MillerKnoll Inc (MLKN) 2009 Q4 法說會逐字稿

Good morning everyone and welcome to the Herman Miller, Inc. fourth-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 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.

Good morning everyone. We have a lot to cover this morning so I'm going to jump right in with the overview and then hand it over to Greg and Joe to go through the financial details.

As you have seen from our press releases it has been another very busy quarter here at Herman Miller. We continued our efforts to align our cost structure in order to maintain profitability, and we have made some significant adjustments to our capital structure to maintain a strong financial position.

We have also continued to aggressively invest in the new and emerging markets we have previously identified. In summary, we are doing what we told you we would do and what you would expect any good company to do during times like these.

First, on the cost structure side. Our financials for the quarter reflect the benefits of the significant operating expense reductions we announced last quarter. As you'll recall, we announced actions that will reduce our annual expense levels by $110 million to $115 million, a 26% reduction from our fiscal year 2008 levels.

In addition, in May we just announced a plan to consolidate manufacturing operations with a closure of our integrated metal technology subsidiary in Spring Lake, Michigan. This work has just begun and will provide another $5 million to $7 million in annual savings when fully implemented in the spring of 2010.

All of these actions have been taken in the context of a challenging business environment and our determination to maintain profitability. And we have accomplished that objective again this quarter.

With a sales decline of 38% we have still been able to achieve an adjusted operating income before restructuring charges of almost 6%. We also generated positive net income of over $7 million, and that is even if you include the one-time restructure charges. Without those charges it is over $10 million in positive net income.

On a capital structure side we maintained our conservative approach to managing our balance sheet. We stayed in our cash conservation mode throughout the quarter, and thanks to solid working capital management, coupled with lower capital additions, increased our cash and investment balance to over $204 million.

We didn't stop there. You saw in our May 14 press release we reduced our dividend to save another approximately $14 million annually. And yesterday we announced what we plan to do with some of that cash. As Joe will talk about in more detail later in the call, we launched a tender offer to repurchase up to $75 million of our public bonds. This will allow us to delever our balance sheet, while also reducing our interest expense and providing additional balance sheet flexibility.

Finally, and most importantly on the growth side, this quarter you saw us take two significant steps toward more -- move forward aggressively in new emerging markets. Earlier in the quarter we announced a strategic alliance between our Convia subsidiary and Legrand designed to broaden the reach of our energy management solutions for commercial buildings.

The Legrand Company provide a broad platform of modular power and lighting distribution systems, as well as an extensive global sales and distribution channel. When combined with the Convia technology, we have in place a model designed to broaden the reach of energy management strategies to fuel the adoption of flexible, sustainable spaces, ultimately reducing real estate and building operating costs.

And yesterday we were very excited to announce that we have acquired Nemschoff, a longtime leader in the healthcare furnishings industry. The acquisition of Nemschoff is a significant step to Herman Miller's growth strategy and further evidence of our commitment to the healthcare market, where Herman Miller has been a leader for more than 40 years.

For quite some time we have talking with you about the importance of expanding the universe of customers we serve and the solutions we bring them. The recent downturn in the global economy has only reinforced how critical this is to our long-term stability and success.

In the US and globally our populations are aging and growing. As a result, the demand for healthcare services continues to grow faster than the overall economy. Therefore, we have focused an ever-increasing amount of our strategic resources towards growing our product and solution portfolio for this customer segment.

Beth Nickels and her team have done a great job over the past couple of years, but the reality is we did not have the internal resources to capitalize on the opportunities available in this market. The acquisition of Brandrud was a great first step, and we have already seen a positive impact on our business as a result.

However, there is still a lot of room for us to grow. We determined that the best, fastest way to do that was to add another quality business to our healthcare portfolio.

Nemschoff is a market leader in healthcare furnishings, specifically in the soft seating and patient care area. They are recognized for their high-quality products and leading-edge designs. The combination of Herman Miller, Brandrud and Nemschoff creates the strongest product portfolio in the industry from administrative areas to waiting rooms, clinical areas, pharmacies and patient rooms.

Our combined brands also enable us to better leverage the strength of our sales and distribution within Herman Miller Healthcare, ensuring we can better serve the growing healthcare market. With the addition of Nemschoff we are confident we will see an increase in our healthcare sales and profitability, which will benefit our entire business.

From a financial view, Nemschoff will add approximately $90 million to our annual revenues. Our total purchase price, which is composed of cash, equity, and potential future payments, net of a significant tax benefit, will end up in the range of $65 million to $85 million.

We anticipate that the transaction will have no impact on our EPS in year one, but should be accretive and add approximately $0.04 to our earnings per share as we get into year two and have implemented all of our synergies.

History has shown that organizations that build marketshare during the tough times rebound faster and hold onto those gains for many years. Our own history, starting with D.J. De Pree's bold decision to invest in modern furniture, demonstrates a strategic move supported by societal change are often best made when others are unable or unwilling to act.

Our ability to make this investment in a difficult economy is directly related to the great work by all of the Herman Miller employee owners.

Last, if it wasn't enough of a growth story to get you excited, I would be remiss if I didn't mention just a few of the outstanding new product launches and awards we won at last week's annual trade show in Chicago, NeoCon. We took multiple honors for the Embody chair, the Setu chair, and the new Twist LED light and our energy manager technology for workstations.

In addition to these, we had several other great new enhancements and additions to our product portfolio. And to top it off, the National Furniture Dealers Association again named us Large Manufacturer of the Year, the third time we received this recognition in the past four years. Altogether a very solid start to the new fiscal year.

With that, I will turn it over to Greg and Joe to give you a better understanding of our results and financial strength.

Thanks, Brian. Good morning everyone. The pullback in demand that we experienced last quarter continued through the current quarter. Our revenues were down 38% from last year, and down about 10% from the third quarter. But because of the proactive actions we took to reduce our cost structure, we were able to reduce our operating expenses by $30 million, or 26%, from what we spent in the same quarter last year.

While our gross margins were down from the prior year, we saw them improve sequentially from Q3 by 260 basis points. All of this allowed to achieve operating income before restructuring charges of 5.9% of sales, a strong accomplished in the face of a dramatic decline in revenues.

Looking at sales for this quarter, consolidated third-quarter(Sic-see press release) sales were $320 million. Our North American sales of $268 million marked a decrease of approximately 35% from the prior year. Declines in the foreign currency exchange rates for Canada and Mexico caused $7 million of this decline.

Our non-North American businesses experienced a steeper decline. Sales declined 53% from the fourth quarter last year to $44 million. Foreign currency exchange rates here caused $3 million of the reduction. We saw declines across all geographic areas this quarter, with the largest declines in the UK and Japan, which as you know, are two of our core markets.

Orders for the quarter were $324 million, a decrease of 35%. Orders were negatively impacted by $11 million due to changes in foreign currency rates. The rate of decline has clearly slowed, and there are signs demand has stabilized.

Sequentially orders increased 16% from the third quarter, as we have seen some increases in project business. Order rates were the strongest in government and healthcare sectors, which helped to offset relative weakness elsewhere. In addition, the number and volume of new projects put on hold or canceled seems to have subsided during the fourth quarter.

Our gross margin performance for the quarter was 32.5% of sales. This was a decline of 240 basis points from the prior year. Year-over-year margins were negatively impacted by the loss of leverage as a result of lower sales volume. This was partially offset by continued efficiency gains and spending reductions by our operations teams, as most benefits from the restructuring action.

On a sequential basis gross margins improved by 260 basis points from the third-quarter rate of 29.9%. We experienced quarter-over-quarter improvements in commodity cost, labor, as well as lower overhead costs as a result of restructuring actions announced last quarter. These benefits were partially offset by increased discounting.

Commodity prices turned favorable over the prior year as aluminum and fuel prices were partially offset by higher prices for steel, plastics and wood. All the raw material commodities have improved sequentially from the third-quarter levels, led primarily by reductions in steel costs. We are anticipating continued improvement in the first quarter, although higher oil costs are putting pressure on both fuel and plastics.

Once again, our teams did a remarkable job of adjusting labor costs despite the rapid declines in volume. As Brian mentioned earlier, we have just begun the consolidation of our IMT facilities and should start to see some benefit of that in the second quarter, with the full effect near the end of the fourth quarter this year.

Moving onto operating expenses and income. Operating expenses totaled $85 million for the quarter, which is a $30 million decline from the $115 million we spent in the fourth quarter last year, a reduction of 26%. Sequentially our operating expenses were flat with the third quarter. We were able to offset the fourth-quarter increases in spending for NeoCon, new product launches and costs related to the acquisition, with additional benefits of restructuring actions implemented midway through last quarter.

Our results for the quarter included $4.6 million in restructuring costs, while half of which is due to severance from previously announced actions and the other half from pension-related costs associated with the IMT facility closure just announced.

Our operating earnings for the quarter were $14 million or 4.5% of sales. But when you include exclude the restructuring costs, our operating earnings totaled $19 million, or almost 6% of revenue, within the high-end of the range we outlined last quarter of mid-single digit operating income.

We also had some good news in taxes. Our effective tax rate for the quarter was a little over 1%, much lower than in prior quarters and lower than our statutory rate of 35%. This was due primarily to foreign tax credits generated from the repatriation of cash during the quarter. And in addition, we had some favorable adjustments due to additional benefits from our research and experimentation credit.

Our resulting net income for the quarter was approximately $7 million or $0.14 a share. Excluding restructuring charges, our adjusted earnings were $0.20 per share.

I will now turn the call over to Joe, and he can give us an update on our balance sheet and the changes we made to our capital structure.

Regarding the current quarter balance sheet metrics, we grew our cash balance by over $20 million to almost $193 million. Cash flow from operations for the quarter totaled $27.3 million compared to $90.4 million for the same period last year. The prior year cash flow from operations benefited significantly from higher earnings, as well as a favorable impact on working capital from increased comp and benefit accruals.

Capital expenditures of roughly $5 million are down almost 60% from the $12.3 million spent during the fourth quarter last year.

We are in compliance with all of our debt covenants, and are currently running with a leverage ratio debt to EBITDA of approximately 2 times from a gross debt perspective. And to use a net debt basis to do a leverage calculation, our debt less the cash we hold, you get down to about 1 times debt to EBITDA.

We also announced three changes to our capital structure this quarter that I want to spend a few minutes on. The first is our in our dividend policy. We kept in place our over 30 year history of paying a dividend. That didn't change, although we did reduce the dividend by 70% -- 75% effective with the July dividend payment. It will save us about $14 million per year and allow us to continue to conserve cash, as was well as funding the debt retirement and acquisition that we announced yesterday. It also aligns our payout metrics with more traditional levels.

The second change to our capital structure is the commencement of a tender offer for a portion of our outstanding 7.25% notes -- [7 and 8] notes that are coming due in March 2011.

The tender was announced yesterday and will expire on July 22, 2009. We utilized some of our excess cash to pay for an early paydown of our highest cost debt in order to slightly deliver the bid -- delever the business and also to reduce our interest costs.

The third change to our capital structure is an amendment to our revolving credit facility in order to provide some increased financial flexibility. The most significant changes include an increased covenant to similar levels as our private placement notes, and also a reduction in the size of our revolver at $150 million.

All these changes are prudent and forward-looking steps, not compelled by a current financial need. As previously discussed, all of our current credit metrics are in solid shape. The changes allow us additional runway in case the recession is more prolonged than anticipated, and also provide us with additional flexibility as we continue to pursue our growth strategy.

Now to unpack the Nemschoff purchase price a little further let me provide you some more details on that transaction. Our total cash outflow in Q1 as a result of the transaction will be approximately $36 million, which consists of $32 million cash as stated the purchase agreement, plus payoff of the net debt existing on the Nemschoff books at close.

The second major component of the sales price is Herman Miller stock. But it is important to note that the Herman Miller stock price is being valued at $24 per share, rather than the current $14 per share we are trading at.

That is where the third part of the purchase price fits in. It is called a contingent value right, or CVR, which is in essence a guarantee that in two years the Herman Miller stock price will be at $24 per share, or will be responsible for the difference between approximately the current price and that $24 per share price.

The fourth component of the transaction price is a success fee, based on the achievement of a consolidated healthcare sales plan. This amount can vary between zero and $25 million.

Last, we received a significant tax benefit from how the deal is being structured, which will allow us to deduct the goodwill amortization for tax purposes. This is going to provide a tax benefit of between $10 million and $20 million.

One last note. As you look forward to our cash balances next quarter, you will obviously see them go down as a result of the Nemschoff cash outlay that I just mentioned, plus a $75 million debt paydown previously discussed.

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

We have continued the decision not to 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, although for now the order pattern appears to have somewhat stabilized, and we will see two months of topline benefit from our announced acquisition.

We still believe that in the long term we will be able to generate operating income in the mid-single digits, with a 30% to 40% decline in revenue that we are experiencing, although in the first quarter we will incur some costs from the early retirement of debt, the acquisition, and approximately $2 million of restructuring costs related to our previously announced closure of our IMT facility.

We have great confidence in our ability to continue serving our customers well, and at the same time in adjusting our costs and maintain our financial flexibility to meet current and future business conditions.

We continue to have a very strong balance sheet and a solid capital structure to weather both economic challenges and enable market opportunities. Let me now turn the call back to the operator and we will take your questions.

(Operator Instructions). Budd Bugatch, Raymond James.

This is actually Chad pinch hitting for Bud. A couple of questions. Obviously there is a lot of ground to cover today. You mentioned increased discounting. Could you quantify for us the impact of pricing year-over-year in the quarter?

And I think you still got maybe at least a quarter or two left of potential benefit from the August price increase. How are you feeling about that? Has competitive pressure picked up? Just comment on the pricing environment.

Sure. The net impact, when we look at the price benefit and the discounting, it was somewhere between $0.75 million and probably $2 million, in that range. Greg?

Then just commentary on going forward, the pricing environment, competitive pressures, etc.?

This is Brian. For sure, when you're in this kind of an economic cycle pricing is always going to be extremely competitive. We are in a competitive industry every day. But I would say -- my view still is while folks are competing very hard, and for sure it is a tough environment out there, we don't see a general pattern of people doing silly things. I would say overall the industry continues to realize that you're not going to win the war ultimately by everybody just dropping their prices to the point that we don't have a healthy industry going forward. So I think people are being rational about their pricing.

At the same time, of course, people are trying to do what they can to hold on to their customers and their share. It is certainly not an environment that you're going to see lots of price increases probably being able to pass through. On the other hand, I would say it is fairly rational.

In your earlier commentary you talked about stronger orders, I believe, in government and healthcare. Were those positive on an absolute basis or less bad relative to the Company average? Just in general, how was the performance of healthcare this quarter versus the Company average?

Healthcare was not necessarily positive, but it was much less decline than we thought. Now one thing that you have got to remember, and the healthcare business is much more bumpy too in terms of when projects were. We know we had some large projects that didn't repeat. So I don't know that we would think that is a general pattern as much as when you look at a quarter specifically you will get differences in that realm.

The overall -- I think government was actually -- was relatively flat to slightly up on a year-over-year basis. That obviously tends to be a more stable customer base. And certainly with the additional spending that the government is doing and its focus on green building, we think that continues to be a good place for us. Especially when you combine not only our long-standing supply with the government, but also in the advent of things like Convia and our energy management product that goes straight at the issue of green building that the government is very hot on.

So we think those two sectors will continue to be strong. I would say to you one of the other areas that was very strong on a year-over-year basis for the whole fiscal year was the whole education segment, particularly higher Ed. We had a very good year in that particular piece of the business. It is fairly small, but as a customer segment that has been a good place for us as well.

You talked about the spending related to NeoCon in the quarter. Could you guys quantify it, give us an idea of how much was spent in this quarter that won't necessarily recur in Q1?

We don't typically quantify that level of detail. I would say to you we are pretty confident whether we can manage to similar levels that we had this quarter. We know we're going to have a couple of hits, as Greg outlined from some of the debt restructuring. And we will have some acquisition costs in there. We also had some this quarter on the acquisition front -- legal fees and bankers and those kind of things that it takes to get some of this work done. But overall we are pretty confident we can be in this range, and we can manage it within a scope.

Great. Thanks a lot guys. I will defer to others.

Todd Schwartzman, Sidoti & Company.

I just wanted to get clear on the revenue guidance. You had mentioned down 30% to 40%, for what period is that?

We have been giving that number more looking at what it was year-over-year last quarter, and that is what the forecast is out there for Miller. We haven't necessarily said it is going to be any specific period. As you know, we haven't been giving short-term guidance.

I thought you were giving it for Miller, but I guess not. What kind of mix, either in dollars or percent of sales, would you like to see the noncorporate environments represent longer-term?

I don't know that we have set a specific percentage. Quite frankly, if the core business grew very fast and we also had a big business in the other segments, we would be happy as a clam. In fact, that is the objective.

So we haven't necessarily set a percentage out there. We believe that some of those segments, simply will have a little bit better dynamic. But I wouldn't tell you that we've got a particular percentage in mind that we are shooting for.

Geographically, I know in terms of non-North America you singled out the particular weakness in the UK and Japan. Can you give us a sense, maybe mentioning some of your more important non-North American markets, about whether you are continuing to see accelerated rates of decline? What areas are moderating? And in what order, if you will, would you expect to see recoveries vis-a-vis the North American market, in terms of general economy that is?

I think overall we have seen the rate of decline moderate internationally just like we have in the US. I would tell you the patterns are fairly similar. We saw a steeper decline in some of the international markets like Japan and the UK. I think partially because we got hit with two things, by the way. We got hit with both volume and with currency conversion.

As well, as you know, the UK economy is very much dominated by the financial sector, so it is a much less balanced portfolio of customers. I think that is partly what -- why you see it exacerbated in some of those areas.

So the moderation I think we have seen overall. What we had seen is some belief that the places that will come out faster are probably Asia. And certainly when I say Asia, in particular China, India, Australia has actually been better than some of the other places. We think some of those emerging parts of Asia will come back first. That fits with where we have started to put a lot of our assets in China and some of those places.

The Middle East continues to be one of the markets that has been more stable, I would say, overall. We think the UK will be there, it is just going to take a little bit longer for that sector to work its way through.

In terms of future acquisitions, can you give any kind of color as far as what you might be looking for in the way of tuck-in deals?

We have talked for a long time that we will look for things that give us new capabilities in some of the targeted markets we are looking at, either by vertical customer segment or geographically.

I think what we just did with Nemschoff, what we did with Brandrud last fall, with Ruskin, are examples of us looking for capabilities that match up with where we think the opportunities are. We aren't -- I wouldn't necessarily get down on nailing which one is next on our radar screen.

And certainly we've got a lot of work to do with the ones we've done recently. And that is going to be our focus for the short to mid term is making sure that we get the right kind of benefits for you all, investors, as well as for customers, out of the ones we have done so far. But certainly there are spots in international that we have interest in, as well as some of vertical markets.

Last question is regarding Nemschoff. You mentioned it should be earnings neutral in year one. For the next quarter or two are we talking about minimal dilution? Or I wonder if you can just give us a sense of the timing of that?

We expect fairly minimal dilution. The first quarter may be the -- the first quarter or two will be probably the most challenging only because we are going to have -- not so much from their operations, but we will have cost from the external people that we have to paid to help get through some of this work, as well as just the immediate rush of getting through all this communication and those kind of things and getting folks lined up.

That is where it will be the most challenging, but even then we don't expect it to be significant, that their earnings power in and of itself will offset most of those costs.

Then the real trick, longer-term, is getting the combined synergies both on the revenue side as well as the cost side to enable us to get to those numbers we outlined. We are very confident though that we've got an extremely detailed plan. If anything, that I think you guys can count on from us is, when we put our minds to executing and we know what the plan is, we can deliver on it.

I am confident we've got the right people. We have the strongest healthcare team we have ever had in the history of the Company. Nemschoff simply adds to that, as the Brandrud thing did. We've got some great leaders out of Brandrud. We picked up some additional leaders at Nemschoff. Combined with the operating talent we have at Herman Miller, we really confident we can pull this off and get to where we want to be.

This is Joe. I want to circle back to your initial question just to provide a little more clarity. You started out saying that 30% to 40% decline in revenues, what periods. Now when Greg was describing that in his comments in the discussion, that really was coming from 30% to 40% decline in total in our business.

Looking back to our peaks, so what if you look at 2008 when we were running at that $2 billion phase, that is really what that 30% to 40% decline was. And his statement was, with a 30% to 40% decline in revenue, similar to what we are seeing now, we can still generate that mid single-digit operating income number.

For sure as we go throughout the year those numbers are going to change dramatically in terms of the year-over-year number.

Year-over-year decline. The first quarter of last year we are still strong. We had $480 million in revenue in the first quarter last year, so it was still at a high rate. That means you will still probably see a more -- a significant decline in revenues. But as you go through the year, obviously this current year we just ended, the second, third and fourth quarter, the revenue started to -- trended down. So the percentages will change. I hope that helps.

Yes, it does. Thank you very much.

Mark Rupe, Longbow Research.

Can you find quantify what the raw material and cost benefit was in the fourth quarter? I know you cited on the last quarter that you thought there would be an incremental $4 million benefit from raw material and $5 million from cost reduction actions. Did those come in where you expected?

Pretty close. This is Greg. Commodities came in a little better than expected, as commodity costs continued to trend down through the fourth quarter. And so actually the end of quarter pricing was actually a little bit more favorable than the average for the quarter. But yes, very much in line on the savings piece. Commodities was a little better than we had anticipated.

Just as it relates to the sales level, was that in line with where you expected then? We were obviously expecting a little bit higher than that. Could it have been that much a little bit better than what you were previously thinking, given the sales being a little bit lower?

I guess by definition of the calculation, sure. Absolutely.

Then just on the healthcare acquisition. What is the magnitude? Obviously, it is $90 million in revenue. I'm just trying to get a sense -- I know you don't disclose how big your healthcare portion is -- but does this increase that business by 50%? Is there a number you can give us an idea how big of a magnitude this acquisition is?

It is pretty -- it is significant to our overall healthcare business. It makes a pretty big change in our share of that market. This significantly moves the needle in terms of our size and scale in that business.

Then just lastly, you made a comment about the number of holds and cancellations either slowed or improved here recently in the quarter. I am just curious to see what in fact that was, and then what you might think was driving that?

I think partly what you're seeing -- first of all, what we said is we saw fewer cancellations and holds. And what you are seeing is starting to see signs of, if you want to look it at anecdotally, there was a lot of -- there were customers in the fall and early winter who in some cases had [evidently] leased new facilities and/or built new facilities, and decided not to move because they just wanted to hold onto their cash -- any piece of cash that they could.

We started to see some of those folks come back and say, hey, you know what, I already got the building standing. I am leasing another building or I have two owned facilities, I am now going to make the move.

We saw some of those things starting to break free, where earlier we were actually seeing some of those kind of holds which were pretty unusual. I think the other thing we started to see is some of the day-to-day reordering stuff has come back, that I would call it the top-up maintenance work -- that even that stuff had fairly well dried up. Again, we haven't seen a -- I wouldn't say we have seen a major shift in direction back, but what we have seen is some positive signs underneath it all.

Then just one final question. On Convia, at what point in time do you think you'll start being able to put out some kind of expectations for that? Obviously there has been -- you made some good moves here, but I know it is a major initiative for you guys.

Once we get into probably middle of this next year I think we will have a pretty good idea of what the ramp up looks like with the Wiremold/Legrand folks.

The hard thing to predict right now -- we're getting -- we had a very good response to what we were doing at NeoCon, partly because for the first time we were able to take the overall concept of Convia and productize in a way that our traditional office furniture dealers could sell the energy manager component.

That is a big deal, because before I think the sale was a little complex in terms of the building infrastructure piece for them. Now they have the ability to go sell a component as part of the workstations that provide real customer benefits around energy usage and ability to monitor, but that also means that they can begin to sell the story, the broader story.

At the same time connecting the Wiremold folks in, we get them talking to building owners sort of at the same magnitude, but more about the building infrastructure.

So we think the one-two combination is going to be what is important. And I can tell you we had our best quarter of activity last quarter from an order standpoint and a project one standpoint with Convia. None of these numbers make a difference from an overall perspective to you guys. But we saw really good signs in the fourth quarter that we are starting to get some level of traction.

And there is an important milestone in a few weeks where the US Green Building Council will be officially opening their new headquarters in Washington DC, which Convia is featured as the primary control structure in that facility. Not only in the building layer, but also embedded actually into the furniture as well, with some fairly nice branding spots for us.

That connection to green buildings and energy is a big deal for us and it is a big deal for Convia. And the combination with Wiremold and getting their 50 to 75 sales folks out there in the marketplace, which we just got through all the training as we finished the quarter, and we had a lot of those folks with us at NeoCon. So we will have a much better understanding I think as we get into the December/January timeframe.

Matt McCall, BB&T Capital Markets.

Let me follow up on two of the previous questions, and I then I will get to mine. First, Brian, you just said that you started to see some of that day-to-day business come back. Can you talk about when it first got weak, how weak it got, and just qualitatively, and then when you started to see some improvement?

I think we talked about this even last quarter that we were seeing a pretty big bifurcation. We were still seeing project activity, but some of the smaller stuffed had dropped off. I think as we got into sort of March and April we began to see that some of the day-to-day order entry looked a little bit less -- a little less choppy. Now, again, I am not telling you it is not choppy, because it is still choppy, as Greg said, even in the press release.

On the other hand, there is some sign -- and I think you see this even in the consumer world, right? Small purchases were being put off -- people are coming back to. So I wouldn't say at least it is an order of magnitude yet, as much as if I can use this overused term everybody is planting around, there are little green shoots around it. So March, April we began to see it and then May was even a little more stable.

Greg, you talked about -- there were two questions, one about discounting and pricing and one about commodity deflationary benefit. I just wanted to tie the two together. I wrote down different numbers and I want to make sure I got it. So your target in the quarter was about $4 million from commodity deflation, and it sounds like you got that.

Yes. A little bit more than that, but, yes.

Then in the prepared remarks it that sounded like you expected to see incremental benefit from that $4 million?

Correct. I would view it this way. That the end of the quarter prices were lower than the average for the quarter in the fourth quarter. So by default, now that I am starting this quarter at a lower than average, I will get a little bit better in the first quarter. But with the pressure on oil right now for fuel and plastics, that is the unknown out there right now.

Then you should probably get about three quarters, of that, I guess. Because this is the first quarter you really saw some benefit, so you'll see some incremental deflation, assuming steady prices from here, you get some benefit through Q3?

Steady benefits through Q3, yes. That is correct. As you remember, last year in the first quarter -- I guess, the easiest way for me to look at it is if I go year-over-year, by the time I got to the end of this year, prices were very similar to what they were at the start of last year. Then we saw a very rapid increase last year right in the first quarter. I think the number incremental was $10 million and then the second quarter was $14 million. Then it started to fall in the third quarter. So it wasn't until we got really until the end of this year that prices were back to where they were.

Right. So your $4 million was a sequential improvement, not a year-over-year improvement? And the year-over-year was about half of that?

The year-over-year was actually -- because of fuel last year, steel was a little bit worse as averaged throughout the quarter. Aluminum was quite a bit better. The impact year-over-year was not that significant.

Then on the discounting pricing, what was the number you gave? I am sorry, I missed the range that you gave on the net impact. And it was a positive impact?

It was a negative impact. Discounting, when you're comparing periods it is a very interesting discussion, because mix has a lot to do with the impact on discounting. And big projects versus small projects or base business also has a big impact. So typically one quarter -- from a one-quarter view on discounting doesn't really give me a trend. Discounting was a little worse than it was last year, about somewhere around that $1 million mark.

But again, like I say, mix has a big impact on that. So it is something we're watching. And like Brian said, I don't think people are getting crazy out there when it comes to price, but it is obviously changing.

Then I am trying to put all the pieces of the puzzle together. So when we talk about Q1 versus Q4, typically if I look back historically you've got about a 4% seasonal decline, if you will, Q4 versus Q1 on the top line.

A lot of moving parts here. You've got the acquisition you're going to bring in for to 3 months. You've got the pricing and discounting dynamic that you just talked about. You throw in mix there, which is another part of the story.

If I look at consensus right now, there is about a 7% sequential increase baked in rather than a 4% decline. As I add all those up can you just talk directionally about what we should expect Q4 versus Q1?

If I add all those up I kind of go not too different than Q4.

And then if we look past -- if we look on down the income statement, you mentioned acquisition costs. You mentioned some costs associated with the debt. We've got deflationary benefits that should get a little better. You've got some cost coming out.

So the same type of question there. You're talking flat, but if you add all these up, are you also talking about a similar earnings environment? I know you had the tax benefit this quarter. I don't think that will recur. So help me understand all the puts and the takes there.

I guess I would look at the puts and takes there -- don't forget, obviously the acquisition comes with its own operating expense, so I think we've got to make sure that we factor that on top of it. But the costs from the early retirement of debt, depending on where pricing comes in, won't be insignificant. So I would expect to see similar results with increases for the bolt-on piece of the acquisition.

I think if you just get down to the base here, we continue to believe that we can have operating income in that kind of mid-single digit level at the level of sales and order activity we currently see. Then I think you just have to factor in the unusual items that Greg mentioned around the debt payment and some of the minor cost you might have related to the acquisition. But in an operating basis ongoing, that sort of mid-single digits level look like it is doable from what we can tell.

As we look -- you talked about $110 million to $115 million coming out and another $5 million to $7 million on -- from the May announcements. As we go through I think -- some of these were temporary costs -- some were structural, some were temporary. Can you talk about what the expectation is internally for some of these costs to return as we come out of the depths of the downturn?

I think it is way too early to be talking about what returns when and where. Right now we have the organization very focused on managing operating expenses and our cost to the level we are at today, because we don't see an immediate change in volume. When we get to the other side, we will begin to talk about it.

The only one right now that I would say is the most temporary, if you want to say that, or temporal, is probably the fact that we are still working 9 out of 10 days for a lot of folks. Now some of that was offset this quarter, because we have a bonus plan where if we beat some of our internal targets, we have to pay some of that back to folks. We in fact did that this quarter. Which is great news, because I think that will do nothing but energize our folks to continue to do what to me has been a great job of operating in this environment.

So that is probably the one that is going to come back the quickest. Most of the other things that we have done, quite frankly, have been with an eye towards asking ourselves how do we operate in the long term.

I think last time in a downturn most of the moves we made, we held onto. So the things that would tend to bounce back around for us are going to be that 9 out of 10 days. It is going to be variable compensation. And things that are variable with volume anyway, like direct labor, sales comp and those kind of things.

But much of what we have done -- we will set out this to try to continue to run at the kind of operating income levels you guys have historically seen from us when we get back to those kind of volumes.

Then last one. The temporary work, 9 out of 10 days, have you quantified what the benefit for that has been?

We quantified it at the beginning of the quarter that we expected that to be a $25 million to $30 million annual savings.

Now remember, that was offset this quarter partially by the fact that we paid some of that back to folks in a bonus. So some of that annual or quarterly savings was offset. It will continue to be offset if we do better than some of our internal forecast for where we think we have to be.

And as well as that gets a little more lumpy when you look at manufacturing, because some parts of the plants are literally running a little bit of overtime and some are working less than four days. So it is bouncing around, depending on the orders coming in from customers, and the speed within which they require product.

I told you it was the last one. I want to slip one more in. The healthcare market, can you quantify what the market -- the total market size is? And then if you are not the share leader, who is, and what you think their share is?

The total market size for healthcare furnishings, I think when you talk to folks overall it is probably somewhere in the range of around, if I remember right, $2 billion, if I remember from memory. It is broken up into different pieces. You've got an administrative sector that -- by the way, that is $2 billion of what we are really going after.

You have got administrative sector. You've got a sector that is really around the patient room. You've got a laboratory sector and you've got a pharmacy sector. And you really got to look at those individually. Overall if you took that total market, we would certainly say we are one of the marketshare leaders, if not the leader, with this move.

In particular, we play very strong in both the admin and the patient care side. With the advent of both Nemschoff and Brandrud we've got a pretty big share in that case. Now just like our core business though, nobody has a dominant share or an oversized share, because this is still a fairly fragmented industry and so is the healthcare piece.

On the other hand, we think we've got very good strength from a brand positioning standpoint. And with the power of our distribution, salesforce, and ability to innovate, we think we continue to have a leading spot there.

Thank you all very much.

(Operator Instructions). [Garland Buchanan], Dobson Capital Management.

Can you give a breakdown on your international business by geographic area and country specific, if possible?

We don't break it down by area. I will tell you that it is fairly evenly split with our biggest operations physically being in Europe, and particularly in the UK. The UK is our single largest geography outside of North America. We also have a good-sized presence in both Mexico and Canada. Then from there it really is very geographically diverse.

So when you look at China or Asia as an example, we have a presence in most of the major markets in Asia. With our operational centers really being focused around China and a little bit in Singapore. But it is really diverse. There is no one piece that dominates, with maybe like I say the largest being the UK.

Then I don't know if you already said this or if you disclosed it, what are your expected synergies from the Nemschoff acquisition?

We didn't go into that in detail. We think there are great topline synergies, of course as we combine their connectivity with a broader -- between us and Nemschoff we will get to a broader number of hospitals that we have not reached in the past. We each have our set of customers. And we think there is great ability to cross sell from the patient room to admin, and from admin to the patient room. That is a big deal. Certainly as we look at it, we think we can bring some purchasing power synergies to the combined group.

They use a fair amount of steel, but not anything to the magnitude that we would. We think there is some benefits there. Then we have some other things that we think longer-term will play out.

So no dollar value on that?

No.

When you talk about things to come in less choppy or there being somewhat of a stabilization, does seasonality play into that at all, and if so to what degree?

Yes, it does play into it a little bit. Because for sure our third quarter which ends March, is typically the most difficult period. And it is also, to be frank, the most difficult period to get a read on, because you get a lot of holiday periods in there, a lot of short work weeks over a very compressed period of time.

As is it has it, as you guys know, as you got out of the fall -- we actually had a pretty good period in the fall, but then all of a sudden you started to get all the bad news just as people went into the holidays. So trying to ascertain what was the typical holiday effect versus what was the economic effect, that as I would call it the normalized economic effect of a deep recession, versus the panic affect of about everybody was reading in the newspaper, those three factors were very difficult to get a read on before.

I wouldn't want to give you the impression that I think we've got that -- it is all very nice and even, because it isn't. On the other hand, I think just as you see in the general economy, a greater level of confidence that at least we can find our way to the other side. I think we see that as well in our customer base.

Again, it's not as if we have seen a tidal wave of folks coming back into buy office furniture. On the other hand, I think that at least the business climate feels like people are getting more rational and beginning to ask themselves how do they get to the other side, and have the confidence they are going to get there.

With the Nemschoff acquisition could you pro forma what percent of your sales are now healthcare?

We don't actually disclose that. That gets into a segment reporting issue that we don't do.

If you were to lump it together with healthcare, home and education, could you say what percent bumps up?

Healthcare home and education --.

I am looking at your third quarter presentation. It looked like 15% of your sales in 2008 were healthcare, home and education. Can you give a pro forma number with the Nemschoff acquisition?

First of all, I don't think we ever give it with healthcare, home and education, because we actually include in the external stuff. Isn't healthcare, Greg, included in the work business?

We do a chart. We do show a chart that groups those in from us. A strategic perspective that shows the diversity of how we have changed over the time. You can do the math. And we have given what the revenue is -- was last year for Nemschoff, so I think you can do the math to figure out how that changes that percentage.

Okay, thank you.

This will conclude today's question-and-answer session. At this time I would like to turn the conference back over to Mr. Walker for any additional comments or closing remarks.

Thanks for joining us today and for your continued interest in Herman Miller. I also wanted to express my appreciation to the people of Herman Miller. This has definitely been one of the most challenging years in Herman Miller's history. We have made significant changes to our cost structure and our capital structure, all the while continuing to invest in growing the business through Legrand alliance, the Nemschoff acquisition, and a multitude of new products announced last week. I am sure that the next year will not be all smooth sailing, but we have established a groundwork for a successful long-term journey.

Finally, I want to welcome again the people of Nemschoff, who will now be part of that future. We are excited to have you joining our family. That's all for now. We look forward to talking to you again next quarter.

This concludes today's conference. We thank you for your participation.