MillerKnoll Inc (MLKN) 2010 Q3 法說會逐字稿

Good morning, everyone, and welcome to this Herman Miller Inc. third-quarter 2010 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 risk 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. Jeff Stutz, Treasurer and Vice President, Investor Relations. Mr. Walker and Mr. Greg 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 all 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. Brian Walker. Please go ahead.

Good morning and welcome, everyone. As the harsh reality of the economic downturn unfolded over these past 18 months, positive news in the business world became increasingly rare. For businesses in general and certainly within our own industry, talk of growth has been largely reserved for describing a future state rather than a current reality. This makes what in other times would be disappointing results encouraging.

After five consecutive quarters of double-digit declines, our consolidated orders increased in the third quarter. Yes, they grew, by 4% compared to the prior year.

Despite recent headlines on healthcare reform, consumer confidence and ongoing economic concerns in the Euro zone, our international healthcare, retail and learning vertical markets have improved provide a needed ballast to our business. While order rates within our core North American operation have continued to lag the prior year our diversified vertical markets have shown remarkable strength in relation to where we were at this time last year. This reflects a marked improvement in the performance of our business during a down economy and is the result of a deliberate strategy to expand the potential of our revenue base in recent years.

As expected order levels in this quarter were down relative to Q2, reflecting the typical seasonal slowdown through and immediately following the holiday period. We have historically seen a drop in order pacing during December and January, followed by a ramp-up beginning in late February and continuing through the balance of the fiscal year. This historical ramp-up in the Q4 order pattern has been wide ranging in recent years.

At best this has made for a difficult sales forecasting in our fourth quarter even during strong economic times. Clearly, the current state of economic uncertainty makes this even more of a challenge this year. Despite lower sales on both a year-over-year and a sequential quarter basis we were solidly profitable in the third quarter, achieving an adjusted operating earnings percentage of 5.8%. Our teams once again did a great job managing expenses in line with revenue levels, and as we pointed out in our press release, a number of cost savings initiatives remain in place, including reduced work schedule for the majority of our employees.

We also made good progress this quarter on our two plant consolidation projects, one in Seattle and one in West Michigan. These projects are on track to be completed in the fourth quarter of this year, with the anticipated cost savings beginning in the first quarter of fiscal 2011.

To be sure the health and direction of the global economy remains a question that only more time will answer. Meanwhile our order growth and continued profitability this quarter leave us encouraged that we are taking positive steps in the right direction. As always we will continue to balance our focus on near-term profitability and cash flow with this longer-term view of the commitments and goals outlined by our strategy. We recognize that achieving this balance requires a willingness to boldly pursue investment opportunities that offer long-term growth potential, even at a time of financial stress. That was certainly the case with the acquisition of Nemschoff earlier this year.

Our internal product development efforts also play an important role in achieving this balance. And we have continued to be encouraged by the levels of market acceptance of our newest products, particularly our Setu and Embody chairs.

Whether through internal development, strategic acquisition or alliance partnerships, we remain committed to delivering softly designed, innovative and affordable products that will allow our dealers to win and retain business and our end-user customers to improve their environments. This quarter we were thrilled to announce a new alliance relationship with Trainor Modular Walls, a division of Trainor Glass Company. Through this alliance, Trainor's mountable walls, doors and hardware will be distributed exclusively through our North American dealer network. This partnership will significantly enhance our ability to create adaptable interior space solutions for our customers.

Finally, we remain dedicated to furthering our position and reputation as a thought leader in our industry. This quarter, we were once again honored as our industry's sole representative on FORTUNE magazine's list of 100 Best Places to Work. And we were again named the most admired company in our industry. We also earned recognition on Fast Company's list of the world's Most Innovative Companies. We appreciate these honors for what they say about our people and our culture, and we are very proud of the accomplishment, especially given the challenges of the past year.

That said, we recognize that honors alone do nothing to advance us towards our strategic goals. Only the hard work of our talented employees, strong leadership and industry's best products can do that. With this in mind, we feel very good about where we are headed.

That is it for my introductory comments. Now I will turn the call over to Greg to cover the numbers in more detail.

Thanks, Brian. Good morning, everyone. Consolidated orders were $290 million in the third quarter. This represents an increase of almost 4% compared to the prior year and a seasonal decline of 16% relative to Q2 of this year. Orders within our North America segment decreased 1% compared to Q3 last year. As Brian mentioned our healthcare business posted strong results in the period, with order growth of 60% versus the prior year. Of course much of this increase is driven by the addition of Nemschoff to our brand lineup, but even if you exclude Nemschoff our healthcare business posted double-digit order growth in the quarter.

We also experienced a double-digit year-over-year order increase within our learning vertical market.

With a few regional exceptions, order activity has continued to lag the prior year across the majority of our North American contract furniture business. In total orders within our core North American work vertical market decreased approximately 13% compared to Q3 of last year. Orders within our non-North American business segment increased 21% relative to last year, driven by strength in the UK, Middle East, Asia and South America. And finally, order entry within our retail business was up over 70% compared to last year.

Net sales in the third quarter were $330 million or 7% lower than the prior year and reflected a 4% seasonal decline from the second quarter of this fiscal year. Within our North American business segment sales of $270 million were 9% below prior year and down roughly 5% on a sequential basis. The addition of Nemschoff to our business helped drive a double-digit percentage increase in healthcare sales compared to the prior year.

Sales within our learning vertical market were also up compared to the prior year. Beyond that we experienced year-over-year decreases in net sales across the rest of our North American segment, with the core North American work business being down approximately 16%.

Sales in our non-North American business totaled $47 million, approximately 5% or 9.5% lower than the prior-year third quarter. Relative to the second quarter of this year, non-North American segment sales were down 4%. While sales across Europe have continued to show year-over-year decreases business levels in the Asia-Pacific region were up 25% relative to last year. Sales in Brazil were also up over the third quarter of last year.

Our retail business, which experienced a deep decline in business levels last year at this time, reported very strong sales growth this quarter. In fact sales more than doubled in comparison to the prior third quarter of last year.

On a consolidated basis, changes in exchange rates from a year ago drove an estimated $4.5 million increase in net sales relative to this quarter last year.

Now onto gross margin. Our third-quarter gross margin was 31.8% of sales compared to 29.9% in the same quarter last year. Despite a year-over-year decrease in sales of $25 million, our gross margin improved 190 basis points, driven by lower commodity costs and restructuring-driven cost savings. The commodity cost savings were derived primarily from steel and steel components. In total we estimate this drove a $4 million to $5 million reduction in cost of goods relative to the third quarter of last year.

Compared to Q2 of this fiscal year, gross margin declined 40 basis points. As expected, lower sales and reduced production schedules in Q3 negatively impacted gross margin in the period. Production inefficiencies associated with the consolidation of the Brandrud and Nemschoff manufacturing operations also contributed to the sequential quarter margin decline. We estimate these temporary production inefficiencies reduced our Q3 gross margin by 20 basis points relative to Q2 of this year.

We also experienced a sequential period increase in commodity costs, which drove an estimated $1 million to $1.5 million increase in direct materials relative to Q2. While the largest dollar increases were seen in steel components, the cost pressure was felt across a variety of our direct material categories. Fewer large projects in the quarter relative to Q2 drove an overall favorable trend in price discounting on a sequential quarter basis. This helped to offset some of the increase in our direct material costs.

Based on our operating results in the third quarter, we recognized expenses totaling $300,000 within cost of goods associated with our employee wage recovery program. By comparison our second-quarter gross margin included $2 million in wage recovery expenses. As a reminder, this program offers employees on a reduced work schedule an opportunity to earn back their lost wages if the Company achieves a certain level of profitability in a given quarter.

Operating expenses in the third quarter of $86 million were approximately flat with the prior-year level and $4 million lower than Q2 of this year. The current quarter expenses include approximately $5 million from Nemschoff. They also reflect a favorable adjustment related to the contingent value right or CVR component of the Nemschoff purchase price. This adjustment was driven by the increase in our stock price during the quarter and resulted in a $1.8 million reduction to consolidated operating expenses. Expenses in the third quarter included approximately $800,000 related to the wage recovery program and by comparison we recorded $3 million of wages recovery expenses in Q2 of this year.

Restructuring expenses in the third quarter, of approximately $2 million, related to employee severance benefits and move costs associated with our previously announced factory consolidation projects. Operating earnings in the quarter were $17 million or 5.1% of sales. Excluding the impact of restructuring expenses adjusted operating earnings in the quarter were $19 million or 5.8% of sales.

Our effective tax rate in the quarter was 32.8% compared to 39.4% in the prior-year third quarter. Net income in the quarter was $8 million or $0.12 per share on a diluted basis. [Excluded] the per-share impact of the restructuring charges, adjusted EPS was $0.15.

As required under GAAP, for purposes of calculating diluted EPS, we have excluded from net earnings the favorable valuation adjustment related to the CVR this quarter.

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

Thanks, Greg. Good morning, everyone. Cash flow from operations in the quarter was approximately $8 million. Changes in working capital drove an $8 million use of funds in the period. This was a net result of decreases in trade payables and compensation-related accruals, offset in part by seasonal decreases in A/R and inventory.

The timing of project activity within our international vertical market drove most of the working capital use of funds in the period. In the third quarter of last year, cash flow from operations was $19 million with changes in working capital driving a net use of approximately $300,000 in that period.

Capital expenditures this quarter of $3.9 million were down from $4.5 million spent in the same period last year. Through three quarters of fiscal 2010, capital spend totaled roughly $15 million, and we are targeting a full-year spend of between $20 million and $23 million.

We made just over $1 million in dividend payments during the quarter. This compares to approximately $5 million in the third quarter of last year. Also, consistent with our recent practice, we made no outside share repurchases in the period.

As part of our ongoing effort to strengthen our balance sheet, this quarter we made the decision to reduce our unfunded pension liability. On February 9 we contributed 967,000 shares of stock to the plan. These additional shares represent 1.7% of our total shares outstanding as of quarter end. The market value of these shares on February 9 was $16.7 million, an amount which drove a cash tax benefit of $5.8 million. This increase to the value of the plan's assets will also result in a reduced pension expense run-rate going forward, making the contribution of shares non-dilutive in the near term from an EPS perspective.

Our decision to use shares was based on our continued interest in conserving cash and reducing balance sheet risk. Doing so will help ensure our ability to meet the ongoing cash needs of the business, as well as retain the flexibility to take advantage of strategic investment opportunities.

We ended the quarter with total cash and equivalents of $123 million. Of this amount, approximately [$50] million is held within our international entities. We remain in compliance with all debt covenants and are currently running at a gross debt to EBITDA ratio of approximately 2.6 times. We also continue to have approximately $139 million of unused capacity on our revolving credit facility, with the only usage being from outstanding insurance-related letters of credit. Given our current cash balance, ongoing cash flows from operations and borrowing capacity, we remain confident that we have sufficient flexibility to meet the financing needs of the business going forward.

That's the balance sheet overview for the quarter, and I'll now turn the call back over to Greg to share some thoughts on the outlook as we move through Q4.

Thanks, Jeff. Consistent with the recent quarters, we are not providing specific forward-looking sales and earnings guidance, although we thought it would be helpful to share with you some general thoughts on the trends we will be looking for as we move through the fourth quarter. The seasonal slowdown in business levels in the third quarter has historically pushed the ending backlog to a low water point for the fiscal year. This has typically been followed by an uptick in order entry rates that continues through the balance of the fiscal year.

In past years the sequential increase in order rates between Q3 and Q4 has ranged from as low as 4% to more than 20%, though 11% to 16% is more typical. This combination of factors, a low beginning backlog and a wide range in expectation for order entry, makes forecasting sales in Q4 very difficult. This year our beginning backlog is $13 million lower than it was heading into Q4 last year. Based on our historical experience we would expect our weekly order trend to accelerate through the quarter. In fact orders in the first two weeks of Q4 were already up 5% from the Q3 average. Ultimately, our Q4 sales level will depend on the magnitude of this acceleration over the next several weeks.

Moderate commodity pricing pressure is expected to continue through the balance of the fiscal year. We expect this to negatively impact our Q4 gross margin by between $1 million and $2 million compared to Q3. However, we expect higher production levels and improved manufacturing efficiencies to at least offset this. We're continuing to keep a close eye on trends and discount levels. And while we view this as an outlook risk going forward, at this point we don't anticipate a significant change from the third quarter.

Operating expenses generally increased in Q4, driven in large part by the completion of marketing and product development programs in advance of NeoCon. Through the first three quarters of fiscal 2010, we have done a good job of holding the line on core operating expenses, and we intend to remain diligent in managing these costs going forward. Cost saving programs, including the reduced employee work schedule, will remain in place for the balance of the fiscal year.

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

(Operator Instructions). Mark Rupe, Longbow Research.

On the contract business, I think you had cited that the orders were down 13%. Just excluding seasonality kind of the flow-through of the quarter, is that getting any better as time goes on?

Is what getting better? Can you -- make sure I'm getting your point exactly?

The traditional kind of corporate office environment on the furniture side, on the order side.

I would say -- we talked in the second quarter. The day to day stuff has gotten better. It kind of depends on where you are at. I mean, globally, internationally, for sure we have seen improvement. Domestically, I would say it has not changed a lot yet.

I think one of the things we are looking at is the question of when you go through the process that folks pull back heavily on capital expenditures, there takes a period of time in our industry and we have tended to lag the general economy as folks rebuild their project queue. Meaning, architects, you can hear from them they are busier now doing RFPs. But those do not show up in orders quite as fast because they got to get the work planned for those changes, even of it's moving building to building. So I think we are still in that phase of the industry where a lot of that work is going on, that people are beginning to plan their moves even if those are consolidations.

The other thing that you do see from quarter two to quarter three, [you always] have to keep in mind is that quarter two is a heavy, heavy government period. So you always see a little bit of back off when you go from quarter two to quarter three. You've got two factors. You have the seasonality of the number of days that essentially people are working. And then you also have the impact of the government heavy buying season that drops off. So that third-quarter period for us is always the most difficult to really get a good handle on.

Okay. Okay. And then as it relates to the healthcare and the learning verticals, obviously, you guys do a good job there. Is there anything there that you are doing? I mean the market I'm assuming is on a relative basis performing better than maybe corporate America. But I mean it sounds like you're doing even better than that. I'm just curious to see what kind of opportunities that you're capitalizing on in those two verticals.

Well I think particularly our focus has been to find ways to segment our efforts both by customer, by product, and by geography, and then align our resources around those and get a deeper understanding of the customers' needs there, and either tailor our current products or develop or acquire new products. I think what you are seeing is the impact of four or five years of concentrating in those areas and beginning to ask, how do we build both selling resources, knowledge at the dealer level of how to target those customers and then backing that up with products.

So I think this is part of what we have been trying to do for a number of years. And I think we are seeing partly the fruits of our labor there. And then second of all those two segments have tended to have more money to spend.

Now certainly the healthcare segment has not been as healthy as it has been in prior periods. On the other hand relatively compared to the rest or compared to the office business, it has hung in there better.

Okay. Right, okay, perfect. And then just lastly on the pricing I know you had cited you had a little bit of alleviation in the current period. As you look forward do you expect much change on the pricing front as far as it relates to the impact on margins, positive or negative?

In the near term, you know what we can see in our backlog and what we are hearing, we do not expect a big impact in the next three or four months of shipments. But beyond that it gets pretty cloudy. But the anecdotal evidence would not suggest necessarily that it is continuing to get worse.

Todd Schwartzman, Sidoti & Company.

What is your visibility on steel pricing for fiscal '11, if I may look out that far at this point?

I think it has moved up probably a little faster than we would have guessed given what's going on in the general economy already. And I think this is one -- Greg and I talk about this about every other day. Is that the forecasts move around from further increases to it already being overheated. And particularly areas like aluminum, folks are already talking that it may have already peaked and could be on its way back down.

I think for basic steel, the issue that we have got right now is it is not that we are at a point where we have an imbalance in supply and demand in the sense of the capacity is not there, but folks have taken capacity off the marketplace. So I think what is going to be interesting to see is when do the steel producers begin to bring capacity back.

So I think overall, we are preparing ourselves and thinking through what happens in a world if we start to see prices move again. At the same time, at this point, we don't believe it is a runaway train but we're trying to make sure we are prepared on both sides of that.

Great. Regarding the Brandrud, Nemschoff consolidation inefficiencies, can you maybe give a little color on the source, the nature, of those inefficiencies and how you see that playing out and when it dissipates?

Greg will probably give you some more detail. One of the things you have got is we've got Brandrud's actual volume being produced in Seattle is down to very, very little. Yet we have still got the building and some of the people there because there are products that we have yet to reengineer, if you will, into the Nemschoff system. And some of that is products that maybe don't have heavy volume, but you have got customers who have bought them in the past that will expect to be able to get the supply of those. So we're keeping extra resources around at this point. So we are at that very messy spot where you begin to bring volume down and you don't have all of the overhead and other things flushed out of the system.

And then I think on the other side of it, in Sheboygan, where we have moved the products of course, we are still coming up the learning curve on that end as well and getting our folks in Wisconsin efficient in making those products in the same way that Brandrud was. So we are in the crossover period, is the way I would describe it.

Our belief is that we will get through that crossover period over the next three or four months, and then as we get into the summer, we should get a much clearer picture of where we are at on the other side.

Great. On healthcare in total, what was the organic growth rate, revenue growth rate for 3Q?

On the orders side it was in the neighborhood of 20%.

And in terms of delivered sales?

I don't know that I know that off the top of my head.

And same question for education? I don't know if you quantified that earlier in your remarks.

We did. We typically have not in the past. It was in the double-digit range.

Okay. Lastly, fourth quarter tax rate, anything unusual we should be thinking about there for 4Q?

I'm not sure what our full quarter forecast --

This is Jeff. Year-to-date through three quarters were 25% effective rate. We would expect the full year rate to probably be between 25% and 27%. We will be completing our audit by the end of the fourth quarter. And there may be year-end tax accruals relative to our provision from last year as well. So we will wait and see, but we would expect the full year rate to be between 25% and 27%.

We are on an accelerated program with the IRS so our audit for the prior year, it's done relatively fast. And of course with the new accounting principles once you get through the audit, a lot of those questions of reserves and such have to be trued up. And that is what Jeff is referring to, is that we think we will complete that. So the rate could move around depending on conclusion of the audit work.

(Operator Instructions). Matt McCall, BB&T Capital.

Good morning. This is Sean Connor for Matt. I was wondering if you could comment on Convia? I have not heard you talk about that today and how the integration or partnership with Legrand is going? Any update you could provide there?

Sean, we are continuing to get out and train the Legrand sales force. That is going better. We do see ramp-up in their prospecting list, if you will. We have not had as much conversion to orders as we would have liked. We have had some -- on the other hand, we have had some important customer engagement that has impacted not only Convia but it has also helped us on the furniture side, where we have had customers that when we can tell them the complete story of what we are trying to provide to both help them be more efficient users of space, be able to deal with their environmental requirements as well as help them look at the total ability to reduce energy, that has enabled us to win some customers; that I think if we were just in there on a furniture basis we probably would not have had the same degree of capability. So we are still encouraged by the word with Legrand. I think that was the right choice.

Unfortunately, of course, with what has gone on in the building industry there is not that much going on in terms of construction and even retrofit. So I would say the Legrand guys have not seen that great a volume on their end.

On the other hand the controls market, which is really where Convia plays, it is one of those that still looks like overall it has strong longer-term patterns.

Is the key just the continued knowledge of the product and the offering, or is it you need to see the macro -- more of a macro improvement? I guess what ultimately drives more conversion rates?

It is both. First of all, you have to get the knowledge rate up there. We have to get both the Legrand sales force knowledgeable about, and able to tell the story of, a programmable if you will electrical system that enables people to manage energy costs. So we have to get that story out to where they can sell that effectively.

The project sizes are not large though, because often you have got customers looking at smaller sized buildings, is where we play. So you got very small projects. There is not any one individually that is super significant. And then I do think as the economy picks up and the building sector overall picks up, that will certainly play stronger for Convia; no different than it does for our core business, but you need projects and folks deciding to change things.

It is unlikely you are going to go in and implement a control system in a building that you're making no changes to. Now that does not mean you have to be building a new building, but you'll probably have to be down to at least a level of deciding to change your interiors before you're going to go back and make some of those changes.

I guess on your order patterns specifically in the non-North America, do you think that type of order pattern will be sustainable in those markets? Was there anything specific in it that helped drive that strength? Or was it just fairly broad-based improvement?

It was fairly broad-based. It was not in any one particular geographic market, I think as Greg noted in his comments. The one area in particular that we have seen strength in is our seating product lines, which of course we have some new product lines that are not only getting us new customers because of what those products do; we have gotten to some new value points with Setu; some new areas that we have not traditionally played in.

So I think what we are seeing is the benefit of the work we did to broaden our distribution footprint over the last three to five years, as well as those economies just being stronger. So it was not specific projects that I think drove it as much as their general economic activities, in particular, even multinational deciding that they believe that will be the areas for growth for the future for their business. So that is where they have tended to be spending more money to fit out offices and add people.

Then you mentioned an overall wage recovery expense in the quarter, and I missed it; I caught the SG&A piece. Could you repeat what the overall impact was?

I think the overall impact was about -- was $1.2 million.

And do you have a CapEx budget for next year?

I don't know we have a -- generally I would say that our CapEx, while we have a couple of projects that we are looking at that will cause it to go up, I would say right now we are looking in the neighborhood of probably $30-ish million.

Great. Thank you, guys.

Budd Bugatch, Raymond James.

I do want to concentrate a little bit on orders. The international performance year over year was pretty strong at 21%. You said there was not a serious project win or a couple of things you could point to that really drove that kind of performance?

No, it was pretty broad-based. In fact a lot of it was -- the folks would say it's a lot of base business stuff coming back, particularly on the seating side.

That is pretty encouraging, is it not?

Yes, it is. And in fact I would say we saw it come back -- the base side come back stronger in international than we have seen it domestically. But I do think it has a lot to do with the work John Portlock to kind of broaden that distribution footprint. So we are hitting both retail as well as contract through that distribution at the same time.

Is there much currency impact in that number or in the sales number?

In the sales number, Budd, I know the number was about $4 million to $5 million. (multiple speakers)

Positive impact.

Yes.

This is Jeff. We estimate about the same magnitude on the order side.

And what would that have been related to in the percentage? That would have been a big number in percentage then, right?

We can do the math here quick for you, Budd.

It would be about 9%, I think, Budd.

So in other words in constant currency or local currency revenues the gain was about 12%; still better than a poke in the eye with a sharp stick, but.

Yes. I mean if you had that overall you would be pretty happy.

I think so. And when you look at order pacing, and I realize the third quarter is really difficult because of the holiday period, to figure that out. It looks like it would be on average $22 million to $24 million, depending on how many effective weeks you want to put into the quarter. What do we look like going forward now? What do we look like? You said the first two weeks were up. That would tell you like $25 million on an annual -- on a weekly basis if you were at the average. But maybe it is better than that?

No, I think you are in the neighborhood.

Okay. And when you are looking at the healthcare, retail verticals, we have never -- you have never been willing to size those before for us. Are we getting closer to that kind of disclosure?

Probably especially for healthcare. I mean retail is still relatively small, as you and I have often talked. It is a small but profitable business for us. And to be frank, when you look at international that is sort of -- when we talk about it as a vertical we are often talking domestically, because actually we are playing in retail more in international as well today. And that has really sort of -- it is not large in any one area. So you don't really see it as a concentrated thing in international. But it is actually a broadening of the distribution channel in total.

And so we are getting closer to sizing [next quarter's]?

Yes.

We are not there yet, I take it?

Correct.

Okay, I got it. You can just poke me again. As we look at restructuring going forward -- but do we still have more of that to book in the fourth quarter and next year?

We still have more in the quarter. I think we estimate the completion of both the plant consolidations will be complete as well as the rest of the severance paid out. We think that the amount is in the neighborhood of $4 million in the fourth quarter.

Okay, so $4 million will show up as a pretax restructuring expense in the fourth quarter?

Yes; that is our estimate right now.

And we might get some of that moved from fourth to first. It is going to kind of depend on where we are in terms of getting products moved and all of that kind of good stuff.

We have a lease on the Seattle facility that we can't restructure under GAAP until we have actually exited the facility completely. So that is one of the big wild cards out there.

And once you do then shudder it entirely from production, you have got to maintain those costs in kind of a restructuring account until either the facility is gone or re-leased to somebody?

Yes, we booked the entire remaining rent payment at the time that we exit, and then the ongoing, if there are probably small ongoing maintenance costs, would book as we go.

I understand. Okay. CapEx for the fourth quarter looks like $5 million to $8 million, if my math is right, for one quarter. I take it that is tooling for NeoCon. Can we talk a little bit about what we should see there?

Yes, it is actually not only NeoCon. We have several new products in the pipeline, some of them in the healthcare arena which you will see at NeoCon. It is also new products that will launch in the fall prior to and including Orgatec. So we've got some new seating products coming that we are very excited about that will give us even a broader range on the seating side. And we also have some new work on the office side in more the broader landscape, if you will, workstation, private office that we will show some of we believe at NeoCon, although those things are always -- you know on that development schedule. And then there will be more of that as we get into the fall range.

So we have new products coming from virtually every segment. Geiger will have several new products at NeoCon. And then the other thing that is in there is we have some investments in facilities, in particular some facilities for demonstrating healthcare and some facility investments here as well as in some of our showrooms. So it's a pretty heavy period compared to where we have been anyway.

For sure. Okay. All right, just a couple of other quick ones. Usually I ask these. The discounting level, you say it has alleviated. You normally give us some sort of quantification of that either as impact on cost of goods or gross margin. What was the impact of discounting in the quarter?

Budd, it nearly offset the impact of our commodities. It did not quite but it was in that maybe 75% range of the commodity impact.

Okay. And historically, you have also told us the difference between project business and day-to-day business as you measure it.

It was very similar to last quarter. We were in the low 40% for the project mix in North America. That is what we saw this quarter.

Okay. And what about the elements of cost of goods sold, which you oftentimes do give us? In terms of material, overall --

Sure, yes. Material costs in the quarter 40.5% of sales. Direct labor was at 7.4%. Total factory overhead, 14.6%. And freight and distribution was just under 6%.

Okay. All right, thank you very much and good luck. And I think we may be coming out of this period.

Let's all hope so.

(Operator Instructions). Matt McCall, BB&T Capital.

I had a quick follow-up. On the Nemschoff and Brandrud consolidation, the inefficiencies experienced, is there anything there that was not expected? Or is that just the typical type of inefficiencies that you expected? And do you still see the same type of accretion over the next year from the acquisition?

I don't think it is anything unexpected in terms of a category. These things are always difficult to predict about how you are going to see them when you actually get in there and start moving things and you're trying to deal with where your customer orders are coming from.

We saw some mix shift actually towards Brandrud products in the quarter, which of course made moving things even more difficult because you're moving them and you are seeing customer orders from them. It's a good thing you're getting orders; on the other hand it makes the move a little more complicated when you're going at it. So I would say nothing that -- and from a type of expense we would have not expected.

It was, to be frank, a little heavier in terms of inefficiencies than we had predicted pre-acquisition. So that is one of the areas that we are digging into. I would not say we've got great conclusions on yet as to how do we make sure we get back to what we originally planned for.

All right, great. Thank you for that detail.

(Operator Instructions). I am not showing any other questioners at this time.

Thanks, everyone, for joining us on the call this morning and for your continued interest in Herman Miller. We are encouraged by our recent performance and the good progress we are making on our strategy. And you can be assured we will continue to work diligently to achieve still greater success for our employee owners, and you, our shareholders. We'll look forward to talking to you again next quarter.

Ladies and gentlemen, that does conclude today's program. You may now disconnect and have a wonderful day.