MillerKnoll Inc (MLKN) 2009 Q3 法說會逐字稿

Good morning everyone and welcome to the Herman Miller, Incorporated third quarter fiscal 2009 earnings results conference call. This call is being recorded.

This presentation will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These risks and uncertainties include those risk factors discussed in the Company's reports on 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. Greg Bylsma, Executive Vice President and Chief Financial Officer. Mr. Walker and Mr. Bylsma are joined by Mr. Joe Nowicki, Treasurer and Vice President of Investor Relations. Mr. Walker and Mr. Bylsma 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 the callers limit their questions to allow time for all to participate.

At this time I would like to begin the presentation by turning the call over to Mr. Walker. Please go ahead.

Good morning everyone. Last quarter we highlighted a significant challenges that we are starting to unfold and the actions our management team are putting in place to strengthen our position and weather the upcoming storm. The economic crisis and the uncertainty surrounding the global economy was a major theme then and the uncertainty of these times continues to be the dominant issue today.

As we expected, the credit crunch and general pull back in capital spending by our customers came very fast on all fronts of the business and it has held through most of the quarter. Predicting demand was tough last quarter and it remains very difficult today. While operating with this level of uncertainty is difficult, our people and leadership are experienced in navigating in times of uncertainty, have managed through sharp declines in the past and know how to adjust our business in a manner that enables us to remain strong and build for more prosperous future. This includes working with our supply and distribution partners to ensure they are able to maintain and build our ability to serve our customers.

We made great progress in adjusting our cost this quarter as the majority of the previously announced actions were completed ahead of schedule and we are on track to capture the savings we committed to. These changes included permanent employment reduction, elimination of temporary positions, production lay offs, reductions in program spending and the closure of one administrative facility. As Greg will point out, while all of these actions were fully implemented this past quarter, we did not realize the full benefit in the quarter. As a result, while the absolute results were disappointing, we are impressed with what our people were able to accomplish in a difficult environment.

Near the end of the quarter, we made some additional changes to our compensation and benefit programs, designed to create a more variable cost structure. These are tough decisions that are not taken lightly, but we believe it was necessary to create further variability in our cost structure while retaining our talent and maintaining high service levels to our customers. I am grateful that the employee owners of Herman Miller responded to these actions with the same spirit of resolve and participation that has been hallmark of our culture.

Our collective goal is to win more than our share of the opportunities available and find other means of reducing costs. In addition to these changes we also realized some of our management team to increase our speed of implementation and ensure we are delivering the products and solutions our customers and dealers expect and need. This included the appointment of Greg Bylsma to the Chief Financial Officer role as a successor to Curt Pullen. Curt assumed the role as President of our North American Work Environments business. As noted in the opening, Greg andJoe will join me in making today's presentation. Curt is here to assist us with answering your questions.

As I stated in the opening, it remains difficult to predict demand with any level of certainty, therefore, similar to last quarter, we are not providing earnings guidance. I will tell you, though, we believe the recent decline in order levels may be here for sometime and we are planning for this probability. We saw a drop in order levels in December with further decline in January. We are hopeful, but cautious, that customers are starting to take some actions to move forward. The bottom line is, sequentially we anticipate fourth quarter revenue to be slightly lower. We believe the actions and adjustments made will enable us to manage through this situation and maintain the flexibility and capability to respond to the eventual turnaround.

Let me close by leading all of you with a clear statement that our cost structure adjustments are not detracting from our strategy. We continue to pursue our diversification of revenue. Innovation continues to be at the center of all we do. We have a great pipeline of products that you will see launched in NeoCon with reference setting performance and value along with some compelling ways for our customers to increase their overall workplace performance. We also continue to make progress in the expansion of our footprint in the healthcare and international markets through our acquisitions and alliances. In short, we have a great deal to offer our customers.

Economic struggles can sometimes provide added clarity and focus to an organization and to the solutions it provides for its customers. That's the case at Herman Miller. We've been through similar conditions before, we know what needs to be done, we are financially strong, and we are moving ahead with purpose and speed.

With that I'll turn the call over to Greg and Joe to give you a better understanding of our results and financial strength.

Thanks, Brian. Good morning everyone.

We experienced a significant pullback from the economic picture that began unfolding last quarter, but it was a bit sharper than anticipated. Our revenues were down 28% from last year and about 26% from the second quarter. Because we took action to reduce our cost structure early in the quarter, we were able to offset the volume decline. The restructure actions costing $23 million were completed during the quarter and our operating earnings, excluding these charges, were a relatively solid 5.8% of revenue. And if we structure in expenses excluded from net income, we produced earnings of $0.18 per share in the quarter.

We have not yet fully realized all the benefit from our cost reduction actions and expect to see further benefits of approximately $5 million per quarter going forward from recently announced changes to our benefits and work schedules. We continue to generate cash flow from operations. We have increased our cash balance and our balance sheet continues to be strong.

Looking at sales for the quarter, consolidated third quarter sales were $354 million, down 28% from last year and down $123 million from our second quarter. North America sales of $296 million marked a decrease of approximately 28% from the prior year. Significant declines in foreign currency exchange rates for Canada and Mexico caused $8 million of this reduction. Our non-North American businesses are experiencing the same harsh pull back. Sales declined 28% to $52 million from the third quarter last year and declines in the pound sterling caused $2 million of the reduction. Year-to-date our healthcare business has expanded although orders are slowing here as well. While our retail business has declined, we are seeing strong growth in new channels to market.

Moving on to order rates for the quarter. Consolidated orders totaled $279 million for the quarter and that is a decrease of 38%. Orders were also negatively impacted by $10 million due to changes in foreign currency rates. As expected, our order pacing dropped in December, stabilized in late January, and towards the end of February activity started to improve and has remained at those levels over the past few weeks.

Moving on to gross margin. Our gross margin performance for the quarter ended at 29.9% of sales, a decline of 440 basis points from the prior year. Margin was negatively impacted by high commodity costs and a loss of leverage as a result of the lower sales volume. This was partially offset by the continued efficiency gains and spending reductions by our operations team as well as partial benefits from the restructuring action. We also cashed margin improvement from the price increase implemented last August. This was partially offset by increases in discounting.

Raw material prices were higher than last year by approximately $6 million which was somewhat offset by declining diesel prices. Sequentially, material prices were basically flat, but we did begin see price leap toward the end of the quarter. Most of the material reductions remained in inventory and will be realized in March. We expect to see further material reductions throughout this next quarter though not to the low levels of the prior year. Given the rapid reduction of volume, our teams did a remarkable job of adjusting labor cost and despite inefficiencies in January, we are back on target for our labor matrix in February. Additionally, our cost reduction actions recently taken will continue to provide relief.

Let's talk about operating expenses and income. Operating expenses totaled $85 million for the quarter, that is a decline of 21% from the prior year same quarter, a reduction of $23 million. This demonstrates the variable nature of our cost structure and our internal resolve to quickly adjust cost to meet new volume levels. Our results for the quarter included $23 million in restructuring cost associated with the actions announced in December and consisted primarily of severance payments. Our operating earnings for the quarter resulted in a loss of $2.8 million but when you exclude the restructuring cost, our operating earnings totaled $21 million or almost 6% of revenue. Year-to-date our operating earnings reached $132 million or 10% of revenue. This amount also excludes the restructuring expenses.

We completed our previously announced restructuring actions during this quarter, however, we did not fully realize all the benefits in the current quarter. To supplement the previous actions given the sharp drop in revenue, we announced changes that will add another $20 million of annual cost savings. Taken into account all of the actions announced and implemented, we are targeting an operating expense level that is $110 to $115 million lower than our fiscal 2008 level and we remain committed to manage our cost structure to produce solid results with volume fluctuations.

I will now turn the call over to Joe and he will give us an update on the balance sheet.

Thanks Greg. Regarding the current quarter balance sheet metrics, we grew our cash balance by over $6 million to $172.4 million. Cash flow from operations for the quarter totaled $18.7 million compared to $35.6 million for the same period last year. Cash flow from from [ops] this quarter included approximately $9 million of payments related to the restructuring actions. Capital expenditures of roughly $4.5 million are down over 50% from the $9.2 million spent during the third quarter last year. Our plan is to continue to conserve capital expenditure levels to align with business.

Adding to our cash reserves, we have $237 million available on our revolving credit line. Considering our available revolver and our cash reserves we are confident in our ability to continue funding our strategy and we are well prepared for the uncertain times ahead. We are in compliance with all of our debt covenants and are currently running with a leverage ratio, debt -to-EBITDA, of approximately 1.6 times, which is toward the low end of our targeted range of 1 to 2 times, debt-to-EBITDA, but given the current market conditions, it is appropriate relative to our capital structure and business strategy. By the way, to use a net debt basis to do the leverage calculation, debt less the cash we hold, be it down to less than one times of debt-to-EBITDA, a strong balance sheet.

That's it for now on the balance sheet this quarter. I'll hand it back to Greg.

Thanks Joe. As Brian mentioned, we have continue the decision to not provide guidance in the press release at this time. We believe the uncertain picture caused by the current economic climate continues to cloud the picture for the short-term. We are cautiously hopeful that the bottom may be in sight or possibly has been reached this quarter. However, we still don't feel it's beneficial to publish a quarterly sales and earnings range.

However, we believe that in the long-term with the changes we have announced, we'll be able to generate operating income in the mid-single digits even with a 30% to 40% decline in revenue. We have great confidence in our ability to continue serving our customers well and, at the same time, adjusting our cost and maintaining our financial flexibility to meet current and future conditions. We continue to have a very strong balance sheet and solid capital structure to weather both economic challenges and enable market opportunities.

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

Thank you. (Operator Instructions) We'll take our first question from Mark Rupe with Longbow Research.

Hey guys. A question on the orders. We had picked up a lot of orders being delayed and broken down into smaller shipment levels. Just curious to see how that of your current orders, if there has been any material change and when they are going to be shipped and how some of that is recorded.

Mark, this is Brian. I don't think we've seen any material change and when they are going to be shipped and recorded. We don't see any added risk, really in the backlog itself. I would say what we have seen happening is a greater degree of delays on prospects that we see coming in. Some cancellations, but more in the form of delay. So oddly enough what we see happening, our frontal looks pretty strong, but we are seeing less coming in, enough to come into offset what's dropping out on the other side from cancellations, but not really an effect that we see once we have an order in the hand.

Mark, it's Curt. I would agree with Brian, and in the November, December timeframe, it seems like a lot of the day by day business really slowed down to the extent that folks were getting their bearings on what they were really going to do and if they, themselves, were going through adjustments in their own businesses.

We have seen some of those projects begin to loosen up where folks are beginning to feel more confident about what they really need to do, what they have to do. But Brian is right that there are projects in our funnel that have had dates move out as companies are reconsidering what their plans and intentions really are. The good news though is that the side of the funnel continues to be very stable, and which we look at that as an opportunity in the future in terms of when these decisions really do get made.

Perfect. I don't know if you've commented on any of the pricing, if there's been a lot more in terms of aggressive pricing out there on some of this [bid] activity.

Well, pricing always when you are at this period does get a little bit more significant, Mark. I would say to you, though, it hasn't gotten to a point that in general it is out of hand. There are cases here and there where a project will go extremely deep, but for the most part the pricing has not gotten to a point that I would say it's an overly big concern for us at this point.

Just lastly, I know raw materials and steel prices last year obviously impacted, and it sounds like maybe a little now. Any kind of commentary that you can provide on how much of a benefit you can see. Granted volumes are down, it might be tough to look at but is there any kind of number that you might have in mind that we will see going forward?

Greg did you give a number for what it was for this quarter?

It was $6 million year-over-year for Q3. We would expect to see probably about $4 million of that come back to us in Q4.

I think the net of it Mark and this has been a real interesting conversation with customers. A lot of people believe that in fact you have already gotten year-over-year benefits. We have not seen that yet and listening to our friends and neighbors I don't think anybody else has seen it yet and some is still trapped in inventory that will ship this next quarter or was trapped in inventory.

The other thing is while it's come down and certainly in some commodities especially in food commodity and that you have seen it drop below a year ago levels. We haven't seen that nor do we have a forecast it is going to drop below where it was a year or so ago. We think we might approach back to where it was. That may change but of course in the last couple of days we have also seen oil reverse itself and move back up. So if we continue to see some of those trends that could be offset a little bit, but we think we'll have quarter-over-quarter benefit when we go from third to fourth but not necessarily year-over-year.

Perfect. Thank you very much. Best of luck.

We'll take our next question from Chad [Bowlin] with Raymond James.

Good morning, Brian, Greg, Joe, Curt.

Good morning, Chad.

Talk a little bit if you would for me, help me understand the restructuring savings. The $110 to $115 million figure, that includes the $60 million or so of annualized savings from the actions you announced back in November. So there's an incremental 50 to 55 based on the actions you took near the end of this quarter. Is that right?

I think, you might be getting two numbers confused. Greg mentioned a number that we targeted operating expense at 110 to 115. Is that the number you are picking up?

Yes.

That's actually what we think the operating expenses will be lower by than the prior year.

So that would include some assumption for lower volume driving - -

That's correct. That is the third piece, Chad. One, is the expense reductions we described and talked about last December and two, the additional $20 million we just described and three, lower volume drives some variable costs reduced as well to it.

Including a great deal of lower variable incentives, of course. Whether that be sales incentives or executive incentives or company-wide bonus programs. So you have a lot of that stuff which we really felt, if you will, the benefit of. It's hard to talk about incentives being lower the benefit, but we certainly saw the cost structure benefit of that as we got into the second quarter and now we are really starting to see the additional changes coming from the actions we took.

Okay. So for that 20 million additional piece, what would be the timing of getting the full benefit from that? Will it start at that full run rate in Q4 or does it take some time to ramp up? How should we think about that?

We'll be there pretty much in Q4. We are already implemented on that one. So we may have missed a week or so, but not much. We are off to the races.

Okay. A follow-up, in regards to pricing could you quantify for us the dollar amount of pricing realization you got in the third quarter and would we expect to see I guess the full run rate benefits of the August price increases in the next quarter?

Yes, Chad. This is Greg. I would say that to be, I think as we move through this quarter we didn't see incremental month by month. We pretty much captured, it looks like we captured what we are going to capture. That was about 5, in the 5ish million dollar range offset by about 1.5 to 2 million of incremental discounting that we saw. So the net capture was in that $3 million range. We would imagine to see that moving on to Q4 as well.

And Chad, I think to Mark's point the only thing that I would say to you is if you are seeing pressure, as you might imagine, from customers around the fact that they were accepting a price increases when raw materials were going up as we have see commodities reverse, they are putting pressure back the other way. That depends on what direction that the commodity markets are. That might get harder and harder to hold on to in that case.

Okay. Last question and I'll let others into the queue. You talked about qualitatively the pace of orders in December, January, and February. Can you quantify for us the average weekly orders in each of those months?

We'd rather not, Chad, and I would also tell you that what you have in there too is you have lots of variations based on which weeks we are working, but when you look at it by month you get actually fairly strange variations based on the holiday season. That is always very difficult in December and January especially when you are looking, even when you do year-over-year comparison. What I would say to you, the dip was more pronounced in January, that was not only on the weekly level, but that is also because we had less days working and we certainly saw more stability in February, which I think when we talked to other businesses, I think a lot of other people are seeing a similar pattern. We wouldn't be so bold yet as to say that we would say it's bouncing back up to a number yet as much as we'd say we can see enough stability, we've seen more stability than we did earlier in the quarter.

Great. That's very helpful and obviously good luck in this very challenging environment.

We'll take our next question from Todd Schwartzman with Sidoti & Company.

Good morning guys. Just curious, do you guys track the impact that used furniture has on your new shipments and orders?

We don't track it in any numeric sense, Todd. I think that it certainly does have an impact. I would tell you the impact tends to be greater after these economic declines are on the way back up and it tends to hurt more where there are buildings that have been left vacant in major markets, take New York or some of those where they don't tend to move some of the furniture out and then people move back into a fully furnished offices. That tends to be where it begins to hurt more and it tends to dampen the recovery, I think, more than it hastens this side.

Often used furniture, when it is actually sold and moved, it is sold by say a large company and it is purposely then already brokered to another location which tends to be more smaller customers and folks that tend to not be as competitive with.

Got it. Thanks. Also, Brian, you had made a comment on the fourth quarter revenues. Could you repeat that expectation please?

Yes. What I said was based on the fact that we saw a little bit more stability in February and from what we got in backlog right now, our belief is that revenue will be slightly down in the fourth quarter sequentially over what we saw in the third. And that's really based on what we had in the backlog and what we are seeing right now. If we continue to see more stability, that might be different. But that's the best we can tell from here.

And also, Joe, I just wanted to go back to one of your comments speaking to the debt-to-EBITDA ratio. You said 1.6. Is that correct?

That's correct. Trailing four quarter basis.

Also, I may have misheard but I thought you said that was toward the low end of your 1 to 2 times target. Did I not hear that correctly?

That's correct.

So 1.6 is toward the low end of that range?

Yes. I was really moving forward to my second part of the discussion where I went to the net debt basis, Todd. As you think about the cash balances that we carry (inaudible) cash balances. If you look at it from a net debt perspective, you are actually under 1.

Okay. Makes sense. Finally can you talk about CapEx, your needs for Q4 and how should we think about spending for full-year 2010?

You've seen, Todd, we really have CapEx down quite low right now. I would expect that that number we are pacing right now 25 million to 30 is probably what we'll run for next year. And that could even prove to be high. We don't have any major new CapEx projects other than product tooling type stuff. We are being fairly tight on everything else. We have a showroom we are completing out in LA. That one will give us a little bit in the fourth quarter, but we've already spent some of that money. We don't expect the number to change greatly over the next twelve months or so.

Terrific. Thanks.

We'll take our next question from Matt McCall with BB&T Capital Markets.

Good morning. This is [Shawn] for Matt. Most of my questions have been answered, but the one thing that I did want to ask I know you said the new savings, the new $20 million of run rate would pretty much be seen in Q4. What about the $60 million that you announced previously? Is that also going to be on pace for a full run rate in Q4 or is that going to be delayed a little bit longer?

No. We should get all of that in the fourth quarter. We got a fair chunk of that in the third and we just did, some of the job eliminations didn't end up being fully implemented until after the Christmas holiday so we still had some of the people around through December and into early January.

So as we got into February, we began to see the majority of that and I think the other thing Greg was pointing out is whenever your going through those things there's a layer of disruption and inefficiency that happens as you go through that process, but the majority of it where there - - we might have some stragglers in some of the international locations and places where you have to go through more of a consultation process as mandated by the government. That's where the bigger wild card is. Other than that, we should be in pretty good shape for the majority.

Okay. And then I missed it Joe. What did you say the availability on the revolver was?

$237 million. It's at total capacity $250 million. We have some LCs outstanding against. But no borrowings but really LCs that we hold against it that makes up the $13 million that it is reduced by. And that agreement we just signed a year ago so it's got another four years in existence on it so a long duration.

Great.

Thank you. (Operator Instructions) We'll go now to David Cohen with Midwood Capital.

Hi, just to clarify a hypothetical given the various moving parts (inaudible) costs, your costs action. If, and I know you are not necessarily anticipating this, but if you had the same revenue profile in Q4 versus Q3, you would have, you would expect $5 million of incremental cost savings plus $4 million of savings from more materials sequentially? Is that a fair assessment?

Yes. That's fair.

What other moving - - if you could replicate your revenue profile the next quarter, what other puts and takes are there from a profitability perspective?

Of course the one most difficult to predict put input to take is what happens to pricing in that range and what is the product mix, right, because the mix moves around. And it's not only a mix within product lines, it's a mix based on what part of the business and is it retail, is it international, or whatever. I don't think we expect any significant movements in mix, but that can actually move the number around quite a bit depending on where we are at in that range.

Two of the things that I would throw out there, one is obviously depending where the volume is, the fixed overhead absorption. So if, as Brian described, slightly lower, it means you'll lose a little bit of fixed overhead absorption. The second thing is always in the fourth quarter from an operating expense perspective we have a lot of product launches that occur in NeoCon in June. So we traditionally see this seasonal uptick in operating expenses in fourth quarter. So that will drive a little higher operating expenses.

Thanks.

It appears there are no further questions at this time. I would like to turn the call back over to our speakers for closing remarks.

Thank you all for joining us today and for your continued interest in Herman Miller. I also want to express my appreciation to the people at Herman Miller. Despite the current economic challenges, they continue to bring a level of quality and commitment to their work that ensures our future success. We have solid plans, outstanding focus, and the people and network of business partners that will keep our business moving and gaining strength. Thanks. That's all for now. We look forward to talking to you next quarter.

That will conclude today's conference. We thank you for your participation. You may now disconnect.