MillerKnoll Inc (MLKN) 2010 Q1 法說會逐字稿

Good morning everyone and welcome to the Herman Miller Incorporated first quarter 2010 earnings results conference call. Today's call is being recorded. This presentation will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These 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, Mr. Greg Bylsma, Executive Vice President and Chief Financial Officer, Mr. Walker and Mr. Bylsma are joined by Mr. Jeff Stutz, Treasurer and Vice President Investor Relations, Mr. Walker and Mr. Bylsma will open the call with a brief presentation which will be followed by your questions. We would like to begin the presentation with Mr. Walker. Please go ahead.

Good morning and welcome everyone. I want to start by introducing to you Jeff Stutz, our new Treasurer and VP of Investor Relations. Jeff has been a member of the Herman Miller finance team for a number of years, and we're excited to have him with us today in his new role.

On our call last quarter, we ended by acknowledging that the tough economic climate we face in fiscal 2009 will continue to challenge us into 2010. But we also emphasize our view that we are on a long-term journey, and that we had made great strides in setting the stage for our future success, including the announcement of several strategic initiatives. Business levels in the first quarter were substantially lower than last year, a direct reflection of the rough waters we anticipated coming into the period. Despite this, our financial results for the quarter demonstrate the degree to which we have improved the efficiency and flexibility of our cost structure in the past year. These improvements enabled us to again deliver solid operating profits, even after absorbing charges associated with restructuring actions and the debt retirement.

Sales in the quarter decreased 32% from last year's level. While new orders, adjusted for the pull-forward impact of last year's price increase, declined 36%. Operating earnings in the quarter were $21 million, or 6.5% of sales, when you exclude the restructure and debt retirement expenses. Despite the magnitude of the sales and order declines, the rate of decrease in order entry has leveled off over the past few months. While it certainly doesn't suggest we are in a recovery mode, it does signal a degree of stabilization in demand, a condition necessary before a market recovery can begin.

Altogether, we had a promising beginning to the fiscal year and in a few minutes, Greg and Jeff will provide you with a more detailed review of the numbers. First though, I'd like to share with you a few observations on the progress we've made on the priorities and investments announced last quarter. We completed the acquisition of Nemschoff near the end of June and immediately launched a process of integrating its products and processes into our existing healthcare business. One of the first steps in this effort was the announcement that our Brandrud manufacturing facility in Seattle will be closed and its operations transferred to the Nemschoff campus in Sheboygan, Wisconsin. This process will be completed later this fiscal year.

Not surprisingly, there's tremendous excitement throughout the organization for what the addition of Nemschoff means to the advancement of our healthcare strategy. Beth Nickels and her team are moving aggressively forward in the integration process and have us off to a terrific start. In July, we settled a debt tender offer, which resolved the retirement of $75 million of our highest cost debt obligations. In doing so, we met our objective of delevering our balance sheet and reducing ongoing interest costs. We also moved forward this quarter with our plans to consolidate our integrated metal technologies operation in Spring Lake, Michigan. As a reminder, we expect this move into existing space with other facilities will provide ongoing savings of between $5 million and $7 million on an annual basis when fully implemented later this year.

Finally, we are proud to have once again been named to the Dow Jones Sustainability World Index, an international stock portfolio that evaluates the performance of the world's 2500 largest companies, using economic, environmental and social criteria. In fact, of the approximately 300 companies selected, we were the only contract office furniture manufacturer to make the list. It's the sixth consecutive year we've earned this recognition and reflects our legacy of commitment to business practices to drive both solid financial performance and environmental advocacy.

I'll now turn the call over to Greg and Jeff to cover the quarterly results in more detail.

Thanks, Brian. Good morning, everyone. Our first quarter results reflected what has been and still remains a challenging economic environment. That said, we are encouraged by our start to the year despite a revenue decline of over 30% from a year ago. We succeeded in delivering profit from operations at the mid single digit percentage level, a goal we outlined for you at the start of this economic downturn. This was achieved in large part from the restructuring actions we've implemented in the last year. Some of which as Brian pointed out, have not yet translated into operational cost savings.

The first quarter sales were $324 million, down 32% from the prior year, and up slightly on a sequential quarter basis. Given the closing date of the Nemschoff acquisition, we were able to consolidate nine weeks of their results, which added $15 million to our top line in the period. North American sales in the quarter were $270 million, which is down $126 million or 32% from Q1 last year. Declines were experienced across all components of our North American operation, though our healthcare business has continued to show the most resilience due to the downturn.

Sales in Canada and Mexico decreased significantly, due in part to a $3 million negative impact from exchange rates. Sales in our non-North American business regions reported even deeper year-over-year declines. Sales of $42 million in the quarter were down 40% from last year. We saw the steepest declines this quarter in Continental Europe and the Middle East. Exchange rates from a year ago drove roughly $3 million of the decrease in sales this quarter.

One bright spot in the period was a significant percentage increase in sales in India. While we are still talking about relatively small dollars, we were encouraged to see our Indian sales double this quarter compared to last year. A positive sign that our efforts to structure a sales organization in that region are beginning to pay off.

Orders in the first quarter were $322 million, a decrease of 40% from the same period last year. As we outlined in our press release, this year to year percentage drop was impacted by the timing of our general price increase, which became effective in August of last year. In the first quarter of last year, we received an estimated $35 million of orders that were pulled ahead by customers anticipating the price increase. When you adjust for this impact, our year-over-year decline in orders was $178 million, or 36%. Of this dollar increase, we estimate $6 million was due to changes in exchange rates from a year ago.

Despite the percentage decline from last year, we are very encouraged by continued signs of stability in weekly order entry levels. This is showing itself in the form of a more normalized pattern of order trending, which we began to experience back in the March to April time frame last year. One other positive trend is our non-North America segment where orders rose 6% sequentially from the fourth quarter.

Gross margin is next. Our gross margin percentage in the first quarter was 33.2%, a decline from last year of only 70 basis points on $155 million decrease in volume. We continue to benefit this quarter from substantially lower commodity and fuel prices versus the prior year. We also realized significant savings in our labor and overhead spending relative to last year as a result of our restructuring efforts. These factors helped offset a large loss of leverage from the lower volume.

Material prices decreased significantly from the prior year, which drove an estimated $7 million reduction relative to last year. Fuel prices, which reached record levels in Q1 of last year, were also much improved. This helped drive a 40 basis point improvement in overall freight and distribution expenses for this quarter. Expenses were down across virtually every component of our manufacturing overhead structure. The largest reductions came in the area of employee wages and benefits, a direct result of the restructuring actions we've implemented. That said, our overhead expense was higher than the prior year on a percentage basis due to the decline in revenue.

On a sequential basis, gross margin in the first quarter improved 70 basis points from the fourth quarter where we were at 32.5%. This was mainly due to a $2 million improvement in commodity costs. We also had incentive bonus expenses in the fourth quarter of last year, whereas none were earned in the current period.

Moving on to operating expenses and income. Operating expenses in the first quarter were $91 million compared to $106 million last year. Included in current quarter expenses was a $4.5 million charge associated with a premium paid on the debt tender offer and approximately $4 million from the Nemschoff business unit.

Last quarter, we outlined for you the components of the Nemschoff purchase price, one of these components is called a contingent value right or a CVR. We recorded the CVR as a liability at the date of purchase and then adjusted its value at quarter end based on the market value of our stock. This adjustment resulted in a $1 million reduction to operating expenses in the quarter. However, as required under GAAP, this favorable impact to net income was excluded from the determination of diluted EPS in the quarter. The reduction in operating expenses resulting from the CVR was more than offset by an increase in bad debt reserves in the quarter. When you net it all out, adjusting for these items, operating expenses decreased over 22% compared to last year.

Restructuring expenses in the first quarter of almost $3 million related to severance and benefits associated with our consolidation projects. Operating earnings in the quarter were $14 million, or 4.4% of sales. However, when you exclude the non-reoccurring expenses, our adjusted operating earnings were $21 million or 6.5% of sales.

We had good news again this quarter in the area of income taxes. Our effective tax rate was negative 0.7%. The low rate resulted from the release of $3 million in income tax reserves, due the closure of IRS audits for the years 2005 to 2008. Going forward, we expect to see a more normalized effective rate, bringing our full year rate to between 28% and 30%.

Net income in the quarter was $8 million or $0.14 per share. Excluding the per share impact of the tender offer premium and the restructuring charges, adjusted EPS in the quarter was $0.22. This does include a $0.05 per share benefit from the reversal of the tax reserves.

That's the income statement overview for the quarter. I'll now turn the call over to Jeff to give us an update on the cash flow and our balance sheet.

Thank you, Greg. Good morning, everyone.

We ended the quarter with a cash and equivalents balance of $100 million. Down from $193 million at the end of May. As expected, outlays related to the Nemschoff acquisition and the debt paydown drove a significant reduction in our cash position during the period. As the team outlined last quarter, the total purchase price associated with Nemschoff had multiple components. During the quarter, we made a cash payment of $37 million, which included a $12 million outlay to retire the net debt on Nemschoff's balance sheet as of the transaction date.

In July, we incurred a cash outlay of $79.5 million in completing the debt tender offer. In completing this transaction, we repurchased a portion of our highest cost debt obligation. The tendered notes carried an aggregate principal value of $75 million, bore annual interest at 7.125%, and were due in March 2011. The final clearing price on the tender offer was 1.06, meaning the notes were repurchased at roughly a 6% premium above their principal value. As Greg just mentioned, this premium amounted to approximately $4.5 million. An amount below the maximum bid price outlined in the offer and well within the acceptable range of our financial models.

Cash flow from operations in the quarter was $27 million. Changes in working capital, primarily refunded income taxes and reductions in AR and prepaids, drove a $10 million source of funds in the period. By contrast, working capital changes in the first quarter of last year result in a $44 million use of funds. This was principally due to the payment of prior year incentive bonuses which accounted for $38 million of the total cash use at that time. Capital expenditures were $6 million in the first quarter, a 29% reduction from the $8 million spent last year in the same period.

Dividend payments in the quarter were $1.2 million, compared to roughly $5 million last year. The reduction was driven by our decision late last year to conserve cash by reducing the quarterly payout rate by 75%, a move that will save us approximately $14 million on an annualized basis. We are in compliance with all debt covenants, and are currently running at a leverage ratio, that is to say debt to EBITDA of approximately 2 times on a gross debt basis. We're also in a strong liquidity position having just renegotiated our revolving credit facility last quarter.

We currently have $139 million of unused capacity on the revolver, with the only usage being from outstanding insurance related letters of credit. We believe this borrowing capacity provides us with sufficient flexibility going forward, especially when it's combined with the reduced debt load. That's the balance sheet overview for the quarter. I'll now turn the call back to Greg, who will share some thoughts on the outlook as we move through Q2.

Thanks, Jeff. Consistent with recent quarters, we aren't providing specific forward-looking sales and earnings guidance; however, we thought it would be helpful to share with you some general thoughts on the trends we'll be looking at as we move through the latter half of calendar 2009.

Excluding the partial quarter impact of Nemschoff, orders in Q1 averaged $24 million per week. The addition of Nemschoff increased this run rate to just over $25 million per week. We would typically see an increase in order rates between Q1 and Q2. The primary reason for this increase has historically been the seasonal buying pattern of the GSA, which tends to increase as we approach their fiscal year end in September. In past years, it has not been uncommon for us to see double-digit increases in government orders between the first and second quarters, thereby driving an increase in consolidated orders of between 3% and 6%.

Orders from the GSA generally take longer to convert to sales than do dealer based orders for commercial business. For this reason the sequential increase in order rates between Q1 and Q2 is often greater than that of sales. In other words, we typically built backlog during the second quarter, which has subsequently worked down as government projects are completed an invoiced.

One caveat here is the Federal Government orders are expected to track with our historical experience. However, our state and local entities have been more negatively impacted by the recession. This could have a dampening effect on the seasonal uptick in orders between Q1 and Q2. From a gross margin perspective, we expect to see an increased pricing pressure going forward. We're also continuing to keep a close eye on commodity pricing and view this as an outlook risk though we don't anticipate a significant negative impact in Q2.

Assuming steady levels of production, we expect to see gross margins at or slightly below our Q1 level in the near term. When you exclude the impact of the debt tender offer and the added expenses from Nemschoff, we've done a good job holding the line on our core operating expenses over the last two quarters. We intend to continue this focus on expense management going forward. Our upcoming quarter will include a full 13 weeks of operating expenses from Nemschoff. Additionally, we expect to see an increase in expenses associated with a program of incentive compensation tied to our decision last year to reduce employee-based pay by 10%. As profitability improves, employees have an opportunity to earn back a portion of this reduction in the form of a quarterly bonus.

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

Thank you. (Operator Instructions). We'll pause for just a moment to assemble our queue. We'll go first to Todd Schwartzman with Sidoti & Company.

Hi, good morning, gentlemen.

Good morning.

What is your current full year CapEx expectation now?

Todd, this is Greg. We would expect that to be somewhere between probably 28 and the low 30s.

Okay. And on Nemschoff, is there any EPS impact for the quarter?

Yes, I mean, given all the ins and outs, there might be $0.005, which is probably a little bit better than we expected.

Negative?

Positive.

Positive? Okay. And outlook for steel prices if you would for the balance of the year?

For the balance of the calendar year?

Balance of fiscal year.

Fiscal. Right now in the near term, we could see the charts like everybody else can. They're ticking up a little bit. As always, in the steel industry, this appears to be a bit more of a supply-driven price increase right now which has always historically been a bit more hard to hang onto for those guys. So so much is going to depend on what happens in the first part of the calendar year to see if that sticks.

Is there any other inputs for which you're a little bit more optimistic of some deflation?

I think right now overall, Todd, our view, even with Greg's comments on steel, has been that we don't see a lot more positive and we don't see any real negative big factors out there. We think they'll sort of offset. The one again, as Greg said, we're watching this game of the steel companies to play with capacity levels to try to drive up prices, but overall I guess the one question you got out there is what happens on the oil front. But so far, all that stuff seems to be bouncing around within a range.

Yes, Todd, I guess the other thing that's hanging out there too is that eventually by the time we get to the fourth quarter we should see some improvement obviously from the IMT closure.

Got you. And finally, what can you tell us about customer visits, both for Q1 and subsequent to quarter's end? Thanks.

Hi, Todd, this is Jeff. I can take that one. We had customer visits, they were down in the double-digit range year to year. But we view it as a real positive sign, they were relatively flat with Q4, in fact, they were flat with Q4, pretty much right on so they've been really consistent.

I guess not looking at it from a customer visit perspective, but the one thing you are starting to hear, I was traveling around in the field last week, the one thing I think is sounding a little positive is that up until now, the landlords in the commercial real estate market have been sort of unwilling to commit to what are pretty depressed rental rates for long-term. They've been more in an extension mode, I'll give you another year at a lower rate, or something to that effect. What you are starting to hear from some of the folks out there, although I would say this is early days, is people starting to say that landlords are more willing to lock into sort of at least mid-term levels of that which is causing more activity in people looking at potential moves. And some of that is moves to consolidate what are probably now fragmented buildings across sort of Metro areas and asking how do I put more stuff together.

That to me is a positive sign for us, there starts to be a churn of movement. The other thing, if you look at the architectural billing index, it was improving, it then had a big falloff. But the one thing that's up still for them and above their 50 mark is the inquiries index and certainly as you listen to those folks, they're starting to see more activity, which we really got to get folks going to visit their architects, starting to talk to their landlords about new space. That's where the stuff will start to churn for us.

Are midterm leases considered roughly maybe three to five years?

Well, I think most of the major cities you're hard-pressed to find anything less than five years. Now you're starting to hear people talk. It's expensive to move. If you don't have at least five years that you can lock in the rate, people are less willing to do it. At least in this country.

Thank you.

We'll go next to Budd Bugatch with Raymond James.

Good morning, everyone. This is actually Chad filling in for Budd. A question, maybe if I could have Greg clarify some of the comments he made. I think you said gross margin would be expected to be at or slightly below Q1 and I thought you said -- did you say assuming flat sales or how did you characterize it?

I characterized that as given relative production from Q1 to Q2, as long as it's in the same hunt, which given what I said about orders, one could -- I think that's a fair assumption.

So thinking about sales from Q1 to Q2, we have the positive of the government business, although based on your comments, that sounds like a relatively modest positive. And then we have a full quarter of Nemschoff revenue.

Yes.

So is that kind of the two major pieces as I think about the progression?

Yes. And always the hard part for us is to figure out how much of that government orders increase actually gets invoiced in the quarter which is always challenging this time of year. Historically you'd look and you'd see our inventory build by about $10 million from Q1 to Q2 on an annual basis in large part driven by that delay in invoicing in the federal projects.

The other thing, Chad, that's going on, this is Brian, a lot more of the business today is sort of project-driven than what we might normally see. So you really -- you've got to really go out to capture projects right now and a lot of those are not major big footprint projects. So you're seeing a lot more of what you've got to go get as far as the next quarter's revenues, you've got to sort of hunt it and get it in the door within that period, which that's made the window a little tighter in terms of forecasting.

Okay. Got you. And you guys talked about increased pricing pressure. Could you quantify for us sort of the net pricing versus discounting impact that you saw in this quarter, and any quantification or help on your thoughts going forward.

Yes, Chad, very small in the quarter, those two things sort of netted each other out to the point that it wasn't a big factor. So far, it's been okay. We know that the length of the period that you see around this lower activity levels means everybody gets hungry to compete and it's certainly as we look out there, one of the things we're going to fight hard to do, quite frankly, is make sure that we're holding on to our core customers and in fact some places where we have installed base and what you do see happening is you've got to fight harder at smaller volume levels than you used to do. So it isn't as if -- the large projects were always contested at very hard pricing points, that's always been the case.

What's happening is you're seeing more need to fight at more moderate sized projects. And we're just trying to make sure everybody understands the one thing we don't believe anybody has a comparable advantage from a cost perspective, and we're not willing to give up share and/or our position in the marketplace without a fight. So we don't think it's gone crazy so far but we're going to stay in there.

Okay. And on Nemschoff, I think you guys said there was an incremental $4 million in operating expense in the quarter. Obviously, not a full quarter run rate, but could you characterize maybe for us how much of that is sort of one-time or initial kind of transition integration costs that might fade through the year, how much of it's kind of normal run rate SG&A?

Chad, this is Greg. While there is a little bit, as we try to quantify it, a lot of those costs are coming from sort of the folks here that are helping out over there. It's not really incremental cost to the business. So it's -- the total spend for the nine weeks wasn't quite $4 million, and we would look at that at least for the near term as some of those costs continue as we sort of, go through the integration, those would tend to probably stick for a little bit. So I would think that just below the $4 million number for the nine weeks is probably a pretty good number as you look into a full 13 weeks.

One more quick one. When you initially announced the Nemschoff acquisition, I think Brian talked about neutral EPS in year one and $0.04 accretive in year two, was the folding of the Brandrud manufacturing into Wisconsin kind of incorporated in that or was -- are benefits from that incremental to that initial view.

That was always in our plan. We knew right up front that's what we were going to do. We did simply -- to be frank, we couldn't talk about it because we hadn't told the people yet. That was always part and parcel of what we thought we had to do.

Great. Well, thanks very much, guys. Good luck on the rest of the year.

Thanks.

(Operator Instructions). We'll go next to Mark Rupe with Longbow.

Just a couple questions here. On the order pacing you had mentioned some -- the comments on the project side of the business being a decent amount of that. But is the day-to-day business, have you seen any signs of life there, any inflection or change?

I don't know that we've seen a change, Mark. I think it might be marginally better but nothing that I'd say that you'd see it as moving the needle in a big way yet. I think there are some positive signs in some of the businesses as Greg mentioned. Certainly the retail business, while being small, we've seen that become a better run for us. Some of that I think is they purged a lot of inventory so they're back into kind of normal mode. We've also seen the international business has certainly, from where we would have expected it to be, that has been particularly in Asia and some of those emerging markets, we've certainly seen those look like they've got more strength earlier.

Again, that's not really day-to-day business because in those markets we don't have a big installed base so we're still playing off of sort of projects. And my gut is what we're going to see is this is going to really be a project-led recovery at one level. You're going to have to see people start to try to figure out how to get themselves reconfigured for what their new reality is going forward and be willing to put the money up and get that work done. Probably how we're going to lead our way out of it.

On your commentary towards government, I believe you said state and local might be a little bit under pressure here. Can you give us a sense of how big that is of the overall government business?

Yes, Mark, this is Greg. I would say that overall, obviously as the government has remained strong, our percentage has changed relative to the total. But I think the state and local piece historically have been in that sort of 5 to 7% range.

Okay.

And it's not to say necessarily so much that we expect that that state and local hasn't already seen a hit. It has. It's just a question of how much more of an impact will that have on that seasonal order pattern.

Got it. Okay. Perfect. Just lastly, any comments on kind of the regional characteristics? Is there anything going on here in the US where you're starting to see maybe Manhattan get better or certain other regions that have been under a significant amount of pressure, any signs of relief in some of those areas.

First of all -- this is Brian. The center of the country still remains the strongest for us. I think that's partially the center didn't have as big a run-up so it didn't have as big a falloff either. So it's not as if it's going gangbusters; it's just been more regular at one level.

Our team would say that they're starting to see some more activity, particularly in the Northern California kind of region that really had gone fairly quiet. The New York City area I would say is still quiet but again, as I said earlier, I think what you're starting to hear is more discussion at sort of the property broker level that those guys are starting to see activity. So it hasn't necessarily trickled its way back to us yet but listening to the brokers start to talk that they're seeing people begin to ask about making moves. That's sort of the first sign.

I was listening to Warren Buffet the other day, talk about he was looking at truck tonnage. At one level, inquiries of brokers and inquiries of architects is probably a leading edge kind of move that you pay attention to.

Thank you, guys.

We'll go next to Matt McCall with BB&T Capital Markets.

Thanks, good morning everybody.

Good morning, Matt.

Let's see. Greg, just to follow up on some comments, I think there was some clarification in an earlier question about the gross margin line. If you net out the -- I think you referenced some temporary costs in the quarter at Nemschoff, you're going to add in a full quarter, however, of Nemschoff operating expenses, but then you referenced some potential incentive compensation coming back. I didn't quite grasp the directional guidance you were providing there. Sounds like obviously up a little bit with Nemschoff but what was the net point you were making?

So I guess if you go back to Q4, we had the same plan was in place in the fourth quarter and at that level (inaudible), about $1.6 million of this bonus expense, if you will, in the fourth quarter. We would imagine something in that neighborhood, given obviously all the other factors that we outlined.

Okay. So the big changes would be you're going to take away a little bit of temporary costs with Nemschoff, add back about a $1.6 million in incentive comp and then add in the full, the remainder of the quarter expenses from Nemschoff, those are the big moving parts?

Those are the moving parts, yes.

You referenced an inventory build normally Q1 to Q2. You had a bit of an inventory build Q4 to Q1. Looked like backlog was down a little bit less than orders. Is that just timing of some orders and if it is, does that mean you're going to see less of a build Q1 to Q2 this year?

Two things in that. In the build, obviously is inventory from Nemschoff which was about half of the build.

Okay.

And then we did get a couple million dollars tied up just due to sort of GAAP accounting rules and when we could recognize revenue that got tied up right at quarter end which was about 2 million bucks. So we did see -- we tend to see a little bit of a government build always begin in Q1 which would be the balance of that build.

So none of it is really -- Matt, none of it's really build in manufacturing inventory, if you will.

Right.

What we're really talking about is we acquired inventory with Nemschoff. It's not as if they built inventory, it's just that's their inventory level. So you've got that going on. The other thing you've got is this thing we call jobs in progress. We shipped the product to the customer. It's maybe not completely finished in terms of installation; this particularly happens as Greg mentioned earlier with the government so then it gets sort of hung up. We're not able to recognize the revenue until the customer signs off on the installation.

Got it. Okay. Got it. You referenced government business. I don't think you put a number on state, local versus federal but what about government as a percent of total, what's the run rate and what's the outlook?

We've never disclosed exactly what the government is specifically but what I would say to you is the government is, especially the Federal Government, is one of the stronger areas out there right now because of course they're one of the few people that get to print money which is kind of a helpful thing and certainly they're investing a lot in building capability. So that's one area that if there's an area that has remained strong, that's certainly one of them, Matt. As Greg said, it's not as if state and local has gone away. It's taken its own shots at some of the state governments in particular, have problems with budgets and they can't print money. So you're seeing a little bit of pressure on that side.

This is Jeff. Just to tag on to that, I guess just to reiterate a point that Greg had too, when you move Q1 to Q2 in our order rates it again is not uncommon if you look back at history to see the bump up in government order levels move consolidated orders in a range of 3% to 6%, so --

Got it. Okay. Thanks, Jeff. The last question, we haven't touched on your temporary costs that you've taken out. I think maybe part of that incentive compensation is a part of this conversation, but can you talk about your expectations for some of those temporary costs to come back? I know you're taking one out of every two Fridays off, things like that. So just give us an idea about when we should see some of those return and if that $1.6 million is part of that.

Well, essentially the $1.6 million, it's sort of an offset to the savings because the way it worked if you remember, we set a bogie for a level of performance and said to the folks if you can help us beat that bogie, we'll share some of the upside to you. We did it as a way to feather back, help our people out, quite frankly, get them motivated to do what they've done a great job of which is helping us find other areas to save besides their own labor costs. The thing that happened this quarter, the reason there was no payout, is we had the hits for the bond retirement and a couple of those things so that just got us below the bogie that we had set. Next quarter we won't have that cost. Therefore our operating income on an operating basis will be a little bit higher and we'll pay some of that bonus out, as Greg said earlier. Right now what we have told our folks is we don't see changing what we're doing from an every other Friday off any earlier than sometime in the third quarter. And all that will depend on what we're seeing in terms of activity levels. If we got to the point that we were consistently paying that bonus, of course we would then go back to working full-time weeks.

So right now I would say we don't have a prediction of it changing. We don't see enough of an upturn that we can tell ourselves we can afford to bring all of that back. It has worked. I would say relatively well, certainly put a lot of pressure on our folks. We appreciate the fact that they have hung in there. So far that's enabled us to retain the talent that we have needed for the other side, get the work done that we needed, and be able to sort of buffer the results through this.

Okay. And Brian, just to clarify. The $1.6 million could also -- it would be essentially replaced by the return of those costs in '09 or '10, so this is kind of in the meantime?

In a way. If you look at -- I think the number that we gave was around $30 million annually so $7 million a quarter, so rather than being $7 million next quarter, if it was $1.5 million, we would have had $5.5 million net. You follow what I mean?

Got it.

We had the same thing in the fourth quarter and we've said to the folks, they could earn up to all of it back and other than the piece that was related to the 401(k). So what it really is, it helps them with the kind of daily wage piece.

Got it. I said this is the last one. I just want to sneak one more in. Convia, haven't heard you mention that word in the call. Wanted to get any incremental thoughts you've had there post the partnership.

I'll be straight with you and tell you we didn't get to where I hoped we would get in terms of orders in this first quarter. We had a couple of issues with getting the new board. We had to create a new board to embed into the Legrand product. We did get them out the second week of the second quarter, but we didn't get them out in the quarter which we had had hoped. It wouldn't have moved the needle a lot, in terms of overall revenue, but it's an important sign for us in terms of what's going on.

Where we have gotten to is we have now trained virtually all of the Legrand sales force. Now I think we've got a couple hundred folks out there every day of the week selling the Convia system as part of the Legrand system. That's a big deal. We've got great customer interest this quarter based on the opening of the US Green Building Council headquarters which is probably the most granular and sophisticated application of Convia out there. I would tell you that that's created a new set of buzz in that we also are going to be in the new marketing office for the redo and the relaunch of the Empire State Building with Convia which is somewhat directly connected to the work that we did at the US Green Building Council.

The other thing we began to launch and market this quarter is what we call the Herman Miller Energy Manager, which is essentially the Convia technology productized into workstations. That certainly we've seen positive impact with customers who maybe aren't ready for the full-blown Convia implementation across the building, but can get a lot of the benefits around energy management, occupancy sensing and the like into the workstation.

So we haven't gotten where we wanted to in terms of revenue, to be frank. On the other hand, our team and the Legrand team, the Legrand team reports very good activity levels and prospects. The senior management of Legrand says their sales force is very fired up about the partnership and I think we'll know a lot more when we get sort of three more months out there now that we've got everybody trained and up and running.

Okay. Thank you, Brian. Thank you, guys.

Thank you. That concludes our question-and-answer session. I'd like to turn the conference back to Mr. Walker for any closing remarks.

Thanks everyone. In closing, we're seeing a good start to the year, despite the challenges we continue to face from an economy hobbled by recession. We've made significant improvements in the structure and composition of our business. In doing so we have maintained solid profitability while at the same time making investments in support of our long-term goals. It's a balance that has served Herman Miller well throughout its history and one that continues to work for us today. Thanks for joining us this morning and we look forward to talking to you again next quarter.

Thank you everyone. That does conclude today's conference. We thank you for your participation.