envision a time when this becomes material for disclosure purposes in terms of segment or additional reporting?

Yes, I do, but I would think that that is probably not in the next few years just in terms of it has got to ramp up from -- it's a little different because it's a startup business. I think part of the thing is going to be how much do we get crossover between the infrastructure business and the core furniture business.

(multiple speakers) -- profitability of this? That has got to be a drag on earnings right now. Do you want to quantify that?

You know, the drag, there is certainly the drag. I would say that it is not huge in the big scheme of life in terms of net profitability. The margins are actually pretty decent on it, the gross margins, when we are actually shipping product. So it is primarily because we have got the ramp-up costs on the operating expense side right now.

Okay. And my final -- (multiple speakers)

There is not a lot of capital involved either. So this is not a heavy capital business at this point, and it is not a heavy business from an operating structure. We only -- I mean it is very very few people. I mean you're really talking about a handful of folks. All of the manufacturing is largely outsourced. So we're not talking about major, major infrastructure here.

Okay. My final area is Brandrud. You have had a joint alliance with them or a strategic alliance with them I think for awhile, a couple of years. What is the incremental impact on revenues and earnings from that this year or next year?

Well, it will be fairly small this year because, of course, we won't really get the acquisition done until the end of the third quarter essentially, right at the end, probably the last month. I think you have seen the reports that Brandrud is around $20 million in sales.

And were you booking any of that now yourself, or is that all their revenues?

We were getting a fee from them. So it is actually fairly modest in terms of what we had in terms of revenue.

Got you. Right. Brian, thank you.

(OPERATOR INSTRUCTIONS). Todd Schwartzman, Sidoti & Co.

I wanted to follow up on a previous question internationally. Which customer segments are the strongest and the weakest right now?

I think it really is around the patch. You know we have had continued very strong growth in the UK as we mentioned in Asia and China. I don't know that we really would say in any one particular industry. We do a great job with the government business right now. John Portlock, the guy that runs the international piece, would say that that government business in the UK has picked up pretty nicely in the quarter, and I don't know what else would you add?

We do a lot of business with large financial institutions around the globe, and a lot of tech companies, of course, are moving stuff to both China and India and those kind of places. So we're serving a lot of our core typical industry segment, things like high-tech banking. We have done some infrastructure folks I know in China, particularly some of the state-owned enterprises have been interesting pieces of business for us. So it's a pretty fair spread.

I think even in Canada as Curt talked about had a good quarter as well too. And Canada was actually an interesting area; it was several utility companies. So there's another industry group which we saw some strength in.

And that's a good add Joe because internationally it has also been some of the oil and gas guys as they have expanded internationally.

And within China, how much of the total is represented by the state-owned enterprises?

I do not know if I can give you a percentage on that. I don't know if I got a percentage off the top of my head. But it has been probably a nice little surprise for us at some level as those folks have been more accessible to us than we probably would have thought going in.

Yes, John's comments to me when I was talking through the results with them were that there has been very strong demand from the Chinese companies, and he felt like there was room to grow on that, particularly some of the seating products that they were interested in.

Great. I did not catch it, and I don't know if you mentioned earlier. But what was the delta for the quarter of North American shipments versus Q2 a year ago?

We said that that was flat I think year-over-year. It was in my comment. Yes -- (multiple speakers). We are flat with shipments in North America versus the prior year.

If you look back, we had a very big jump last year. We had a big, big comparable where we took a lot of orders in the first quarter of last year that then shipped. If you go back and look, it sort of bounced between the two. We had more growth this year in shipments in the first quarter, and orders looked a little flat. Some of that spilled over when you look at the comparisons between the two quarters.

And that is also the same hurdle we ran into in the third quarter. Because our third-quarter last year's sales were quite high. Comparably I think they were up 14% or so. So when you look at this year for the third quarter in our forecast, keep in mind that we're against some tough comp from the prior year as well.

Right. Regarding the February price increase, it is now 10 months or so. What are you realizing on average? I realize it does vary greatly, but what kind or realization are you getting?

I think we have been running in the range of somewhere around -- we ask for the list price increase is about 4%. It has been running somewhere around 1% to 1.5% in total. So we have been getting about a quarter to a third of what we are asking for.

That is really no different from the recent past, right?

No.

But what happens, as those contracts renew, you pick up more and more ground as you kind of cycle beyond the announced price increase. So that is what is really happening.

That is good news.

Lastly, maybe could you shed some light in discussing some additional opportunities you have to take cost out of the business that have not really been discussed so far?

Well, this is Brian. Essentially we made a lot of the major people moves that we saw out there. The rest of the stuff is going to be much more I would call it programmatic. The much more difficult work that takes continuous improvement activity like the Herman Miller production system work we're constantly working on in terms of both manufacturing, as well as office areas. We also think there is some room to do some overall simplification of some business processes and some of the product lines by looking back at some of the platforms that we have.

So we see some real benefits on that side of it. Those plans are not completely finalized, but we think we can do some things around platforming that will actually increase satisfaction for the dealers and customers and at the same time take up some complexity out of both our marketing efforts as well as manufacturing. So that is pretty exciting for us.

And we're looking at making some changes to, in fact, how we go to market from a marketing perspective that we think will drive some great benefits in terms of positioning ourselves more effectively with customers. We actually think by doing it in the right way, we do not have to increase costs. In fact, we think there will be some cost shakeout of that.

I just wanted to have one final question. Are you doing anything in the way of outsourcing production of seating products? If so, could you maybe elaborate on that?

No more than we have always in the past. Remember you have always got to keep in mind that we have been a little different than other folks, although I think some folks have moved in that direction in that in many -- in several product categories we're largely a big assembler. So when you say outsourcing, we do not really think of it necessarily as outsourcing.

But our primary drive in manufacturing has been and will be going forward that we design products and solutions specific to ourselves. We then develop those individual components to fit together as a whole. And then we will find folks to make any of those components that we can, and what we will do internally is those processes enable us to offer the customer speed, reliability and choice.

So when you look it what we do around seating, we assemble the majority of the share together, and we buy the components in that are made to our specifications. We have not made any significant change there from a business model perspective, although there is always little tweaks going on around the business. But seating is the one that is the most clear today and I would say you say the least likelihood of change in.

Matt McCall, BB&T Capital Markets.

Curt, you just mentioned one interesting point, talking about contracts renewing. Can you give us any color on -- I know there was a tough inflationary environment there for a couple of years. What the opportunity is if some of those rollover over the next couple of years?

I don't know if we really talk about the specifics of it. I just would say in a general sense whenever we announce a price increase, there are certain contracts that we are locked into that have durations remaining. So as those renew and that can take months or sometimes longer, it is the renewals where you have that opportunity to then adjust.

So I think what we're saying is the pricing influence that we were able to see this quarter is the effect of whatever was that mix of business going on during the quarter, which is just sort of a normal thing that we all experienced.

You have to remember that in our business, and I'm sure we have one of our friends or neighbors listening, a lot of times many of those customers are in competitive situations. So it is not as if we have them 100% to ourselves and they just automatically roll to new prices. So we are often looking at those things not only in terms of what can we do pricing, but how do we maintain our relationship or build our share of those customers. So that is a balancing act that you really have to make a choice on customer by customer, situation by situation, and there's no real general rule of thumb there.

Got you. Good point. Thank you, guys.

And there are no further questions at this time. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you all for joining us today. In closing, I want to thank you for your sustained interest in Herman Miller throughout this past year. I also want to express my appreciation to all the Herman Miller employees for their outstanding contributions in 2007 and particularly in this most recent quarter.

Working through the changes to our business was a challenge for all of us, but we're proving we are capable of achieving still greater results. As we look to the new year, we are a stronger Company and well-positioned to further improve our underlying business performance, accelerate our growth and utilize our strong balance sheet more effectively. I'm extremely thankful this holiday season to be a part of Herman Miller, a great company with a great future.

That is it for now. We wish you best wishes for a joyful holiday season and a prosperous happy new year.

Thanks, everyone.

Thank you, everyone. That does conclude today's conference. You may now disconnect.