MillerKnoll Inc (MLKN) 2008 Q4 法說會逐字稿

Good morning everyone and welcome to the Herman Miller Inc. fourth quarter fiscal 2008 earnings results conference call. Today's conference is being recorded. This presentation will include forward-looking statements to 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 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; 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 caller's 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 and as always I will open our presentation with a few introductory remarks and then turn the call over to Kurt and Joe for a more detailed review of our results. We have completed one of the best years in Herman Miller's history both in terms of our financial achievements as well as an execution of our strategic priorities. I'm going to spend some time this morning reviewing those accomplishments and then share a sense of what we see ahead for us in the new fiscal year.

I will start with the financial results, the focus of this call. We finished the year with sales up 5% over the prior year crossing the $2 billion mark for the first time since 2001. Leverage from the additional volume combined with our continued implementation to Herman Miller production system drove gross margin improvements of 100 basis points to 34.7%.

A heightened cost management focus (inaudible) operating expense improved by 80 basis points to 22.5% of sales. As a result, our operating income rose 200 basis points to 12.3% of sales. In November, we committed to increase our operating margins and you can see consistent and significant progress in each of the past two quarters.

We also put our balance sheet to work this year and took a little more leverage in order to facilitate repurchasing over $266 million of our stock. This drove an over 8% reduction in our weighted average share count for the year. All of that combined to drive a record earnings per share of $2.56 for the year, an increase of over 29%. And we also saw our cash flow from operations increase by 55% to over $213 million for the year. As a result, we ended the year with a cash balance of over $155 million.

Great results like these don't just happen. It took a lot of hard work from the 6000 employee owners of Herman Miller to get there. Our folks executed at a level of excellence that is truly remarkable. This type of performance also requires leadership. We are fortunate to have a committed and experienced group of leaders who are willing to make the tough calls and know how to inspire the people of Herman Miller to overcome any challenge.

While I am pleased with our financial performance I am even more excited by the accomplishments we made toward our long-term strategic vision. We believe there's a great opportunity to grow and diversify our business moving us from being primarily a US office furniture manufacturer to becoming a global habitat company with a formula centered around performance innovation. This past year we made significant progress toward making that vision a reality. Here are just a few examples of our accomplishments.

We introduced innovative new products in every segment of our business this year. In our retail business we introduced a new collection of home office products that won best of show at the International Contemporary Furniture Fair. Our international business introduced a new table-based office system that is remarkable in its simplicity and ease of installation.

Our health-care business introduced two new award-winning chairs for patient rooms. This is a significant milestone bringing Herman Miller design, innovation and ergonomics to what we believe is an underserved market segment. And just two weeks ago we introduced a major revitalization of our storage offering in the core North American office furniture segment.

In fact we just won four awards at NeoCon, our industry tradeshow, for some of those new products including the best of competition among all new industry products for our Teneo filing and storage solution and we're not done. We have several new major products in the queue for release in the next couple of quarters.

We also enhanced our health-care offering with the acquisition of Brandrud. With Brandrud's portfolio of soft seating, our health-care solutions will go further into patient rooms, patient treatment areas and public spaces. We saw double-digit sales growth in health-care this year and we expect that to continue into the next year.

We expanded our distribution channel internationally and ramped up our new manufacturing presence in China. For the year we saw our international sales up almost 18% now representing almost 24% of our total consolidated sales. That is a major shift from the 15% we were at just seven years ago in 2001 which by the way is also the last time as I mentioned earlier we broke $2 billion in sales. But back then it was much more about the US market.

And our work on disruptive technologies like Convia earned us a spot in the Fast Company Magazine Fast 50 list of the world's most innovative companies and an appearance next week on CNBC's business of innovation series. To be frank, Convia is still a very small business but we believe this innovation and building infrastructure is foundational to the future of our business and well-positioned for the challenges our customers and our country face.

Convia can make a significant impact on the ability to monitor, control and reduce the consumption of energy. And it will enable our customers to create environments that are more adaptable and pleasing to the user while reducing the cost of change. To use an automotive analogy, we believe Convia is the Prius of our solution portfolio.

We also further strengthened our distribution efforts in the North American market and were named Manufacturer of the Year by the Independent Office Furniture Dealer's Association. Finally, our people, practices and efforts around social responsibility earned us a ranking in the Fortune 100 Best Companies to Work For in America and recognition for having one of the five best diversity programs in the country.

I could continue with a list of accomplishments. It's something that I and all the employees of Herman Miller take a lot of pride in. But I'll stop here and simply thank everyone across the Company for the outstanding effort they put in this year clearly visible in what we have accomplished. So where do we go from here?

We are keenly aware that the macroeconomic environment we face particularly in the US is challenging. In particular, the demand picture for office furniture in the US is negative and we face significant increases in input cost. We have already prepared ourselves for some of the challenges.

In the fall we made changes to our operating cost structure to get ourselves leaner and better structured for further gains in efficiencies. In the spring, we announced a price increase that will become effective this summer. We continue to innovate and bring new products to the market and we're continuing to expand in new and emerging international markets.

Despite these timely and prudent actions, the macro factors were still have an impact on our financial performance in the coming year. And Curt will talk about that later in the call. But we're not changing our strategy. The vision is the same -- to grow and diversify our business moving us from being primarily a US office furniture manufacturer to becoming a global habitat company with a formula centered around performance innovation.

We have a very strong balance sheet, excellent cash flow and ample cash to continue to invest through the cycle and that is what we intend to do. We remain committed and focused on adding capabilities and building blocks that will enable us to grow and serve a broader set of customers.

We've managed through cycles in the past. As investors you can be confident that we have and will continue to execute at a very high level and we will emerge from this cycle a stronger more diverse Company with a very bright future. Our leaders and employee owners are committed to delivering on this promise and confident as well within our ability to do so. Now I'll turn it over to Curt and Joe to take you through the details of our fourth-quarter financial results.

Thanks, Brian. Good morning everyone. There is a lot to talk about again this quarter. As you saw in the press release we experienced strong quarterly revenue growth of 7%. Our continued emphasis on operational efficiencies and cost management drove 130 basis point improvement in gross margin and a 350 basis point improvement in operating income as a percentage of sales compared to the fourth quarter of last year. These items combined resulted in a fourth-quarter record earnings per share of $0.71, a 42% increase over the prior year. Let's look at sales and orders for the quarter.

Fourth quarter sales of $519 million represented our eighteenth quarter in a row of year-over-year revenue growth. The 7% growth led sales above the range of our guidance of 475 to $500 million thanks mostly to really strong orders in the first half of the fourth quarter that we were able to ship within the quarter combined with higher than anticipated demand from our international entities.

North American sales experienced a solid increase of 6% over the prior year. Our health-care business posted substantial gains both from organic growth as well as from the acquisition of Brandrud. In addition, our North American business saw continued strength in Canada and Mexico. I should mention that the prior year fourth quarter included $5 million of revenue from previously discontinued OEM business that did not accrue this quarter. So our real 'same-store' growth was even stronger.

Non-North American sales increased 23% from the prior year fourth quarter with gains across the board in all regions -- Europe, Asia and South America. We were particularly strong in the Middle East, Australia and Japan. Once again our international sales benefited from foreign exchange this quarter by approximately $8 million due to the weakened US dollar. About half of that was in the non-North American business, Europe primarily and the other half was in Canada. The weaker dollar also increased the operating income of our international business by about $1 million for the quarter when compared to last year.

Looking at orders in total, orders for Q4 were $498 million compared to $477 million last year, an increase of over 4%. We experienced significantly stronger orders in our retail, health-care and non-North American business as compared with prior year fourth quarter. On a sequential basis fourth-quarter order rates were up almost 10% from our third-quarter total of $454 million partially a result of the traditional turnaround from the third-quarter holiday season.

Looking more closely at the order information, orders in North America increased about 3% versus the prior year. Our core US office furniture orders were down slightly reflecting the broad economic trends in US. However, this was more than offset by strong order improvements in health-care as well as Canada and Mexico.

Orders in the non-North American component of our business increased over 16% for the quarter with the strongest gains coming from Asia, the Middle East and South America. 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 the weakened US dollar. Gross margin is next.

We're once again very pleased with our gross margin performance for the quarter which ended at 34.9% of sales and represents an improvement of 130 basis points over the prior year of 33.6%. This strong performance was primarily the result of mix shift during the quarter to more profitable business units along with continued efforts around cost improvement and increased leveraging of overhead resulting from the higher sales.

We have also continued to realize margin improvements on products that have been recently introduced. Additionally, we had approximately $3 million of onetime benefits and margin from reduced inventory levels that generated a favorable LIFO adjustment as well as the realization of service revenue associated with a large project completion.

On a sequential basis, gross margin improved from 34.3% recorded in the third quarter due to the overhead leverage of the additional volume combined with the onetime benefits I just mentioned. Now let's spend some time on a hot topic for the quarter, input costs.

As expected, we did experience an increase in input costs for the quarter primarily in steel and fuel which drove about a $3 million year-over-year hit to the financials. Although unexpectedly, it really didn't start to show up until the month of May. So we only saw one month of the increase this quarter. This is likely to worsen in Q1 as we're going to see a full quarter's impact which is what is baked into our forecast.

As you know, we have implemented a price increase which is designed to offset some of this but we will not see the benefit of that price increase until our second or third quarter. I'll get into this a little more when we discuss the forecast.

Operating expenses for the quarter were extremely well-managed and totaled $115 million or 22.2% of sales compared to $119 million or 24.4% of sales last year. This represents a year-over-year decrease of about $4 million even though sales are 7% higher driving a reduction as a percentage of sales of 220 basis points.

The decrease in spending was driven both by our cost reduction actions announced during the second quarter as well as all of our teams having done an outstanding job in controlling expenses for the quarter yet at the same time getting all of our important work done. Sequentially operating expenses increased $7 million from the $108 million recorded in Q3. As expected we did see a ramp-up of spending in connection with the 2008 NeoCon trade fair as well as variable costs associated with higher sales volume.

We're extremely pleased with return on our investment in NeoCon including the gold and three silver awards to go along with our new product, Teneo, having taken the Best of Competition award as Brian mentioned. Gains in gross margin and reduced operating expenses drove operating income as a percentage of sales up to 12.7% for the quarter which is a 48% increase over the prior year and one of the highest operating income results ever recorded and certainly consistent with our goal of 13%.

Our effective tax rate for the quarter was 35.1% which brought us in line with our full-year anticipated tax rate of 33.9%. You will perhaps remember that at this time last year our fourth quarter effective tax rate was 24.4%. The decreased tax rate last year was the result of favorable circumstances related to foreign tax credits and various tax reserves.

That benefit during last year's fourth quarter positively boosted our EPS for that quarter by $0.03 which makes our current year growth in EPS even more impressive. Consolidated net income for the quarter was $39.5 million approaching 8% of sales and is a 25% increase over the prior year.

Earnings per share for the quarter totaled $0.71, a record quarterly EPS and a 42% improvement over the $0.50 per share recorded at this time last year. Our strong operating results combined with a 12% reduction in the average share count produced these record numbers. I will turn the call over to Joe and he will give us an update on the balance sheet.

Thanks, Curt. Regarding the current quarter balance sheet metrics, higher net income and lower working capital requirements drove cash flow from operations up to a very strong $90 million in Q4 compared to $46 million in the prior year. That's a 95% improvement, a great quarter for cash flow. And by the way for the full year our cash flow from operations was an even more impressive $214 million.

Lower working capital requirements drove (inaudible) source of funds of $41 million in the current quarter. This compared to $7 million sourced during the prior year. Lower accounts receivable balances due to the timing of sales and outstanding work by our collection teams combined with lower inventory levels and increase payables and accruals drove the majority of the change in working capital year to year.

Capital expenditures of $12 million for the quarter are slightly lower than $13 million spending during the prior year, well within our planned levels. Full-year capital expense was only $40 million. We did a great job of managing our capital requirements to slightly less than the prior year's $41 million.

As you know earlier in the year we entered into a $200 million accelerated repurchase agreements with Morgan Stanley. A portion of that agreement was completed during the quarter. As a result they delivered 438,000 shares of stock to Herman Miller to close out on that part. When the remainder is completed at the beginning of September, we should get back approximately 2 million additional shares. Outside of the ASR there were no additional share repurchases this quarter but we still have $171 million of share repurchase authorization remaining.

We ended the quarter with a cash balance as Brian mention of $155 million. Of this amount approximately $56 million is currently located in our international entities. We're also in a strong liquidity position having just renewed our revolver this past winter. We currently have approximately $237 million in unused capacity on that revolver.

We're in compliance with all of our debt covenants and are currently running at a leverage ratio of approximately 1.3 times EBITDA which is about in the middle of our targeted (inaudible) debt to EBITDA. As you heard Brian say earlier, we intend to use our cash balances and financial liquidity to continue to invest and grow our business. That's it for now on the balance sheet for the quarter. I'm going to hand it back to Curt.

Thanks, Joe. We'll look at the outlook next. We're starting the quarter with a backlog of $286 million which is about flat with last year. Our order levels were pretty consistent over the last half of Q4 although we remain cautious about the current overall economic environment particularly in the US.

In addition effective with the beginning of our new fiscal year we sold one of our own dealerships as part of a planned divestiture. This transition will negatively impact our year-over-year revenue comparisons by approximately $8 million for the quarter. When you put all of that together we are expecting first-quarter sales to be in the range of $470 million to $495 million which when you adjust for the dealership transition represents basically a flat forecast to the prior year.

As I mentioned earlier, gross margins in our next 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. We also have implemented a price increase but as I've previously mentioned we won't really see the impact of that until quarter two or quarter three.

We also won't have the benefit of all the -- of some of these onetime favorable adjustments that we saw in the current quarter. As a result, our gross margins are likely to decline in the short-term from where they have been the past couple of quarters and be more in the range of 32.5 to 33.5%. However, operating expenses are expected to be significantly lower than the first quarter -- in the first quarter of -- sorry. Operating expenses are expected to be significantly lower than the first quarter of last year as a result of the cost structure changes we implemented last year and also the sale of dealership mentioned above.

Plus as you know we have a variable cost structure especially when it comes to incentive compensation and with lower earnings we will see lower bonus costs. The effective tax rate for the first quarter is expected to be higher as a result of the [expiration] of the research tax credit and as a result will be in the range of 34 to 36%. Putting all of that together in terms of earnings guidance with relatively flat revenues, higher anticipated commodity costs and lower operating expenses and higher taxes, we expect earnings per share to be in the range of $0.49 to $0.56 per share for the first quarter. I'll turn the call back over to the operator and we will take your questions now.

(OPERATOR INSTRUCTIONS) Todd Schwartzman, Sidoti & Co.

What type of price increases have you announced if any non-North American?

We did a price increase in international. I think they were all fairly consistent somewhere in that sort of 4% range. We're a little bit ahead in international. We did it in two steps. One of them came in a little bit faster than the one we're doing in the US. But overall they're all in about the same range give or take.

Okay, is there any way to quantify to what extent international sales might have benefited in Q4 from buying ahead?

We don't believe that there is any impact of buying ahead in this quarter. That's more likely to be seen as we get into -- and it won't show up in sales as you know, Todd, if you watched us in the past as much as it will show up in orders right before the price increase.

But to be frank, by the time -- when we make the announcement we don't give anybody advanced warning of the announcement. So it's not going to come in prior to the announcement. It's going to come in prior to the effective date typically. And we didn't really announce a price increase until the very end of the quarter I think in May sometime. So no -- very unlikely we see any impact of that other than -- in fact I can't think of any part of the business we'd have seen an impact of that in yet.

I know you mentioned some pockets of strength in the Middle East, South America, parts I guess of Asia. On the whole, what -- in the month of June what type of change in business conditions are you seeing overseas?

Yes, I would say we don't have enough data yet on June to really make any comment on June. We're only a couple of weeks into June and right after year end and first two weeks of any period the data is hard to read because of what happens right before you finish a period. So I would say I don't think we have any read there that (inaudible) change in June.

Overall if you looked at the information that Curt gave you we saw pockets of strength throughout international in the fourth quarter. If there's any area that we have looked at that we're paying attention to it's some of the big financial centers where of course all of the issues coming with the bank would be the area that we would be paying most attention to going forward.

Got it and I know with respect to North America, I know you said you were pleased with the growth that you saw in Canada and Mexico. In the US what are you seeing by geographic region?

It is different by geography. It is certainly from at least from our data -- I don't know if I can speak to this as an industry thing. If you look at the West particularly the Southwest has been a tough area, sort of ground zero for all of the problems in the mortgage prices. That has certainly been a tough area. The Northeast actually has been quite strong for us as well as the sort of Upper Midwest and some of Texas which makes sense obviously with what is going on in the oil market.

How much of the unusually high service revenue from that one isolated project -- what did that contribute for the fourth quarter?

Combined, both of those were about $3 million that LIFO piece and the LIFO peace keep in mind is just the result of the continued HMPS efforts and we're running the businesses leaner and leaner every day. So it's not surprising to see inventory levels drop when you're doing that kind of work. But it's a little unusual to talk about a LIFO liquidation during a time of rising prices yet we have got such an operational improvement that you start to see that but together both of those were $3 million.

Great. Your CapEx budget for full year '09, is that around that $40 million still or higher?

I think we are 50 or so. Yes, we ran 40 this year, 41 the prior year and we are -- we've got a plan of about 50 maybe (inaudible)

Finally, the tax rate assumption I think you said 34/36 for the quarter for Q1? Are you throwing out any number for full year?

No.

Okay, thanks (multiple speakers)

The real question is going to be what happens there with some of the legislation. So we really can't see beyond the quarter at this point.

That's part of the reason it's up right is that things expired and we've (inaudible) get back to work to put that back in if they're going to.

Chris Agnew, Goldman Sachs.

First question on the international -- seeing some leading indicators for instance weakness in Europe. Can you maybe just talk about activity you're seeing across some of the countries you operate in Europe?

Well remember our business in Europe, we play broadly but not deep in any one market with the one exception of that being the UK. So really when you look at the continent, we're not as much driven by the economy because we're not playing as kind of the major market share leadership position we have in the US or the UK. If there is any market again and I said this earlier that we do watch and it's not so much looking at countries, it's looking at sort of major cities where the money centers are where of course we're nervous about the banks.

In particular of course that would lead you to London as one of those. We are still seeing some good opportunities in the UK though around the government and smaller business. But it's the banks in particular for the financial sector that you know -- we don't know what the impact is going to be around those big cities.

Chris -- sorry, Joe. I would add to Brian's comment that earlier in our international experience we were more concentrated in the city of London. But John (inaudible) the President of our business there who lives in the UK as you know has done a great job of diversifying our UK business away from just that London-centric focus and we have a broad business across the UK today which has really helped.

And actually to support that with the numbers (inaudible) what Brian and Curt just said, we actually did in the quarters see an increase in both our sales and orders in the UK. So even with the financial district specifically in the city of London and others being soft because of the diversification that Curt talked about in UK we saw growth both in orders and sales for the fourth quarter.

We probably see the UK being relatively flat which for everything you read about that's not so bad given what is going on in some of those sectors in London.

Great, next question on price. What is the customer acceptance so far to price increases? What is your confidence and ability to realize that? And then maybe just a clarification. Curt, you talked about the price increase plan in August wouldn't offset fully the inflationary pressures. Were you just speaking to Q1? The timing impact -- so therefore do think it will offset as you go forward into Q2 and Q3?

You're right, Chris, we have a sequential sequencing in experience that you'll see in the first quarter whereby the price increase effective in August won't show up in our results until the second and third quarter. So -- yet those commodity prices we started to see moving up in May. So we will see a full quarter's impact on the input side both with diesel and with steel primarily.

We think we can catch that up with the price increase later in the year. And can we offset all that? We will see as we get there. Right now we are thinking once we get to a run rate basis we should be able to have gotten those things ironed out across each other.

Chris, just to make sure we are clear, we won't make up whatever we have the shortfall in the first quarter and the year. We don't believe that. So what we're trying to do is have the price increase positioned so that on a run rate basis as it gets up to full speed we begin to offset the commodity prices.

Of course the question you ask is sort of the wild card in all of this. What will customer acceptance be? And the plain fact is we don't know yet because it's too early. These things because we're really in a contracting business, we have to actually go out and negotiate that customer by customer. So this is a bit of a -- it's a detailed job that will take place over the next several months.

I guess what gives you confidence right now is that I don't think what we're dealing with is a Herman Miller issue or even just an office furniture industry issue. This is a broad macro issue and almost any business leader I've talked to especially from an industrial company basis, everyone is talking about price increases in kind of 5 to 7% range.

I think historically, we have been able to when it's been clear that this is a macro issue, we have found good acceptance by our customers. They understand at some point we're trying to offset as much of those increases through efficiency gains and execution. Of course we're trying to do that again.

We won't make all of it up through price increase. We will have to do some of it through efficiency gains and better execution generally but we believe that the balance that we will be able to eventually offset. The question will be does the industry remain disciplined and does everyone continue to move forward in a way that says this is an industry problem and my belief is we have a very smart industry and that folks recognize that this is one that you can't differentiate on because we all have the same level of issue.

Okay and the follow-up to that. The balance of initiatives (inaudible) efficiencies and the price increases, is that to recover sort of where the price of steel for example where it is today? Or is there -- are you still benefiting in Q2 and Q3 from maybe some longer-term contract agreements? And maybe an add-on to that, I know roughly is it two-thirds of your steel is brought in directly through suppliers? What things can you do to sort of defray the cost pressures that they will sort of want to push through towards you? Thanks.

Chris, because I'm not sure I can answer all of those details let me just give you a broad statement. First of all, the impact of our contracting process delaying the impact we saw the end of that for the most part in May. That's why you began to see the price increases hit us in May.

Can give a perfect forecast as to how it's going to roll in from here? Clearly we can't. Will we continue to look for ways to move around within commodities owned like between hot rolled, cold rolled, all those kind of things? Absolutely. Are we working with our subsuppliers on HMPS-type efficiencies? Yes, we're doing that every day of the week.

So those things combined are in our mind of what it takes to try to offset what is a voracious appetite for commodity cost increases. And to be frank, those things are down to levels of detail that's probably difficult to talk about on a call like this. On the other hand I guess what I can tell you is you guys have seen us consistently find ways to execute and improve our performance. We're focused on that.

We think between price increase and those things we can get to a point where we offset it. On the other hand the question will be does the market accept it from the price side. We can be confident on our end but there is a lot of things in there that we have got to go out and talk to the market and I think as we finish -- we get into the end of the first quarter for sure by the end of the second quarter we will have a much better read of that. But it's just going to take some time to work it through the system.

That's very clear. Thank you very much.

(OPERATOR INSTRUCTIONS) Budd Bugatch, Raymond James.

Congratulations on really a pretty spectacular quarter and year. Question for you kind of -- we're sitting here in South Florida with a very, very broken and cloudy crystal ball kind of looking forward and I recall back when I think revenues had ended at the $1.3 billion level and you were looking to double revenues in a five or six-year timeframe talking about the various levels of growth.

I was curious if, one, you can update us on the longer-range plan to get to that. I think you're going to come short of those revenue growth. And then for -- the year we're just entering, you had in the third quarter given us kind of a range of low-single digit to flattish revenue growth and I think an 11 to 12% op margin target. I wonder if you could update us on that.

Well as you have said, our crystal ball is no clearer than yours quite frankly at this point. As you I'm sure are keenly aware, the macro economic picture is pretty cloudy. I think we have better read on some things like where we think the demand picture is in the US as well as commodities.

The international is harder to predict. So far it's hung in there. Will it continue to do so I think is a question that is on everybody's mind at this point. And quite frankly we don't have a better crystal ball than that. Right now we're pretty confident about what we see in the short run and we're pretty confident in what we see and I would say short run being the first quarter. We've got good visibility there.

As far as the year I would say it's cloudy enough at this point that we're not sure we got a better picture to give you. So sort of the (inaudible) short-term as a quarter we're pretty clear. The mid-term sort of the year is cloudy. Longer-term, we're confident in the long run we are going to do what we said we were going to do strategically and it's going to have to be through a combination of internal development, getting the markets healthy and turned around and doing acquisitions that add to the capabilities that we need for both geographic expansion which we think continues to be (technical difficulty) good opportunity.

What we see on health-care side, we think there are some product categories within the core business that are interesting to us that we don't have a big piece of today that we can enter. And we continue to believe long run can be and will be a big part of our story. So I would tell you our goals while we may not hit exactly the goal we originally set of getting to $2.6 billion by 2010, we haven't given up that we can get within spitting distance of that if we get a turnaround in the next twelve months of the economy. If it's longer we may not get quite there but it will be a matter of when not if as far as we are concerned.

Do you still think revenues for this year as you're planning forward are flat to low-single? Or do think there's more of a larger risk now to the revenue target than I think you espoused in the third quarter?

As they're always -- that's a tough one to call right now. But I would say you know probably that sort of flat number is what we're looking at today and that picture will get clearer for us as we move through the balance of the year.

As I think about your question I go back to some of the comments we made on the prior conference call which we really said there's three factors that we see out that are kind of big unknowns. What does the US economy do and what's the sort of (inaudible) piece of that? Because the big final piece of our business is still tied (inaudible) that traditional measure.

What goes on in international? We're seeing and describing a lot of opportunities there. And there is this unknown across the commodities impact as to how that affects our profitability. But from a growth standpoint, I think Brian is right to say we're well-positioned to look at all these growth opportunities and go after them with abandon and to some of this extent it will depend on what happens in some of those places.

Understood. Help me with a little but of understanding on the verticals. I know you're taking a dealer revenue out in this quarter. Remind me -- I think you owned three or four dealerships or remind me how many dealers you still own and what percentage of revenues that is today?

There are seven dealers that we own.

How much of revenues is that or how much of incremental revenues? Because if you sold them you would get the wholesale side of that.

Right, we really don't ever get into that level of detail.

Well but it would have an impact. If you sold this dealership -- you've given us I think the impact for the quarter. How about for the year since (multiple speakers) had to take that out of the base?

You'd probably figure that they're running that kind of a number on a quarterly basis.

And incremental, Curt, or is that their total gross revenues which would include your wholesale portion?

I don't have that at my fingertips right now but how about I get back to with that (multiple speakers) information (multiple speakers) help you out.

Can you give us any comment -- you gave us the verticals in terms of growth and talking about retail health-care and non-North America. Can you give us a feel for the composition of the verticals now?

In terms of size, Bud?

Yes sir.

As you know, this is one of those things that gets really tough because we can't get more than what we gave in the typical financial release. Otherwise we get into disclosing stuff that quite frankly I don't really care to tell all my friends and neighbors about. So I guess the answer is not anymore than what we disclose in the financials just because it gets to the stuff in there that we've got moving around that we really would not like to talk about.

Well [they disclose] some of it to you so I think they have the same feeling.

They're nice guys.

Okay and what about the product composition? That will be in K, I believe.

It will.

We'll have to wait for that?

There was not a big shift in the mix of product sales. But as a percentage each of them stayed pretty constant to where it was a year ago and even the prior quarters. So product mix stayed pretty stable.

All right, I think I have exhausted my questions. I certainly appreciate your performance and good look on this year.

Thanks Bud. Thanks for the note last night too.

Matt McCall, BB&T.

I think last quarter you gave us some indication if I remember correctly gave us an indication of the maybe order pattern as you finished up -- I think Curt you said that because the order pattern was consistent in the back half of the quarter. Can you give us some kind of number to put behind that and then what type of order or shipment per week number you're using in your assumptions?

I think we have been running these kind of $37 million weeks kind of into the quarter and I don't know that we have really seen much change on that.

Yes, the weekly average for the quarter on orders averaged about $38 million. And as we went through the quarter March was a pretty strong month for us in terms of order flow and that's what really helped as Curt was describing before to fill the backlog in order to get those shipped out in the quarter. So that's what helped with the quarters. I think April softened up a little bit but then May came right back again.

So that was the -- gives you a rough idea of the order flow through the quarter. Nothing too dramatic, reasonably consistent but a little stronger in March and a little stronger in May.

Are you assuming a continuation of the May trends in the remainder of --or through Q1?

I could probably do that math but just haven't.

For the most part if you do the math you would get to that same spot where you would see that pretty much the trends of what we've been seeing as Curt described would be what our expectation for the quarter is.

And, Brian, I understand that the crystal ball is cloudy right now. When you look -- and I understand that you have better visibility into this current quarter. But when you look your sales pipeline and when you look at the (inaudible) the bid activity, the customer visits, some of those leading indicators -- are those leading indicators providing any source of concern or are they still pretty consistent and up year-over-year?

I would tell you overall we still hear good things from the field sales group. They still seem pretty buoyant. We're seeing lots of customer visits. So we haven't seen any precipitous change or anything to kind of immediately tell you there's something going on in those kind of what I would call activity base measures.

Of course pipeline is always a hard one for us because with the speed with which we turn product these days, our visibility from the point we got an order to when it ships is so much tighter than when I first was doing these calls with the guys and we had 12 to 13 weeks of backlog. Now we can see what we're going to ship in the next five weeks and we can kind of hear what's coming over the next couple.

But the distance between customer decisions and us shifting is so tight any longer that you know we really have to look at those activity levels. But you always have to remember that you have got to sort of get your own judgment about what's going on in the general economy at the same time because like everybody, those activities often aren't a pure sort of reflection on what is happening.

So I would say to you we haven't seen any change yet. All of what you guys hear from us is probably looking at the same cloudy crystal ball that you guys have about the general economy and then simply looking at what we are seeing in current order trends and saying that's about the best numbers we have got to base it on. And beyond that the only thing we can do is get out there and sort of fight in the trenches everyday and keep delivering new products that enable us to create new opportunities to go after customers and service them like crazy.

So what we're focusing everybody on (inaudible) go out there and win the business that is in front of you, ship it on time. Make sure it's a great quality. Do the best job you can managing cost and let's keep working on new capabilities. And what I think you guys should see from us, what we can control and what we can manage, we're doing a good job with. Beyond that, the crystal ball will be what it will be.

I would agree with what you just said. I think in the past you've talked about the breakdown of your business project versus that day-to-day business. Any update there?

It stayed about the same. The percentage of business that were the projects in the quarter that we got in were about the same as it was in the prior year and as in the prior quarter. So it stayed pretty constant.

What about looking outside of the US and maybe breaking down the US versus your non-North American business. Any changes within the different geographies?

You mean mix of (inaudible)?

Yes.

I don't think we have seen any real pattern shift across the business. The one part of the business that has been sort of the softest over a period of time has been the retail business but that really again fits I think with that more macro picture that you guys are seeing if you're watching the retail sectors. In particular we had some retailers that we know pulled some inventory out of our pipeline this past year. We felt a little bit of that early on in this year.

That's probably the only macro sort of pattern difference that we have seen so far other than a general lower level of growth in the US. If you cut it out beyond that, and thhe other pattern that we've been talking about all morning which is in the commodity cost thing which is the one that is the most visible and the most clear quite frankly.

So no large projects in the non-North American in that market that maybe provided a boost to that non-North American business this quarter?

You know, our international business as we have always said to you guys is more project driven than the US business. And I would tell you we could give you a list of big projects that hit this quarter but I could also give you the same list to hit the third quarter and the second quarter. There's just -- that business does run on -- we don't have as many day-to-day as much day-to-day base business in international as we do in the US although that is shifting over time and becoming more base business particularly in places like the UK.

But we still have to go out there and win a few big every quarter and often in all kinds of very diverse geographies. That's how you build that business over time. So we could give them to you but it would be kind of a funny game because you have to take them out of every period and then I don't know what you do with that data.

Just no change I guess is the point in what you're saying.

Nothing unusual I would say compared to what we typically see.

You mentioned the inflation again. I think last quarter you quantified in that 25 to $30 million of pressure for the year we're expecting $3 million from just the May time period -- I'm sorry. You saw $3 million from just the May time period this quarter. What's the expectation now for the full year and what is baked into your Q2 -- Q1 guidance outside of any benefit from price?

Sequentially from the fourth quarter we probably have a $7 million impact that will show up in Q1 which will be a 10 to $12 million impact over the Q1 of last year. Beyond that we're going have to see where things kind of land for the rest of the year.

If we just -- I understand it's cloudy but if we just carried the current level forward is it kind of 10 to 12 annualized?

Yes, assuming there aren't changes in these input costs because I don't know where it that is going. And we talked about the offsetting impact of the price increase which will start to pick up later in the year.

If you take out price for now the best estimate we have really is you can take that year-over-year increase in the first quarter and sort of assume that's going to run throughout the year is the best guess. We have right now, if we get something done around oil and some other things that might change. But what we can see today that's about as good an estimate as we have got.

(OPERATOR INSTRUCTIONS) We have no further questions. I would like to turn the conference back over to our speakers for any additional or closing remarks.

This is Brian. Thank you all for joining us today. In closing I want to thank you once again for your continued interest in Herman Miller. I also want to express again my appreciation to all Herman Miller employees for their outstanding work and commitment to our shared success.

As we look forward, we understand the challenges we face in the short-term. We're committed and confident that we have the right long-term vision for Herman Miller, the people to make it a reality and the financial resources to keep moving forward even in challenging times. That's all for now. We look forward to talking to you again next quarter.

That concludes today's teleconference. Thank you for your participation and have a good day.