MillerKnoll Inc (MLKN) 2008 Q3 法說會逐字稿

Please stand by. Good morning, everyone, and welcome to this Herman Miller Inc. third-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 risk 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 Mr. Brian Walker, President and Chief Executive Officer; 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, sir.

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

As you know, we announced a lot of changes leading into and during our fiscal third quarter. We announced how we are going to improve our underlying business performance so that we could accelerate our investment in strategic growth initiatives. This quarter was about following through and implementing those changes.

First, we completed changes to our capital structure to utilize our balance sheet more effectively and also increase our financial flexibility. As a result, during the quarter, we retired 5 million shares of our stock, completing a 10% year-over-year reduction in our weighted average share count.

Next, we closed the announced Brandrud acquisition. The team worked through the due diligence in record time, and we are extremely pleased with the ongoing integration effort. It is going to be 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 in public spaces such as a lobbies and waiting areas.

We have shared a successful marketing alliance with Brandrud since 2005 and look forward to further gains going forward now that they are officially a part of the Herman Miller family.

We are also continuing to implement changes to our business model as we previously outlined to get to our targeted 13% operating income. This quarter we began seeing the impact of all of those changes. With only modest topline sales growth, we realized strong operating leverage and produced operating income of 12.5% and a 30% growth in earnings per share.

Looking forward, we remain appropriately cautious in the current economic environment. Unsettled credit markets and declining consumer sentiment, coupled with softening nonresidential construction and employment data, suggest the next four to six quarters in the US will be challenging. This is consistent with our industry BIFMA recent industry forecast for US manufacturing shipments of a 1% decline in calendar 2008 and a 3% decline in calendar 2009.

In addition, as Curt will talk about in more detail, the raw material markets will likely have a negative impact on our gross margins in the coming year.

Fortunately we have proactively changed our business model, capital structure and also the overall mix of our business. Today we are less dependent on the US office furniture market, and we will continue to diversify both our offering and our geographic reach. While not immune to the market around us, this will help to help insulate us from some of the impact.

We are very excited about our potential. This includes continuing our launch of a very full queue of new products for the core business, international and health care, many of which will be introduced over the next 18 months. We also continue to expand our international business, which continues to grow at a good pace. And we will continue to ramp up our Convia business, which creates both a strong and differentiated opportunity for our core offerings, as well as creating an entirely new market with unique technology and customer proposition.

Each of these initiatives holds great individual promise and we believe collectively points to a stronger and more diverse revenue stream for Herman Miller than we have ever had in the past.

Finally, I will close my introduction by highlighting recent recognition that Herman Miller has received. Fortune Magazine named us as the most admired in our industry for the 20th time in the past 22 years and among the top 10 of all companies for quality of products, our people management, our commitment to social responsibility and our innovation practices.

In a separate ranking, Fortune and the Great Place to Work Institute also named us among the 100 best companies to work for in America and cited us as having one of the five best strategic diversity programs in the country. Additionally Fast Company Magazine named us number 26 in the Fast 50 List of the World's Most Innovative Companies -- truly an honor.

I share these not because we like to see our name in print, but because they validate our ambitions to achieve and sustain our spirit towards performance innovation. These awards are further evidence that our strategy is working and that we are achieving our goals -- a credit to my team and the great people we have at Herman Miller.

Now I will let Curt and Joe take you through the details of our Q3 financial results.

Thanks, Brian. Good morning, everyone. There is a lot to talk about again this quarter, so let me briefly hit the highlights.

As you saw in the press release, we experienced modest revenue growth. Gross margin improved by 130 basis points above the third quarter of last year as a result of continued cost improvement efforts, stable commodity prices and improved pricing realization. Reductions in operating expenses driven primarily from the cost structure changes implemented last quarter drove an additional 100 basis point improvement from the third quarter of last year. Combined, these items resulted in a 12.5% operating income for the quarter, and earnings per share are a record for our third quarter at $0.65, up 30% from last year.

Let's look at sales and orders. Third-quarter sales of $495 million represented our 17th quarter in a row of year-over-year revenue growth. Although our growth was modest at just over 2%, we're pleased that it was near the top of the range that we had provided in our guidance of 475 to $500 million.

North American sales experienced an increase of 4%, and our non-North American sales increased 6% from the prior year third quarter. These gains were partially offset by a slight decline in our retail business and also the effect of our having exited an OEM business last year, which in the prior year third quarter had revenue of $6 million.

We should also note that we experienced a foreign exchange benefit from our international sales this quarter of approximately $8 million due to the weakening US dollar. About half of that was in our non-North American business, Europe primarily; the other half was in Canada. The weak dollar also increased the operating income of our international business by about $2 million for the quarter when compared to last year.

On a sequential basis, our sales declined approximately 2% compared to our second quarter, reflecting the traditional seasonal industry slowdown and our own shutdown over the holiday season.

Looking at orders, last quarter we described a cautious outlook for our order forecast for the third quarter. In total, orders in Q3 were $454 million compared to $458 million last year, a decrease of a little under 1%. As expected, the holiday period gave us a relatively slow start to the quarter in terms of weekly order pacing. However, we did realize an improvement in weekly order rates as we progressed through the quarter, which has continued to strengthen thus far into the fourth quarter.

In addition, it is important to recall the implementation of our February 2007 price increase -- we are talking a year ago -- which had the effect at that time of drawing forward an acceleration of orders into the third quarter of last year, which we estimate to be in the range of 20 to $25 million. Thus removing the effect of this change, we would have experienced minor growth in orders for the quarter.

On a sequential basis, third-quarter order rates were down 21% from our second quarter total of $573 million, partially a result of the traditional holiday season slowdown I mentioned before and our seasonal shutdown. However, our second-quarter order performance was one of our strongest ever and included several large project wins that did not recur at the same level in the current quarter.

Let's look a little more closely at some of the order information. Orders in North America decreased about 1% versus the prior year, and most of this is explained by the impact of last year's February price increase as I just mentioned.

Notwithstanding this factor, we continued to experience solid growth in our health care business, as well as in Canada and Mexico. Orders in the non-North American component of the business increased over 13% for the quarter with the strongest gains in Asia and the Middle East.

Similar to the foreign exchange impact on sales, we also experienced a benefit to our international orders this quarter of approximately $7 million due to the impact of a weakening US dollar.

Orders in our retail business were down slightly versus the prior year, and last year's third quarter contained a $6 million order number relative to the OEM products that we are no longer producing. Thus, our comparative is lower by this amount as well.

We finished the quarter with a healthy ending backlog of $307 million, which is a 3.5% improvement from year ago levels and provides us with a good base from which to move into the fourth quarter.

Gross margin is next. We are once again very pleased with our gross margin performance for the quarter, which ended at 34.3% and represents an improvement of 130 basis points over the prior year of 33%. This strong performance was primarily the result of our continued efforts around cost improvement, favorable material pricing, as well as our ability to capture price improvements relative to last year.

Perhaps favorable pricing around materials sounds unusual in today's environment, so I will explain that a little bit. Because of our way of securing long-term purchase agreements for certain materials and components, as well as our focus on continuous improvement, we did experience year-over-year declines in our steel, plastics and wood costs. These were a good benefit for us in the quarter, and we are pleased with this performance and will continue our determination to manage our costs.

However, commodity prices are increasing, and eventually these cost increases will begin to affect us. Soon certain of our contracts, including those related to steel, will renew, and we expect to begin to see some negative impact of this as we move into Q4. We will talk about more of this when we get to our forecast.

On a sequential basis, gross margin declined from the 35.6% recorded in the second quarter. As we discussed in our second-quarter call, high sales volume for the second quarter enabled our plants to run at very high production volumes, which improved our margin performance, and we also had a favorable mix of product sales in that quarter. Those conditions did not repeat to the same extent in Q3. We have lower production volumes caused by the holiday shutdown, slightly higher discounting and some mix shift in products sold that all contributed to a slight decline in our gross margin for the quarter. But overall margin was in line with our expectations and is a solid improvement over last year.

Operating expenses for the quarter totaled $108 million or 21.9% of sales compared to $111 million or 22.9% of sales last year. This represents a year-over-year decrease of $3 million, even though sales are higher and is an improvement of 100 basis points. The decrease in spending was primarily driven by the cost reduction actions announced during the second quarter and were partially offset by increased accruals for bad debts, as well as annual wages and benefit increases compared to the prior year. Overall we're very pleased with the team's efforts to carefully manage our operating expenses and yet continue to drive our strategic initiatives forward.

Gains in gross margin and reduced operating expenses drove operating income as a percentage of sales up to 12.5% for the quarter, a 26% increase over the prior year and one of our highest operating income results ever recorded and certainly consistent with our goal of 13%, which we discussed last quarter.

Our effective tax rate for the quarter was 33%, which was at the midpoint of the range of 32 to 34% that we are forecasting. Our tax rate again benefited in the quarter from the increased manufacturing deduction under the American Jobs Creation Act and an increase in foreign tax credits related to cash repatriation from our foreign subsidiaries during the quarter, which Joe will talk about shortly.

You'll also perhaps remember that at this time last year, our third-quarter effective tax rate was 30.3%, a full 3 points lower than our current level due to our ability to benefit last year from newly enacted R&D tax rules. That benefit during last year's third quarter positively boosted our EPS for that quarter by $0.02, which makes our current year growth and EPS even more impressive. Consolidated net income for the quarter was $38 million, approaching 8% of sales and is a 19% increase over the prior year.

Earnings per share for the quarter totaled $0.65, a record for a third quarter and a 30% increase over the $0.50 per share reported at this time last year. Our strong operating results combined with a reduction in the number of shares outstanding due to the implementation of the capital structure changes we previously announced produced this strong result. We're proud of these results, which we feel are a reflection of the hard work and dedication of everyone at Herman Miller.

I will now turn the call over to Joe Nowicki, our Treasurer and VP of Investor Relations. Joe will take us through how the balance sheet is doing and give us an update on the implementation of the capital structure changes we announced last quarter. Joe?

Thanks, Curt. Before I jump into the current quarter balance sheet metrics, I want to start with providing an update on our capital structure.

We announced our plans last quarter to more effectively utilize our balance sheet by borrowing $200 million in private placement notes and using the proceeds to execute an accelerated share repurchase program. The private placement notes were issued on January 3. The proceeds were used to immediately enter the ASR on January 4. Upon execution of the ASR agreement, we retired 4.4 million shares of our stock.

Subsequently and in accordance with the agreement, we retired another 600,000 shares on February 1 for a total retirement of 5 million shares so far. The actual price per share and final number of shares to be retired under the ASR will be determined at its completion in September, and we estimate that at that time we will retire an additional 1.5 to 2.5 million shares.

In summary, during the current quarter, the ASR lowered our share count and favorably impacted EPS by approximately $0.03. This was partially offset by the increased interest expense on the additional debt of about $0.02 for a net positive impact to EPS of $0.01 for the quarter. This amount will increase as we go through the year the remainder of the shares are retired.

Regarding the current quarter balance sheet metrics, cash flow from operations was $35.5 million in Q3 compared to $67.2 million in the prior year. Higher working capital requirements for the use of funds of $13.2 million in the current year as compared to $26.7 million source of funds during the prior year. Higher quarter-end accounts receivable balances due to the timing of sales combined with cash payments related to the previously announced restructuring drove the majority of the change in working capital year to year.

Depreciation and amortization amounted to $10.7 million for the quarter as compared to $10.2 million in the prior year. Capital expenditures of $9.2 million for the quarter are slightly lower than the $9.7 million spending during the prior year and well within our plan levels. Investing activities also reflected a net outflow of $11.7 million related to the previously announced acquisition of Brandrud.

In addition to the $200 million return to shareholders under the ASR, we also returned to shareholders $5.4 million in dividends this quarter. After the completion of the ASR, we will still have about $171 million remaining on our board share repurchase authorization.

We ended the quarter with a cash balance of $81.4 million. Of this amount, approximately $54 million is currently located in our international entities. However, during the quarter, we repatriated about $24 million in cash from our foreign subsidiaries. We will be able to more effectively utilize those funds in the US, and given our overall foreign tax credit situation, we are able to complete that action without increasing our effective tax rate.

I think that's enough on the balance sheet for this quarter. Now I will hand it back to Curt.

Joe, thank you. Let's look at the outlook. Again this quarter, we're starting with a strong backlog. In fact, it's about $10 million higher than in the prior year. So that should help us as we begin our fourth quarter, and our recent order levels have been strong. But, as Brian mentioned earlier, we're cautious about the current overall economic environment and are anticipating order rates to remain relatively consistent with what we saw at this time last year. As a result, we're expecting fourth-quarter sales to be in the range of 475 to $500 million, which represents a flat quarter relative to last year's Q4 sales of $485 million.

As I mentioned earlier, gross margins this quarter are expected to face headwinds from higher commodity prices, and while we expect to realize continued benefit from ongoing product cost improvement initiatives in place, these efforts are not likely to offset all of the likely upward commodity pricing pressure. As a result, our gross margins are likely to decline from where they have been in the past couple of quarters and be more in the line of 33.5 to 34.5%.

In addition, our operating expenses are expected to be slightly higher this quarter as we ramp up for several new product launches, as well as prepare for the June NeoCon event. The effective tax rate for the fourth quarter should be again in the range of 32 to 34%.

As Joe discussed, our share count will continue to decrease during the quarter as a result of the continued execution of the accelerated share repurchase program, and our weighted average number of shares outstanding should be approximately 57 million for the fourth quarter.

In terms of earnings guidance, even with basically flat revenues, higher anticipated commodity costs and our expectation of slightly higher operating expenses, we expect earnings per share to be in the range of $0.55 to $0.62 for the fourth quarter, which would represent an increase of 10 to 24% over the prior year. Again, a reflection of the benefits from the changes we have made this year in the operating costs and in the capital structure.

Now I would like to talk next about next year for a moment. I will start by saying that next year our fiscal year 2009 will likely be a challenging year given the general state of the economy led by the slowdown in the US. Fortunately we have already taken measures to adjust our operating costs and our capital structure. We have also benefited from our efforts to carefully and profitably grow our international businesses, which are less dependent upon the US office furniture market. Our non-US sales in the third quarter were nearly 24% of our total as we have grown our businesses beyond North America, and we are continuing to carefully pursue these markets.

Also, within North America, our efforts in the area of health care and higher education also continued to diversify our overall business, and we're excited about the newly launched Convia business and the opportunities that this award-winning capability will bring.

So, as we look forward to our fiscal year 2009, given the overall uncertainty in the economy, we believe our revenues in total will be in the range of flat to low single digit growth. In fact, if the latest BIFMA forecast is correct, it could be quite difficult showing any real growth in the core domestic office furniture business over this next fiscal year, thereby mirroring the BIFMA experience.

At the same time, we expect further growth in our international markets, health care business and higher education markets. Plus, we will see the benefits of our Brandrud acquisition and incremental sales from our Convia business. These positive growth areas will be partially offset by a planned dealer divestiture that we expect to complete at the start of the new fiscal year.

On the operating income side, we feel that our manufacturing operations are solidly under control and that operating expenses will continue to show great discipline. The biggest variable for us could be commodity prices. Right now we are anticipating that these costs could be up anywhere from 25 to $35 million from the current year, factors which are likely to affect everyone in our industry, some of whom have recently announced price increases. Even though, we have historically been able to overcome increases in our input costs without necessarily increasing prices and we continue our efforts to offset these increases with costs and productivity improvements, we are nonetheless also developing our plans for a price increase. The timing of such an increase if implemented, coupled with the speed with which certain of these costs are beginning to move, could negatively affect our margins and profitability in the new fiscal year, particularly in our first quarter, since the effect of any price increase will take some time to realize.

As a result, we anticipate operating income to be in the range of 11 to 12% of sales for the entire full year.

To summarize, we see topline growth of flat to low single digit and operating income of 11 to 12%, and we see three big variables as we look into next year. Number one, the BIFMA forecast and what that actually turns out to be. Number two, the economies outside the US and whether or not these will continue to grow as they have been. And third, and perhaps most significant to us right now, is what is going on with commodities and what really happens here as to speed and intensity and our ability to easily manage through these.

I will turn the call back to the operator, and we will take some of your questions for a bit.

(OPERATOR INSTRUCTIONS). Budd Bugatch, Raymond James.

A couple of -- just to make sure I understand. Curt, if I do the numbers right, I think the operating margin implied by the range for the fourth quarter is like 11.2 to 11.8%, which -- and you had said gross margins between 33.5 to 34.5 for the fourth quarter.

Yes, let me open that up. Hold on a second.

Sure.

Yes, around 34 is our kind of guess on gross margin, and we have got operating income of around 11 and change in the fourth.

Okay, alright. Just make sure we also understand your plans on price increases. You have, as you said correctly, a couple of competitors have already done that. In a weakening environment with costs going up, it is obviously hard to do that. What is your thought about timing, and what more can you say or any more color on that?

First of all, I think if you look historically at price increases, when we have seen that it is a major commodity change, those have been able to stick pretty well regardless of the demand picture. Certainly it is harder, right? So we're not counting on all of it sticking, but we do believe that if steel keeps going to the degree it is, that most, if not all the competitors, will be forced at one level or another to raise prices within the industry. I think that's going to be true not only in our industry, by the way, I think that will be broader.

We're seeing significant increases in steel that just are not possible for anybody to absorb them. So I think we will be able to capture some.

We're working through the details of the price increase right now. We will probably make an announcement shortly of the exact timing. Given where we are at, though, our belief is we will not see much benefit of that. Well, we won't see really any benefit of that in the first quarter. It will probably start in the second quarter and beyond.

So the issue on the raw material costs for us right now is going to be, while we think between all the work we're doing around efficiencies, other cost reduction efforts and the price increase, we can offset a fair amount of the commodity increase, and some of that depends on what is the magnitude of those increases in the long run.

The issue is we're going to have a timing issue that for sure in the first quarter we're not going to be able to offset all of that commodity increase. And, in fact, we will get hit with a little bit of it in the fourth quarter as Curt mentioned, but it will be heavier actually in the first quarter. But we really won't get any relief from a pricing perspective at all.

And regarding next year, Curt or Brian, you gave us some clue as to your thinking about that. Did I hear you say that overall sales will be up flat to up low single digit, or was that just North American office?

That is overall. We think overall zero to low single digits, and as Curt said, as you guys can appreciate watching what is going on around us today when investment banks fail from one day to the next and you did not expect it, I think the question for us right now is it is really difficult to predict.

We've got really good visibility on the fourth quarter because we absolutely, as Curt said, came out with a decent backlog. We know what the orders have been the last few weeks. That is pretty predictable. When you get beyond that, it is a little hard to predict right now, and I think the three big things that are out there in front of us that are variables -- and, by the way, these could both -- all these have both positive and negative sides to them at one level or another.

The first one is the US industry and what kind of demand picture are we going to see there. Right now we would say we think the BIFMA number looks reasonable from what we can see. We are still seeing as you saw this past quarter good growth in international and health care. The question is, will some of the difficulties in the US, particularly in the big money center cities, which is a point for us to play in. Not necessarily, by the way, because we serve the financial services industry, but those big money center cities are going to be affected and could be affected.

The third one that is out there is this whole question of commodity prices. I keep believing and we saw some signs of this this morning, that if it a little lighter, you would half expect that commodity prices would start to back up. And maybe that will give us some relief over what we're currently expecting. But to this point, we have not seen that, that even with lots of negative news on the economy, commodities continue to run forward.

So again, it is not all bad news because we're seeing growth in the places that we've tried to plant new seeds, and that is good news. And the US business has hung in there so far reasonably well. So it is just a pretty cloudy picture if we get beyond that fourth quarter.

You must feel like a manic-depressive this year because going from the first quarter to the second quarter to this quarter in terms of the outlook, it kind of feels like you know -- I remember the first quarter was pretty dour, and the second quarter much better, and the performance has been fine. It has just been the outlook has changed; your mood has got to be changing almost daily or hourly.

Well, you know, it is interesting. I would say maybe not as much internally. I think we been pretty even about what we thought was what we saw, and that is why we made some of the moves that we did in the fall. We said, hey, look, we think this thing is difficult to predict. We think we have some great strategic investments that we need to make sure we've got the headroom to fund no matter what. We think we are in the right place longer-term, but let's get ahead of the curve. So if it is a little more challenging, we have got the headroom to operate. And I think BIFMA has continually sort of knocked the number down step-by-step.

So I think maybe the one that has been the most -- that has been the biggest change and move for us most recently is this whole commodity thing, which again I guess the other side of our prediction earlier was that we would see relief on the commodity side, and that certainly has not proven to be the case so far.

Finally, you talk about strong order pacing now. Can you kind of give us a feel of where the weekly order pacing is right at the moment?

We ran, if you remember, 37.2 weekly average in all of Q1. That jumped up to a $44 million weekly average in Q2, and we ran Q3 at 35, which is not bad given that traditional holiday slowdown and the fact that we closed our operations, as you know, for a full week.

But the last couple of weeks we have been up over 40, which has been a really nice uptick, and that has held up for the last three or four weeks as we have started to get into the quarter, which we find encouraging. And there's a lot of activity. I mean there's tons of stuff going on, and the sales team are working very hard on every opportunity they see out there.

So there's a lot of good activity still going on, and that effect of the pull-forward of orders last year, that 20 to $25 million, would not surprise us to see growth rates above last year. But just in terms of the nominal dollar numbers, we're pleased with the order dollars being in the above $40 million weeks.

That is nice. Good. Thank you very much.

Chris Agnew, Goldman Sachs.

The first question on transport costs. Can you remind me is that included in your gross margin, or is that operating expenses? Are you able to pass on, for example, like fuel surcharges?

Transportation costs has been spread out in fuel costs?

Yes.

Yes, those are included within our gross margins, so they are in our cost of goods sold. And that number has been running somewhere around 5 to 6% of sales. Last quarter specifically it ran -- freight and distribution ran around 5.7% of sales.

We did see some stuff happening this past quarter because of where we were shipping to as much as it was fuel. We were in some heavier cost shipping lanes just because of where projects were going.

The question of, can we pass stuff along in fuel surcharge, my opinion is surcharges have never been very lucrative or manageable in our industry because of the pricing methods we use. As you know, we start with a list price, and we're really project-sensitive.

Quite frankly, last time we tried a little bit of that. Some other folks tried it. Our opinion is, you are much better off going to customers straight up and talking to them about price increase and what that looks like rather than surcharges.

So I would not anticipate we will do anything in the form of a surcharge. It is just too complicated for the salespeople, and they spend their time explaining that versus what we think are a great set of products.

Okay. Thanks. And then a question on capital structure. You did the accelerated share buyback. Interest rates have fallen. Your business, your industry generates a lot of cash flow good times and bad. Would you be prepared, would you think about taking on more leverage to maybe repeat, or do you need to now just use your annual cash flow to generate share buybacks?

Well, as we have always said, Chris, first of all, interest rates, while the base rates have fallen, as you know, spreads have increased to the point that actually as you look at it, the all-in rates are not really all that much different. Wilbur Ross is fond of saying recently, it does not matter what rate it is, you cannot get money. And I think because of that, with the markets being so tight, really there has not been that big a change in the net net rate that you are borrowing at.

Having said all of that, we made the move in the capital structure to a spot that we were comfortable with in terms of not only the mixture of the capital structure, but also in terms of making sure we have the flexibility to do the stuff we want to do strategically.

And I would still say our first thing is, if we could find great capabilities out there that we need that would move us forward, whether that was in Asia or health care or, in fact, in Convia or in the core business, those are the things we would like to do first versus just continuing to change the mixture of the capital structure.

Having said that, if we have excess cash that we don't see a need to deploy in the mid-term, well, you can count on the fact we will treat it the way we always have and tell ourselves that keeping excess cash on the balance sheet is not something we need to do.

But right now we're going to build a little bit of cash probably because of where the ASR sits, and we've got a few months for that to play its way out. But longer-term, our policy and strategy will stay exactly as it has been, that we will be great returners of cash flow to shareholders, we care about it deeply, and at the same time, we're looking for strategic investments as our first priority.

And the other thing I would mention, Chris, on that, is in December, late December, when we closed the private placement deal, Joe did a great job of bringing forward all of the interested parties in that, and you know this but we were oversubscribed by 2X or twice that which we were asking. We did a $200 million private placement. At $400 million of inquiry, we said, thanks, we are good. We have retained our investment-grade rating, and we have got great rates. And we have had some comment back from us with folks being pretty impressed with that overall package and the financing that we were able to accomplish given the strength of the Company's results and capabilities. So that leads us to believe that we still have opportunities to keep looking at that if we ever need to for strategic purposes.

Okay. That is very clear. Thanks. And one more housekeeping, you talked about a dealer that you are deconsolidating in Q1. I was wondering if you could quantify that or at least, I guess Brandrud that will be added on a year-over-year basis. Would those offset (multiple speakers) 1Q?

Pretty much the opposite. You know that over the past several years, we own a few dealers in the US and in Mexico and Canada, and when we find the right leadership team that has the right long-term sustainable commitment to the organization and we have confidence in them, we're happy to help move that back to an independent ownership status. So that is a dealer that is coming out of a planned path that way. And it is not that significant to the overall consolidated results, and they just about offset each other in terms of the Brandrud.

(OPERATOR INSTRUCTIONS). Todd Schwartzman, Sidoti.

Can you provide some color on the unfavorable shift in product mix in the third quarter and whether you see this continuing?

You know, it is Curt. That just ebbs and flows with the project nature and the balance of that against base business. So there are differences in gross margins among product lines and certainly within product lines depending on what that mix specification is, and you know how complicated our business really is.

So and also if you lay into that where the growth comes from, if it is growth in one of our emerging markets that has a particular mix towards something versus growth in more of a base business account where we have different products.

So it is not dramatic, but we watch it pretty carefully. And it was just worth commenting to you guys to say, that is a factor relative to that change in margin percentage when you look at our second quarter, which just happened to have a lot of things line up very positively. High production volumes, great impact on commodities, continuous improvement work, positive mix. And if all of those things tend to lean a bit differently the next quarter, that is part of what you see.

I will just add I think if you are a believer in statistics, there is no trend of a change in mix shift. This is just simply the quarter to quarter variances that happen. We have not seen any consistent move one way or the other, other than the fact that as we grow in some of the markets like international in particular, we have a heavier mix of seating, which tends to be a little bit better from a margin perspective for us.

The other thing is, when you look at it right now with home being down, it offsets a bit of the side of the international move. So, but no specific trends that we can point to. This is just the normal movement by project.

Okay. And what about discounting? Was this more -- was it most prevalent versus prior quarters in terms of geography or customer industries? Any light you could shed on that?

Again, just like the mix thing, I don't think we have anything that would tell us right now that there is a systemic change in the discounting picture in the numbers. I mean certainly as times get a little bit more lighter on the demand-side, people tend to get more aggressive on new projects. But that tends to bounce around to market to market, even city to city from time to time. But I don't think we have seen anything yet that would tell us we see a sustained pattern of that happening.

Okay. With respect to the contracts expiring for raw materials, can you give us an overview, maybe a timeline of sorts in the next one to two years of what expires when?

They are all generally, the ones that are longer tend to be annual contracts. So, and we tend to roll them every 12 months for some piece of the purchases. It is not necessarily all of them either.

Yes, it is not all the contracts. A lot of our raw material contracts are for a particular quarter. So they can vary from a quarter to a year, and they are constantly coming off each quarter.

We just happened to have, Todd, to tie it back to our comments, though, steel and you know from our production process, a lot of things we bring in at the component level. So we are not actually buying the raw stock, if you will, we're buying components. In those cases we do not tend to have as long of a forward buying contracts at least at the raw material side.

In the case of steel, particularly flat steel that we bring in for things like files and those kind of things, we tend to buy that on a 12-month sort of locked in contract or at least a percentage of it. Those contracts, most of them roll as we get to the end of this quarter.

Okay. Also, earlier in the call, you had mentioned that the recent order rates were strong or remain strong. I'm assuming that you are referring to your subsequent to the end of Q3, the things that picked up a little bit maybe. Or were you speaking more towards non-North American growth rates when orders were actually down slightly in Q3?

Yes, Todd, we were talking really about the last several weeks of the quarter itself and the first couple of weeks into the fourth quarter. So we -- as I mentioned earlier, we ran really $35 million a week on average. If you take that roughly $454 million divided across the 13 weeks of the quarter, that gives you $35 million a week. But we really ran $41 million a week towards the last six weeks of the quarter, and we've stayed above 40 into the first couple of weeks of the fourth quarter. That was the way we had described it.

And in those first couple of weeks of the fourth quarter with respect to North America, have orders turned positive?

Yes.

I know you mentioned the shipments looked like they are picking up a bit, but the orders you are seeing growth?

Correct.

Okay. With respect to the share count, do you have an actual number of shares outstanding as of either March 1 or some later date?

Yes, 56.5 was the share count at the end of the quarter. But the weighted average effect is a little higher because that came later in the quarter. And I think, as we mentioned on the earlier remarks, we think the weighted average will be about 57 for all of Q4.

Okay.

We are actually at 56.5 right now at the end of the quarter.

And that is a fully diluted estimated number at the end of the quarter. That includes common stock equivalents as well too, gives you that 56.5-ish million.

Right. And what was the cost basis, the average purchase price of the 5 million under the accelerated?

Well, we will not know. The way that the ASR works, we will not know the actual price we pay until the end of the agreement in total in September. Our partner with it, Morgan Stanley, is out there acquiring those shares right now. So the price we pay will really be based on the average market share between when it began in January through when it ends in September.

So you guys are kept literally out of the loop as it were until such time as the program has concluded?

I do not know what you mean by out of the loop. We get daily reports from the Morgan Stanley folks on the amount that they are buying each share, which is pretty much an even amount over the course of the contract period.

Yes, exactly. If we want to get more into the technicals we can with you, but they have delivered to us 5 million shares. So we have recorded that and retired those shares. The way the remaining 200 million is spent essentially is it just trues up at the end, and that is where Joe gave the range of we think we have got another 1.5 to 2.5 million shares that will come out of the system by the time this ends up. So that is how we really -- you know, at the end, that is why Joe is saying we will not really know until the end of this thing.

But the 5 million that you know have been retired, were you apprised of the total or average cost of those shares?

No, they are currently still in the market buying those back. While they did retire those shares for us, as you know, they would have acquired them through either borrowing them on the other market or other ways to get them to retire them.

Okay. Got it. So it is semantics. It is a distinction between retiring and actual purchases? (multiple speakers)

You are correct.

Okay. Finally, with looking at your guidance, does that assume -- I'm assuming it does not assume any additional layoffs above and beyond the 150 previously announced back last quarter?

Nothing of any significance. I mean the one thing that is always out there is we do move production folks up and down. That does not necessarily mean a layoff. It could mean just short weeks and those kind of things where we need to. We backed off on some temps.

So the direct labor number moves around a little bit more. But if we run at the kind of levels we are talking about right now, we have already made the changes. We got after that stuff early as you know, and so even from a production standpoint, we are in pretty good shape right now.

(OPERATOR INSTRUCTIONS). That concludes the question and answer session. Thank you for your questions. Mr. Walker, I will turn the call back over to you for any additional or closing remarks.

Thank you all for joining us today. In closing, I want to thank you for your continued interest in Herman Miller. I also want to express again my appreciation to all Herman Miller employees for their outstanding contributions. Working through the changes to our business has been a challenge for all of us, but we are 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.

That is all for now. We look forward to talking to you again next quarter.

Once again, thank you all very much for joining us today. That does conclude the presentation. Have a great afternoon.