MillerKnoll Inc (MLKN) 2009 Q1 法說會逐字稿

Good morning, everyone. Welcome to this Herman Miller, Inc. first-quarter fiscal 2009 earnings results conference call. This call is being recorded.

The presentation will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These risks and uncertainties include those risk factors discussed in the Company's reports on the 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 each caller limit themselves to one question and one follow-up question 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. Mr. Walker, please go ahead, sir.

As always, I'll 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.

With all the events that have occurred in the financial markets recently, I know you have all been very busy, so I plan to keep my comments brief and let Curt get right to the specifics of our quarter's results.

As our results demonstrate, our team did a great job of executing this past quarter. As expected, overall conditions have been challenging, but our strategy to diversify our revenue enabled us to find areas of growth, and our employee owners did a great job of managing costs. We ended the quarter with a modest decline in revenue but managed to increase our operating income percentage to 11.8% of sales, delivered an 11% increase in earnings per share and maintained our strong balance sheet.

Orders were better than we expected and benefited from the pull-forward effect of our price increase. While we are very pleased with the past quarter's operating performance and the backlog we take into the next quarter, we understand and are aware that the events of the past few weeks may add to an already challenging environment. You can be sure that we have a firm handle on the levers we control and we will continue to maximize the opportunities presented to us.

The changes we made last November in anticipation of a tougher environment are paying real dividends today. This is reflected in our operating results and has ensured we have the headroom to continue to aggressively invest in our long-term strategic plan.

As I've stated in the past, our mission is to improve the performance of human habitats. We do this through performance innovation, inventing new and original ways for our customers and our own business to perform better. We believe this mission and focus will enable us to deliver -- to diversify our revenue base and find new areas of growth and opportunity in the core market we serve.

This past quarter we achieved some significant steps towards this long-term vision. First, we completed a strategic alliance with POSH Office Systems. POSH is a leader in the design, manufacture and marketing of office systems and furniture across the Asia-Pacific region. The agreement allows Herman Miller and POSH to access each other's product portfolio and distribution network in the region. This will provide us with both new products and new distribution within Asia.

Second, we announced a new retail distribution agreement as part of our Herman Miller For The Home business and looking to continue to diversify and grow in the consumer market, we have begun working with Cosco, the leading warehouse club retailer, whose affluent member demographic aligns closely with our retail customer target.

Third, we finished the development of a new generation of high-performance work seating from Herman Miller -- the Embody chair. We are greatly encouraged by the positive feedback we've received through the early customer engagements. The official introduction of this chair will be at the Orgatec Furniture Fair in Germany in October, and we will begin to take orders from our US customers in the next few weeks.

The new storage products we introduced at NeoCon in June are in production and off to a good start. And, there are still more innovations in the pipeline for the coming years that will continue to grow our presence across multiple markets and geographies.

We continue to be excited and confident about the long-term future of Herman Miller, and you can be confident we know how to manage through challenging conditions in a manner that balances the need for short-term results with the need to invest for the long-term.

Now I'll turn it over to Curt and Joe to take you through the details of our first-quarter financial results.

Good morning, everyone. As you saw in the press release, we're off to a good start for the new fiscal year, particularly in light of the continuing challenging environment around us. We did experience a modest decline in sales for the quarter, which was not unexpected, but we are encouraged by the strength in order entry for the quarter, up 11% over the prior year.

Gross margins held very well, considering a $9 million year-over-year increase in commodity costs. We also did exceptionally well in controlling our operating expenses. They were down $8 million from the same quarter last year.

All of that drove a 90 basis point improvement in operating income, up to 11.8% of sales. Combine this with the 10% lower share count, we ended the quarter with EPS up 11%.

Let's look at sales and orders for the quarter. First quarter sales of $479 million are slightly lower than last year but in line with our expectations and about the middle of the range of our guidance. North American sales experienced a decrease of 2.6% over the prior year. The modest decline was primarily in our US office furniture market and is consistent with the challenging macro environment that we're all facing and which this week's events only highlighted.

This was partially offset by substantial gains in our health care business, which posted improvement from organic growth as well as from the acquisition of Brandrud. In addition, or North American business also saw continued strength in Canada and Mexico.

In the past few quarters, we have been able to offset softer sales in the US with stronger gains in our non-North American business. That was not the case this quarter. We have several large projects in the UK and other parts of our international business where orders were recognized this quarter, but the revenue will not be recognized until Q2. As a result of the timing of these projects, we saw a decrease in our non-North American sales of 4.5% from the prior-year first quarter.

We continued to see growth in most of the emerging markets this quarter, especially in the Middle East, Eastern Europe and South America, and we remain confident in our ability to continue to generate growth in the international business. In fact, our non-North American orders that I'll talk about in a moment were up 10% for the quarter.

While the US dollar has shown recent strengthening, our current quarter benefited by the weaker dollar relative to one year ago. Our international sales were boosted by about $4 million as a result. About half of that was in the non-North American business unit, Europe primarily; the other half, Canada and Mexico. The weaker dollar versus year-ago levels also increased the operating income of the international businesses by approximately $1.5 million for the quarter.

Looking at orders, in total orders in Q1 were $535 million compared to $484 million last year, an increase of 11%. While that's a solid order performance, it's important to note that we did implement a price increase which became effective August 4. As is normally the case, we did experience a pull-forward of orders before the price increase took effect. We estimate that amount to be approximately $35 million of orders entered this quarter that probably would have occurred in Q2.

But even after excluding that estimate, we still demonstrated growth in each of our segments. On a sequential basis, first quarter orders were up 8% from our fourth-quarter total of $498 million. If we remove the effect of the price increase, we are about flat with the fourth quarter.

Looking more closely at the order information, orders in North America increased about 9% versus the prior year. Some of that increase here was due to that pull-ahead effect that I just mentioned, although our health care business demonstrated very solid order growth.

Our other indicators remain positive as we continue to have a high percentage of our business in projects. In fact, we saw an increase in the amount of large projects and an increase in the total volume in our sales funnel, plus the feedback from our recent annual dealer meetings remains positive.

As I mentioned earlier, orders for the non-North American component of our business increased over 10% for the quarter with the strongest growth coming from Europe and South America. In addition, as Brian talked about in his opening, we have also just forged the strategic alliance with POSH, which should augment our growth in Asia. We usually don't spend much time talking about the other category of revenues, which primarily contains our Herman Miller For The Home business. This quarter our Home business had a substantial year-over-year increase in orders, partially due to the price increase we've already talked about. But in addition, we also started to see the benefit from the new retail distribution alliance with Cosco, which Brian mentioned, as well as increased order activity from our specialty retailers.

Gross margin is next. Our gross margin performance for the quarter ended at 33.9% of sales and represents a decrease of 20 basis points from the prior year of 34.1%. This was truly a significant accomplishment as our margins faced the headwinds of both lower volume leverage and significantly higher commodity cost while, at the same time, not yet realizing benefit from our recently enacted price increase, which we expect to begin to see in Q3.

We were able to offset the incremental cost through our focus on continuous improvement, and we also had a mix shift away from lower-margin service sales we recorded last year during the same period. On a sequential basis, gross margin declined from the 34.9% recorded in the fourth quarter, primarily due to the commodity cost increases.

I'll shed more light on our specific cost increases. I'm sure the story will sound familiar, as it's probably the same thing you are hearing from all manufacturers. We were successful in holding off the increases until now, but certain of our contracts have been updated with new pricing, and this quarter we really started to see the impact of these increased costs. We saw significantly increased costs in steel, aluminum and fuel for the quarter, which in total increased $9 million over last year. While these costs cycled in during the quarter, they ramped up more significantly in August, as we had expected. Thus, we will likely see a further negative impact as we move through Q2 since these costs will likely be with us for the entire quarter. There is some indication that both steel and oil prices have begun to soften, which would help us in the long-term. However, even with some moderation from current levels, these costs will likely remain significantly above year-ago levels. I'll take you through our forecasts later, and we'll discuss more specifics on this.

Regarding operating expenses for the quarter, the teams did an excellent job of managing costs. Operating expenses totaled $106 million or 22.1% of sales compared to $114 million or 23.1% of sales last year. This represents a year-over-year decrease of about $8 million or 100 basis points. A majority of the improvement is from the restructure actions we took last November. In addition, we also recorded lower incentive compensation costs.

Sequentially, operating expenses decreased $9 million from $115 million recorded in Q4. This decrease was partially due to lower variable expenses associated with the volume decrease. In addition, our Q4 results reflected higher spending in connection with the 2008 NeoCon trade fair. The good news is that, even with the lower volumes and resulting loss of leverage and significantly higher commodity costs, we were still able to increase our operating income as a percentage of sales by 90 basis points to 11.8% for the quarter, a great accomplishment.

The effective tax rate for the quarter was 35%, down slightly from the prior quarter of 35.1% but up from the previous year's first quarter rate of 33.5%. Expiration of the US R&D tax credit contributed to this higher year-over-year tax rate.

Consolidated net income for the quarter was $33.4 million, which is 7% of sales and just about the same amount of net income we generated last year on 3% lower volume. Earnings per share for the quarter totaled $0.60, an 11% improvement over the $0.54 per share reported at this time last year. The work we did back in January to change the capital structure helped us drive an improvement in EPS on basically flat earnings, due to a 10% reduction in our average share count.

I'll turn the call over to Joe, and he'll take us through an update of the balance sheet.

Regarding the current quarter balance sheet metrics, the Company's cash position at the end of the quarter was $148 million. Of this, approximately $54 million is located internationally. Cash flow from operations for the quarter totaled $3.9 million compared to $31.8 million for the same period last year. The current quarter's operating cash flow reflects a working capital use of funds of $45.2 million, due primarily to reductions in accruals for the payment of prior year's incentives, which, by the way, totaled over $38 million.

As you've seen in prior years, it's not uncommon for us to have low cash flow from operations in the first quarter, due to the timing of the payment of our incentives. Last year first quarter was a little different in that we also had some offsetting increases in our tax accruals including an adjustment related to the adoption of FIN 48, accounting for uncertainty in income taxes.

Capital expenditures of $8.2 million for the quarter are in line with the $8.9 million spending during the prior year. And as a quick update on the $200 million accelerated share repurchase agreement we entered in January, it has officially been completed as of September 4th. In total, we repurchased approximately 7.5 million shares at an average price of $26.61. We received [five point million] shares of stock in the prior year, and on September 9th we just received the remaining 2.1 million shares, which will be reflected in our Q2 share count. In total, ASR reduced our shares outstanding by 12%. Outside of the ASR there were no additional share repurchases this quarter. We still have $171 million of share repurchase authorization remaining from the Board.

We're also in a strong liquidity position, having just renewed our revolver last winter. We currently have approximately $237 million in unused capacity on that revolver. We are in compliance with all of our debt covenants and are currently running with a leverage ratio of approximately 1.3 times EBITDA, which is toward the low ends of our targeted range of one to two times of debt to EBITDA. But, given the current market conditions, is appropriate relative to our strategy.

That's it for now on the balance sheet for this quarter. I'm going to hand it back to Curt.

Thanks, Joe, let's look at the outlook. We're starting with a solid backlog of $332 million, which is 19% higher than last year, although, keep in mind, the pull effect of the price increase did help to drive some of that increase. A portion of that backlog will not ship in Q2, based on the customer requirements.

On the positive side, we do expect to see our traditional increase in government year-end sales this quarter. And our international business has several large projects that are shipping this quarter plus the new distribution agreements in Asia and in our US retail business are expected to drive improvements there. All of this brings us to expect second-quarter revenue to be in the range of $490 million to $515 million, essentially flat with the prior year.

As I mentioned earlier, gross margins in our next quarter are expected to face continued headwinds from higher commodity prices. While we expect to realize some benefit from our ongoing product cost improvement initiatives in place and we will start to see the benefit of the price increase, these efforts are not likely to offset all of the anticipated upward commodity pricing pressure. 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 33% to 33.5%.

However, operating expenses are expected to be lower than the second quarter last year as a result of the cost structure changes we've implemented. The effective tax rate for the second quarter is expected to be higher than the prior year but similar to the current quarter, as a result of the expiration of the research tax credit, and as a result will be in the range of 34.5% to 35.5%.

Putting all that together, in terms of earnings guidance with relatively flat revenues, higher anticipated commodity costs and lower operating expenses, higher taxes, we expect earnings per share to be in the range of $0.59 to $0.66 per share for the second quarter.

Let me turn the call back to the operator, and we will take your questions.

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

On the gross margin guidance, maybe help a little more there. I think last quarter or Q1 '09 you were expecting, I think you said, 32.5% to 33.5%, a little bit of an upside surprise there. As you look at Q2, you get a seasonally stronger period on the top line. Historically, you've got a seasonally stronger period sequentially on the margin line as well. You've got a little bit more price, it sounds like, coming through. Maybe give me some ideas of what type of pressure you're expecting. You quantified $9 million that hit you this last quarter. How is that going to change? And then, how much of that is expected to be offset by price?

On the price piece, we will start to see a little impact of that in Q2, but more of that is likely to show up in Q3. So we've been fairly conservative in our estimate on how quickly that rolls in. We know that a portion of our current backlog is not scheduled to ship until we get into Q3 as well. So we are not expecting a great deal of price impact. It might start to show up in Q2.

On the commodity piece, we probably have a $3 million or $4 million impact relative to what we've seen in Q1 that's going to hit us in Q2, because what we really saw, as I mentioned, is this timing for us -- we got through the first two months of the first quarter with less impact than we saw in August. So we are going to run more like August run rates through the whole of Q2. So $3 million to $4 million more in Q2 on the commodity side, offset a little bit by the pricing. But more of that pricing effect impact is going to show up in Q3; that's how we get to these 33% to 33.5% numbers in Q2.

Just two things to add a bit of color to. First of all, as I listen to other folks, I think our situation is similar in that, while people are talking about commodities backing off, they are backing off, in some ways, from where people thought they were going to go more than they are backing off year over year. So you have to be careful as you listen to folks talk about that. And that certainly is our case.

Our forecast for where they are going in a longer part of the year we're actually more positive to, but in fact they are still much higher than what he had last year in the next few quarters. So we are not really seeing relief as much as were just not seeing them continue to climb as far. So keep that in mind.

The second thing is, the price increase, as Curt described it, that timing of being a couple of quarters out is very similar to the patterns we've seen in the past. Not only do we have to get through things that were ordered in that pull-forward period, but also there's lots of customers that have projects that are in process that we've committed pricing to them prior to when those products actually shipped, and so those things get, if you will, grandfathered under the old pricing agreements.

One other point, just to add clarity to Curt's comments, the $3 million to $4 million is above what we saw in the first quarter. So, as Curt described, in the first quarter we saw that $9 million year-over-year number increase (technical difficulty). In the second quarter it will be $9 million plus the $3 million to $4 million more.

I hesitate to use this and use this as my follow-up because I've got another one, but I want to just clarify that further. If we carry the current pricing cost environment forward, would you start to see benefit show up in Q3? Relative to your price, or price net of cost, would there then turn to a $12 million to $13 million hit year over year into a benefit?

I wouldn't say that. I think it will depend on what happens with commodities, for one, which is still a bit of an unknown. (multiple speakers)

I'm just saying, carry them forward from current levels, and make that assumption.

The real question, Matt, is going to be capture rate of the price increase. I would tell you that the way that we set the price increase, the one that was just implemented, is not enough to fully offset the commodity cost increases. Now, the question will be -- will we implement further price increases, or be able to capture it just simply by what's going on in the marketplace around pricing? We have seen some of our competitors do additional price increases or surcharges. We have not done so yet, so that is, I think, a question mark that's out in front of us.

But of course, we're also in a period where you're expecting that pricing, or at least competition, will be pretty tough. So that's one of those questions we're watching very carefully. Certainly, if commodities don't back up, that's one of the things that we will keep a sharp eye to is -- do we need further price increases to be able to make sure that we have the appropriate margins going forward?

Now, this is my official follow-up. You mentioned a couple of things, some part of the backlog that won't ship. You talked about a one-time benefit from the Cosco, initial Cosco orders. Can you provide a little bit more color -- and I think you also said, and maybe this is related to the backlog, that some of those non-North American orders that will actually ship in Q2 -- can you provide any detail or to the -- can you quantify any of those for us?

Yes. Matt, there's a small portion of the backlog that's not going to go in Q2, and part of that is the price increase effect that people push their things in. But we also match that up against when the projects are scheduled to ship. So there's a small piece of the backlog that's not going to land in Q2 as shipments. Thus, that's how we back down to the forecasted sales range for Q2. So a piece of that is going to flow into Q3.

The Cosco piece, just so we are clear, that wasn't a one-time benefit. What we saw is the launch of the pilot program which went very well, and now we're cycling into broader business with them. So that wasn't meant to sound like a one-time deal, if we weren't clear on that.

Christopher Agnew, Goldman Sachs.

Sorry; before I go to Chris, Matt, you also had a question on the international stuff. John has done a great job of that 10% growth in orders for the first quarter, and the projects pacing of their businesses is going to give them growth in their second quarter over their first quarter results, and we are confident about that.

Okay, Chris, over to you.

As you look across your end markets, obviously, financial services continues to be weak. But are there any other -- are you seeing any signs of weakness, particular weakness, in any of the other end markets, either geography or by industry type?

First of all, I don't think the pattern is different than what we talked to you guys about last quarter. If you look at the US and ask about it geographically, there certainly have been differences. The West Coast has been a more difficult place than other parts of the country. Some of the Southwest has also been a bit difficult. In some ways, clearly tracking around where the biggest problems are in the mortgage crisis.

We've also seen a little bit softer levels in London, in particular. I wouldn't say the UK necessarily, overall, but in particular in London. So it's sort of money center-driven, in some ways, when you look outside of the US. Japan has been a little bit softer, if you have been following what's going on with them economically.

Now, the good news is, in the UK we were successful on a big UK long-term government contract that we hope will help us as well as we've expanded the distribution there. So we think we've got some offsets in the UK. We'll see whether that's enough.

From an industry sector, certainly financial services, in particular, of course, the area that you guys are all familiar with, the i-bank world, has been the most challenging. And in some ways, the question is not only what's going on in those sectors, but what are we doing to capture customers within one. So sometimes that data gets a little blurrier.

I'd add to that, that with commodity prices having done what they've been doing, we have had some very strong results in ag, mining and construction-related equipment. Energy -- obviously, you would expect that to be up for us. It is. And the state and local governments continue to be very strong. So you kind of -- if you look across the patch, outside of the comments Brian made, there are other areas that we've grown with over the past quarter.

If I could follow up, I guess to your comments on international, just trying to pick those apart. Your orders are up strongly. There's a couple of projects that shifted around, and you actually saw currency benefit. And it seems quite, I guess, a little bit confusing, given what's happening in the end markets where the European economy is slowing in particular. Just wondering if there's more light you can shed or -- around those particular projects, or just the general trends you're seeing in Europe.

First of all, I think that you've got to keep in mind there are very few markets outside of the US where we have a significant market share. So often, you're talking about a very small share relative to those markets. So much of the time, where we are growing is it's because we are either opening new geographies, expanding distribution, and/or we're able to win significant projects in a particular area. So you've got to remember that -- I wouldn't say that we can buck the trend of an overall economic cycle. On the other hand, it's not as sort of a direct correlation, as we might see in the US business, where we've got a big foothold. So you've got to keep that in mind.

The other thing to keep in mind is, because we think of international as one thing -- well, it's a fairly diverse thing. So you will see rotation, where we're seeing great growth in places like the Middle East, we are still seeing a lot of the major oil and commodity guys that still have a fair amount of money to spend opening up new places for them to go and get new resources. Those kind of folks we're able to track around, and as we build connectivity with them on a global scale, we can actually follow them into some of those new opportunities. So you have to look at it as being emerging markets, large global multinationals who still are out looking for those kind of resources. And, you've got to couple it with the fact that we are a small player in a lot of places, so we're able to follow and pick our shots.

By the way, it's important to note in Curt's comments, it wasn't so much that customers moved projects around, as it just simply was the normal difference between when we get an order and when we ship a project. It wasn't as if they shifted it out on us because of something that happened in the project scope, it was just the normal question mark when you are a little bit more project driven that it comes a little lumpier than what we might see in the core business. Where you have the same thing going on, you just have enough offset that it just doesn't show up as much to you guys.

You know, Chris, to add on that point Brian is making, remember when we beat the top of the range in Q4, a lot of that was driven by projects that we completed faster than we thought we would, and some of that was in international. So that contributes to their performance in Q4; but then, because of the nature of things, they are expecting a nice increase in Q2 over where they ended in Q1.

Okay, great. That's very clear. Good luck with the new initiatives.

Budd Bugatch, Raymond James.

Could you help just make sure we walk through last year to this year in the SG&A and what were the permanent cost take-outs that -- what are the cost take-outs were in the quarter, what were the puts and takes and how much of that is going to be a permanent reduction in costs?

Yes. I think last November, when we launched that, we said it was around a $25 million annual improvement in our cost structure. Brian, remember that?

Right.

And we are right where we want to be relative to what the volume was and where the teams came in at. And some of that, as I mentioned, was lower incentive comp because of the results that they are not driving as much cost there as what we had in the budget this time last year. But I'd say we're right where we need to be relative to the actions that we're taking, and the teams have done a great job of executing their work in the confines of that new cost structure.

And, that's both in SG&A and in cost of sales, or is it in one of those [buckets]?

It's both. A lot of that cost structure work last year was not in overhead. We've done a lot of that work continually. We have realized improvements this quarter versus last year in overhead, but a lot of that work last year was specifically not in the manufacturing area.

The majority of it really was in the SG&A piece, yes.

Okay, because it looks like you had good cost takeout or efficiencies in manufacturing, factoring in the $9 million raw material increase in some effect of the lower volume. You still had, at least by my numbers, somewhere between $10 million to $12 million of efficiencies in your cost of sales. Is that not accurate?

No, that's probably right, Budd.

But part of what drove that, Budd, was what I would call variable cost rather than fixed cost changes; in particular, things like incentive compensation, which you know our EVA program is far and wide. So when we are running at these lower levels, we ratchet compensation expense down across the Company. So that's part of why you saw the offset in manufacturing.

We also had, if you read the press release, last year we had a particular service contract related to the federal government that we had a hit on last year in the first quarter. So we got a bit of a one-time benefit, if you want to think about it that way. That's why, when Curt looks at margins for next quarter, it's not only are we seeing raw materials coming up, but last year we didn't have the negative side in the second quarter that we had in the first quarter last year. You follow me?

Yes.

So that comparison is, the hit this quarter wasn't as bad as it might appear when you are looking year over year because we had some costs last year that didn't repeat.

Okay, that's very helpful. The other side of my question goes to Joe's comments about the debt to EBITDA being at 1.2 or 3 now to 1, being at the lower end of your 1 to 2 range. Do I take that to mean, Brian, that you're going to be a little bit more circumspect with re-initiating a share repurchase in this quarter, and maybe give that a break until we get through the end of the calendar year?

I think where we are at right now is we continue to think there are some real opportunities out there for us to add some capabilities that would move the strategy forward. Given what's going on in the world around us, of course, we are trying to make sure that we can do that in a way that does not change the risk profile of the balance sheet. So therefore, we are in the mode right now, we are going to hold onto the cash and see how those things play out and, quite frankly, watch what's going on in this overall credit market. It just seems like this is not the time that you want to end up in a situation that you need cash that you've got to go get from somebody else.

So we're confident we've got good cash flow, we've got a nice balance there, we are happy with the size of our debt structure right now. So, as we see some of those opportunities start to look like they are out there, we want to make sure we've got the ability to go capture them. Because, as I said to you guys last quarter, my belief is in the last downturn in the industry, we spent a lot of money and we're very deliberate about keeping R&D going. I think we need to do that this time. But rather than all of our attention being to structural changes, my hope we can add capabilities that actually make sure that, as we come out of this thing, we're stronger on the other side with even more diversity in the revenue base.

Okay, and I want to sneak one other quick one in. Can you quantify, maybe, for us the Cosco opportunity?

It's really hard to tell right now, to be frank. We started with a couple of chairs. I think we'll know more as we see that thing ramp up. We started with very few stores, 20 stores or so. They expanded to 40. We now think we are going to go, for sure, nationwide. It will happen in a couple of sequences because they are not going to do both chairs nationwide at the same time.

So we're going to see a ramp up. In the total business it may not look like a big deal to you guys. It's pretty big to us in terms of getting our -- from two avenues. First of all, it will make a significant impact to our consumer business, if you will, our retail business. More importantly, it's also, I think, a great opportunity for us to make sure that the Herman Miller brand is able to reach out to a wider audience of folks. So we've been as deliberate in this case about the marketing and branding of that opportunity at point-of-sale. I think the question longer-term will really be, beyond the couple of products we've done with them, can we do more with them and what is the residual impact back to both the core business and the rest of our retail base.

We're going to be very careful about how we play those three things together. But I think my belief is this could be compounding with the way they play together. But it's a little hard to tell from a dollars and cents standpoint right now how big the impact will be. I would say we're very encouraged by what's there and very happy with the work with Cosco so far and the way it has dovetailed with both our contract dealers as well as with our specialty retailers. So far, that's working pretty well.

Todd Schwartzman, Sidoti & Company.

I wonder if you could talk a little bit about the products included in the POSH alliance and whether -- it seems that the products in question are going to be manufactured by you and POSH, respectively. I'm just curious about the branding there and what your roles are, if in fact you're going to market Herman Miller products as well as POSH. Who's going to be doing the bulk of the production, and who determines which products are sold under this deal?

First of all, the primary driver behind this at the starting point was, POSH has, in our minds, one of the, if not the, best distribution network in mainland China. So our primary interest was access to a well-developed and functioning distribution channel in mainland China that gets beyond the major cities. A lot of people can get to Hong Kong, Shanghai, Beijing. The question is, where do you go beyond that? POSH has a broader distribution network which is essentially franchise.

So they were interested in being able to take Herman Miller branded products, particularly seating, and to a lesser extent some of our systems products like the Abak environments product that we sell in the UK as well as resolve into their channel. Those products will be made by us, by the way, in our factories, either in China -- you know we have a factory now in Ningbo, China. So what we'll be doing is we'll be selling direct to their distribution. And like in many of these things, there will be an alliance feedback to them for their sales and marketing efforts in that way. So the products will be branded Herman Miller and sold through their distribution.

Likewise, we have a fairly large distribution footprint throughout the rest of Asia, which, if you look at a US dealer, we may be as much as 70% of their sales. In Asia we tend to be a little bit lower because we don't play across the whole spectrum of products and price points. What POSH gives us is the ability to offer to our current dealers throughout the rest of Asia a second set of products at a lower price point, in some cases different application sets. Those products will be sold to those dealers as POSH products, and much like in the case of us selling to their distribution, they will manufacture those products and we will be paid an alliance fee.

It also will give us the ability from time to time, when we have a large customer, be that a state-owned enterprise in China, be that a large US multinational, to go in and give them a complete solution. Often, they are looking at both, maybe some of their back-room operations and things where they want a lower-level product, more different applications.

So it's a very interesting partnership. We're very excited about POSH. We think they get our values. We think that they've got a good brand presence. But, very importantly for us, they have a very strong distribution channel in mainland China, which was our primary driver.

Within mainland China, how much brand value does Herman Miller carry?

A fair amount, actually; you'd be surprised. The name Herman Miller is extremely well-recognized around the globe. I'm always surprised when I'm traveling how many folks know who Herman Miller is and what the Company stands for. It's particularly connected to things like our classic products and the work we've done for many years with some of the best designers in the world as well as our iconic products like the Aeron chair, the Mirra chair and those things that have the ability to transcend geographic and cultural boundaries.

So the Herman Miller brand has very strong recognition in those markets.

Does partnering with POSH reduce in any way the possibility of an Asian acquisition by you guys?

No.

Mark Rupe, Longbow Research.

Hey, guys, congrats. Just had a couple questions. On the government sales, you mentioned that trends have remained solid. Just curious -- how much visibility is there in the government accounts?

Well, I think there is visibility not unlike any of the commercial stuff, Mark. It's a part of our sales force that's dedicated to those pursuits, and they tend to buy in different cycles and they have different drivers. So they don't necessarily follow the same dynamics of other parts of our business, but they do have their traditional buying season, which we are getting into. So I'd say the visibility is just like any other business.

Is there any election impact at all in out years? Typically, in the past, has there been?

No, not really.

Secondly, on the new upcoming seat launch, any expectations that you're expecting for the new launch?

We're expecting to have the best product in the industry globally. To be frank, we're very excited about the chair. We're getting great reviews from customers. These things always take a while before they ramp up because you have to win projects, get installed base. So we don't think the chair will have a significant impact in the near-term, but longer-term it's important because we think it will put the stake in the ground again that we are the leader in seating and that we've leaped forward over everyone else in terms of comfort and performance. It will have its own unique aesthetic value. In the past, whenever we've launched a great new chair by Herman Miller, it also helps bring the other chairs along with it because people begin to look at what the family of products are.

The other thing you always have to think of and the way that we like to look at these products, especially when they are at this level of being a breakthrough is it is a chair, but it also comes with several technology platforms that, longer-term, will begin to ask how do those work their way throughout our product range not only, by the way, in work seating but potentially in areas like health care and others. So what's really exciting here is we are really resetting the reference points for what folks think of in office seating.

Perfect. And then just lastly, any updates in some of the newer initiatives like Convia?

Our challenge with Convia continues to be -- how do we get scale out of that business? We are seeing early signs that our refocus of the Convia team on the MEP channel, which is mechanical, electrical and plumbing, is bearing fruit. We've added a number of sales folks this past quarter. What we found was, while we certainly have to have electrical distribution partners, their gift is not concept selling or system selling, and in fact we're selling a system and a concept.

We continue to believe strongly that Convia is absolutely in the right place for what we face as a country when we are dealing with issues like rising energy costs. We believe and in fact have some new technologies on the Convia side that can help manage electricity. In fact, some of the things like load shedding that you hear more and more about in places like California -- we think it's right on target with that. We also think it's on target with the movement towards sustainable building as well as figuring out how to take waste out of the construction cycle.

So we think we are in the right place. Our challenge, quite frankly, is to get scale on the commercial side. And, as with a lot of startups, we're learning a lot along the way, and trying to manage it to where the size of the investment doesn't outweigh what we can afford to do as we manage ourselves through some tough times.

Jim Casagrande, Pike Place Capital.

You mentioned as one of your offsets in the North American decline in sales was the effect of the Brandrud acquisition, which was in December. Can you guys give us a sense at all or qualify or give us a sense to the size of the effect that that had?

Brandrud is a fairly small acquisition of itself. What I think Curt was referring to is the combined power of Brandrud as an addition to our health care business as really -- and our additional focus on the health care business has made a good, significant offset. I will say, we don't disclose specific information about some of those segments; they are not disclosed in the financials. So therefore, we don't want to get into giving away specific numbers. We think that's -- competitively it's important that we stay as much under the radar screen, quite frankly, as possible.

And I will say the Brandrud numbers were essentially offset this quarter by a dealer divestiture where we had one of our own dealers that the person running it was able to work his way through to an earn-in, meaning he earned his way over years to buying the business. So we lost those sales, and they virtually offset each other. So there wasn't a big net impact of acquisitions and divestitures. But what Brandrud is having an impact on is our ability to gain traction on the health care side.

I think the point Brian is making, Jim, is that there's growth both in the underlying core health care business as well as the impact of Brandrud, and Brandrud is growing. So you have both things going on there.

As a quick follow-up to the earlier question about the government sales, just a little surprised by some of the strength you are seeing there because it seems we're reading every other day that the government is facing some severe budget challenges. So do you have any comments on either what has been fueling the success there or how does that sector look?

I think you have to keep in mind, I don't think you should hear from us that we're seeing, necessarily, large growth in the government sector. It is a fairly stable sector year over year and has been for a long time. The real trick or the real potential that often comes by is a particular agency hitting a renewal cycle and/or an expansion. So you see in certain sectors of the government, not surprisingly, over the last couple of years things like Homeland Security and some of those that are beefing up. So for us, this is important as they hit either renewal cycle and/or one of the new areas that's being focused on and they are trying to organize around it.

So it's not as if it's necessarily growing greatly. Curt was mentioning, state government has been one, and some of that can be our ability to get into new states where we haven't necessarily had as big a presence in the past.

Dennis Sabo, Jodocus Capital.

Can you highlight or take us through how the weekly order rates were trending during the first quarter?

Yes. I think we averaged, if you just did that math, 535 on 13 weeks. What's that come out to, about 41 a week?

Right, but did it have a particular trend during the quarter?

The difficult part is, in our week 15 -- sorry, week nine, we had a $75 million week, which was partially the effect of that price increase. So then, you look at the weeks subsequent to that, and might they be lower? Yes, but you don't have real clear information as to what is the effect of that pull-ahead. So they were relatively flat for the quarter, as best we can tell, ironing out the effect of that price increase.

Secondly, given the weakening economy and the conditions in the commercial real estate market, are you seeing any cancellations of orders at this point?

No, nothing that we find interesting.

What has been the customer response from the price increases? I know you pushed through a 3% or 4%. Do you expect to effectively realize all of that, or is there some pushback?

We don't. It has been years since we've achieved all of it. Typically, we would look at something between a 50% and 75% capture rate, would be pretty good. It's really early to tell how that plays out because, of course, our business really is a very competitive business on a day-to-day basis. We're bidding on projects; many of our customers have multiple suppliers. So you put through the price increase, and then, of course, what you capture is going to be determined as we get out there and see how everybody is reacting in their day-to-day pricing stances.

They don't necessarily react at the initial point of the price increase as much as they react later, down the road. Now, the good news is, I think, what was heartening to us was to see the pull-forward orders, because usually that's a good sign to say that folks at least have product and projects in mind that they intend to do, so they are bringing those projects in. If you didn't see much impact or reaction to the price increase at that point, actually, you would have been a little bit more nervous.

Yes, I thought that was a good sign, too. Okay, thank you for taking my question.

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

If you are able to and want to ramp up the product offerings at Cosco, would the likeliest candidates be additional seating products? Or, would you go storage? I'm assuming that it's pretty difficult for systems to translate on that type of retail distribution.

I don't think we know the answer to that question yet. Certainly I don't think it's going to be -- our focus with Cosco is not on things that would complete with the contract channel. So it would be more home-oriented products, particularly home office oriented products. What those will be we don't know. We went through test one to see whether this worked for Cosco with the products we had. The answer to that so far seems to be yes. Now the question will be, as we ramp up more fully, do we both think that the opportunity is there to do more beyond those couple of products.

What's likely, I think, is that we would design products specifically for that channel, aimed primarily at the home buyer.

That would be branded Herman Miller, as best you can tell, best you can (multiple speakers) --?

That's a great question. Again, I don't know we know the answers to all those questions yet.

What kind of volume have you been doing with the Equa and the Caper multipurpose chairs through the dealer network?

I don't think we want to get into that level of detail around product sizes. And I would say to you, you've got to remember what we're offering through Cosco is one part of the Caper chair. We're offering the past chair. We sell a lot of Caper multi or the Caper side chairs in the contract dealer channel, and Equa has been a mainstay for many, many years. It was the design of the decade, I believe, in the 1980s. So it is an important chair on both sides. But this will have a significant impact on those two product lines if we get up to the kind of volumes that is potential.

With that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Walker, I'll turn the conference back over to you for any closing remarks.

Thank you all for joining us today and 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. The events of this week clearly highlight 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 talented people and network of business partners to make it a reality and the financial resources to keep moving forward.

One other thing I wanted to mention. Herman Miller, Inc. will be celebrating their 25th anniversary of our association with NASDAQ and the launch of our new Embody chair, when we open the market at the NASDAQ site on November 6 at 9:30 AM. Watch for more details and your formal invitation. That's all for now, and we look forward to talking to you again next quarter.

Ladies and gentlemen, this does conclude the Herman Miller, Inc., first quarter fiscal year 2009 earnings conference call. We do appreciate your participation, and you may disconnect at this time.