MillerKnoll Inc (MLKN) 2010 Q4 法說會逐字稿

Good morning everyone and welcome to this Herman Miller, Inc. 2010 fiscal year-end and fourth-quarter 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 going to be joined by Mr. Jeff Stutz, 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, and welcome. When we spoke with you on the conference call last quarter we told you orders through the first two weeks of Q4 were up 5% from the Q3 average. As it turned out, this modest increase was the beginning of a positive trend that would drive order entry for the full quarter to the highest level we have seen in 18 months. This improvement in orders brought a positive end to a fiscal year marked by economic challenge and strategic achievement.

From an economic perspective the macro drivers of demand in our industry remain relatively soft with lagging office construction rates and tentative employment levels. However, after two consecutive quarters of year-over-year order growth, there seems little doubt that our business is benefiting from the momentum of the broader economy.

At this point the more relevant question is whether this recovery can be sustained going forward, given the amount of uncertainty remaining in key economies around the world.

Apart from the economic challenges we made great progress this year toward our strategic goals. Despite lower sales relative to last year, we remain solidly profitable, achieving an operating earnings percentage before restructuring charges of 4% in the fourth quarter and 6% on the full year.

We took action to deleverage our balance sheet, first in Q1 through the early retirement of debt, and later in Q3 by partially funding our pension obligations. Our operations team worked diligently all year toward the implementation of two factory consolidation projects, both of which were successfully concluded during the fourth quarter.

Throughout the year we worked hard to deliver superior product and services to our dealer network. Just like in our own business, the severity of the downturn over the past two years has forced these dealers to reduce cost and increase operating efficiencies. As a rule, the financial health of the network remained remarkably strong all year, although during the fourth quarter one exception prompted action on our part.

In April Living Edge Group, our independent dealer with locations throughout Australia, lost the financial support of its bank and was forced into receivership. To protect the continuity of distribution in that region, we assumed ownership control of the business. Despite the negative implications it has had on our fourth quarter, I can assure you our team has aggressively restructured the operation and is pursuing a strategy aimed at returning the dealership to profitability.

During the fourth quarter we acquired UK-based Colebrook Bosson Saunders, a leading designer and distributor of ergonomic work accessories. This acquisition enhances the scale of our existing accessories business and provides a compelling lineup of solutions to our dealers. The products offered by Colebrook Bosson and Saunders are now included under the Thrive portfolio of ergonomic products and services.

Throughout the downturn the development of new product has remained a critical element of our business strategy. This past week at the NeoCon tradeshow in Chicago, we introduced 18 new products in demonstrating clear and visible ways that Herman Miller is on the march.

Among the most significant areas of change at this year's show was Herman Miller for healthcare. When you entered our new dedicated show space it was clear that we are serious about servicing the needs of healing environments.

We have a broad portfolio of capabilities to serve the entire hospital, and a new innovation in a product called Compass, which was a highlight of the entire show. And the teamwork between the folks at Herman Miller, Nemschoff and Brandrud was remarkable.

The combined Herman Miller and Geiger showroom demonstrated once again our ability to deliver innovative products that solve real problems and are simply beautiful. Introduction of new chairs and tables from Geiger showed we can still lead the industry with designs that delight. And our new workstation products proved we can deliver beauty and function better than anyone.

We formally launched the Thrive portfolio at the show, and in doing so, demonstrated that we can and will move quickly to find new areas to serve our traditional customers and dealers. Our new tables and soft furnishings offered a clear demonstration that we intend to grow our presence in educational settings.

We also hosted an invitation-only event to preview a new chair family we believe will set a new reference point for comfort, beauty and value.

Finally, during the show we announced another milestone for our Company, being the first in our industry, and one of the first in the world, to fuel 100% of its facilities with a renewable energy. This past year we made significant progress towards our 2020 vision of having zero impact on the environment. While we still have progress to make, we can see the finish line.

In a few minutes we will provide you with a detailed review of our fourth-quarter results. However, I first wanted to offer you some perspective on how our Company has responded in past periods of economic transition such as we are facing today.

I recently came across a copy of the Herman Miller annual report from 1975. In it, Hugh DuPree, Herman Miller's then President, described the impact of a tough economy on the industry. He began his letter to shareholders saying, we too, along with most economists, business and government leaders were surprised at the suddenness, the depth, and the depth of the worldwide nature of the recession we have faced this past year. He went on to describe how the recession negatively impacted the Company around the world, and how in response, the Company's workforce was reduced by 12%.

Yet despite these challenges, the Company remained committed to new product development, international expansion, and was able to make significant strides in improving the quality and efficiency of its manufacturing operations.

He concluded saying, so once again we have the opportunity to report to you both fact and spirit of Herman Miller; a company needs both. Without spirit we are a machine; without fact we are a dream.

Much has changed in the 35 years since Mr. DuPree wrote this letter. The decades have transformed the way and scale in which we do business. Today we are a much larger organization, with a product offering and global reach impossible to have envisioned as a $50 million company in 1975.

Yet where we are today, having survived a difficult recession intact, and well-positioned for the future, bears similarity to where we were back then.

Fiscal 2010 brought with it many challenges. That much is fact. For the second year in a row we suffered a 19% decrease in sales, and were again called to make tough choices to balance near-term profitability with long-term investment. Mr. DuPree's message, however, makes it clear that ours is not the first generation in the Company to deal with tough times. I find it encouraging that throughout its history Herman Miller has often put its best foot forward after periods of challenge, emerging with transformational products and business processes.

Today with business conditions clearly improving, there is a growing sense of optimism within the Company. Our continued investments in product and business development throughout the downturn have enhanced both the depth and diversity of our market offer, leaving us well-equipped to grow in each of our vertical markets. And it is all backed by the innovative spirit of our people and a brand second to none in our industry.

I believe this is the very fact and spirit that Mr. Hugh DuPree spoke of. And as we close the book on another fiscal year, I am confident it will continue to serve as a guide into our future.

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

Thanks, Brian. Good morning everyone. Orders in the fourth quarter of $365 million were 13% above the prior-year level. Relative to the third quarter of this year, orders were up 26%, reflecting a strong seasonal period increase that was experienced broadly across most of the business.

Within our North America reporting segment total orders increased more than 10%, compared to the same quarter last year, with the strongest percentage gains coming from our healthcare and learning vertical markets.

Orders within our non-North American business segment increased almost 23% relative to last year, driven by strength in the UK, Asia and Latin America.

Finally, we continue to see strong levels of demand in our retail business, with order entry in the quarter up 15% from the prior-year period.

While we averaged approximately $28 million in orders per week throughout the fourth quarter, the pace of order entry was not even throughout the period; instead, order rates in the second half of the quarter were significantly higher than the first half.

As a result, much of the improvement in orders did not get recognized as sales in the quarter, rather, it is reflected in our ending backlog of $244 million, which increased 26% from the February level. The May backlog includes approximately $7 million from the acquisitions of CBS and Living Edge, which is a factor that should be considered when rolling forward the backlog from Q3 to Q4.

Net sales in the fourth quarter were $322 million, up just slightly over the prior-year level and down 2.5% from the third quarter of this fiscal year.

Within our North America business segment sales of $252 million were roughly 6% below the prior-year and prior-quarter levels. 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.

Sales in our non-North America segment of $59 million were approximately 33% higher than the prior-year fourth quarter. As with orders, we posted solid sales increases relative to the prior year in the UK, Asia and South America. Relative to the third quarter of this year, non-North America segment sales were up 25%, driven by significantly higher shipments in the UK, and to a lesser degree, Asia.

Our retail business reported strong sales growth again this quarter, increasing more than 30% in comparison to the fourth quarter of last year.

On a consolidated basis, changes in exchange rates from a year ago drove an estimated $4 million increase in net sales relative to this quarter last year. At first glance this seems somewhat counterintuitive, given the steady strengthening of the US dollar against the euro and the pound sterling since December. However, it is important to keep in mind that the relevant comparison is of an average exchange rate this quarter versus a year ago. On that basis there was little translation impact on our results from these currencies, rather, the translation impact to sales in the quarter was driven mainly by exchange-rate movement against the Canadian dollar and the Mexican peso.

Our fourth-quarter gross margin of 32.8% represents an improvement of 30 basis points from the prior-year fourth quarter. Higher commodity prices in the current quarter drove an estimated $1 million increase in cost of goods relative to last year; however, this was more than offset by savings realized from our previous restructuring actions.

Overall, price discounting in the current-year fourth quarter was deeper than we experienced last year. In total, we estimate this increase in discounting reduced our Q4 gross margin by between $3.5 million and $4.5 million compared to the prior year.

There were no expenses recognized in the fourth quarter of this year related to incentive bonuses or the Wage Recovery Program; however, our gross margins in the prior-year fourth quarter reflected approximately $1.6 million in wage recovery expenses.

As a reminder, the Wage Recovery Program offered employees, who at that time were on reduced work schedules, an opportunity to earn back their lost wages if the Company achieved a certain level of profitability in the quarter.

Relative to the third quarter of this fiscal year our gross margin in Q4 improved 100 basis points. The seasonal increase in demand meant higher factory production schedules this quarter, resulting in improved cost absorption, despite the slight decrease in sales volume.

We also saw a significant improvement in our overall direct labor percentage, which improved from 7.4% in Q3 to 6.4% in Q4. This is in large part attributed to the completion of our IMT and Brandrud factory consolidation projects.

As a partial offset to these favorable items in the quarter, we did see a sequential period increase in price discounting, which we estimate to be in the neighborhood of $1.5 million.

Operating expenses in the fourth quarter of $92 million increased $7 million from the prior year. Roughly $5 million of the increase was driven by bad debt expenses recognized in connection with a write-off of receivables from the Living Edge dealership.

We also recorded incremental expenses totaling approximately $2 million from the acquisition of CBS and Living Edge in the quarter, as well as $5 million from the acquisition of Nemschoff.

Partially offsetting these expenses -- expense increases in the quarter were $3.7 million in favorable adjustments related to the contingency-based component of the Nemschoff purchase price.

We recognized restructuring and impairment charges in the fourth quarter of approximately $10 million. These related principally to our previously announced plant consolidation projects, as well as employee severance benefits for incremental headcount reductions.

Since its conception inception last fiscal, our employee furlough program was meant to be a temporary means of adjusting our cost structure in line with reduced business levels. During the fourth quarter we made the decision to return our employees back to full-time work schedules effective at the beginning of fiscal 2011. With this move we are returning salaried employee payrolls back to 95% of their target levels, and are leaving in place the Wage Recovery Program to allow for the potential to earn 100% based on Company profitability. We estimate that the resulting 5% increase in base wages will be offset by savings achieved through our fourth-quarter restructuring actions.

Operating earnings in the quarter were $4 million or 1.3% of sales. Excluding the impact of the restructuring and impairment expenses, adjusted operating earnings in the quarter were $13.7 million or 4.3% of sales.

Despite approximate breakeven pretax earnings in the fourth quarter, we recognized an income tax benefit of $2 million, relating primarily to the release of reserves prompted by the closure of our 2009 tax return audit. We also recognized some benefit in the quarter related to the manufacturer's tax deduction under the American Jobs Creation Act.

The effective tax rate in the prior-year fourth quarter was 1.3%, driven by tax credits from the repatriation of foreign cash and benefits related to the R&D tax credit. For the full fiscal year our effective tax rate was 18.8%, versus 31.4% in fiscal '09.

Net income in the quarter was $2 million. As required under GAAP for purposes of calculating diluted EPS, we have excluded from net earnings the favorable valuation adjustments related to the Nemschoff purchase price component for this quarter. Accordingly, we reported $0.00 per share on a diluted basis in the fourth quarter. Excluding the per-share impact of the restructuring and impairment charges, adjusted EPS was $0.10 in the 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 balance sheet.

Thank you, Greg. Good morning everyone. We generated strong cash flow in the fourth quarter, driven by positive earnings, adjusted for non-cash charges, and a $17 million source of funds from changes in working capital balances.

The movement in working capital was the net result of decreases in trade receivables and prepays, combined with increase in trade payables. These favorable changes were partially offset in the period by an increased investment in inventory. In total, cash generated from operations in Q4 was $36 million.

In the fourth quarter of last year cash flow from operations was $27 million, with changes in working capital driving a net source of approximately $8 million in that period. On the full fiscal year cash flow from operations was $99 million compared to $92 million in fiscal '09.

Capital expenditures in the fourth quarter totaled $7 million, bringing the full-year amount to $22 million. Last year capital spending in Q4 totaled $5 million, whereas spending for the full fiscal year was $25 million.

We made just over $1 million in dividend payments during the quarter. This compares to approximately $5 million in Q4 of last year.

Net cash expenditures for acquisitions made in the quarter totaled just under $16 million, with the purchase of Colebrook Bosson Saunders driving approximately $13 million of this amount. The balance related to the purchase of assets for the Living Edge dealership in Australia. On the full fiscal year cash used for acquisitions, including Nemschoff, totaled $46 million.

We ended the quarter with total cash and equivalents of $135 million, an increase of $12 million from the February level, despite the acquisition-related outflows. Of this amount approximately $50 million is held within our international entities.

We were in compliance with all debt covenants, and are currently running at at a gross debt to EBITDA ratio of approximately 2.7 times. The available capacity on our revolving credit facility remains at approximately $139 million, with the only usage being from outstanding insurance-related letters of credit. Given our current cash balance, ongoing cash from operations and borrowing capacity, we remain confident that we have sufficient flexibility to meet the financing needs of the business going forward.

That is the balance sheet and liquidity overview for the quarter. Now I will turn the call back over to Greg, who will share some thoughts on the outlook as we move through Q1.

Thanks, Jeff. In considering the revenue forecast for Q1, keep in mind that we ended the fiscal year with a backlog of $244 million, which is approximately $36 million higher than we had in May of last year. The relative strength of this starting position and the improved order entry we experienced during Q4 indicated that Q1 sales could exceed the prior-year level of $324 million by 10% to 15%.

We generally expect sales in the quarter to be approximately 80% of the beginning backlog, plus an amount roughly equal to the first six weeks of order entry in that period. Of course, factors such as customer timing requirements and changing economic conditions ultimately drive sales in any given period.

Moderate commodity pricing pressure is expected to continue through the first quarter, and we would expect this to be on the same magnitude as we experienced sequentially from Q3 to Q4; however, savings realized from our now completed factory consolidation projects are expected to offset this impact. Accordingly, we would expect our Q1 gross margin percentage to be at or slightly above the fourth-quarter level.

There are a number of factors that will likely influence the sequential quarter trend in operating expenses. As a starting point, our fourth-quarter expenses reflect certain items, such as Living Edge bad debt charges and benefits recognized from reduced Nemschoff purchase liabilities that aren't expected to repeat in Q1.

The first quarter will include a full 13 weeks of expenses associated with CBS and Living Edge operations. As I previously mentioned, our employees will have an opportunity to recover the remaining 5% of the wage reduction in Q1 through improved profitability. In addition, there were no expenses related to incentive bonuses included in our fourth-quarter results.

Given our expectation for increased sales and profitability in Q1 versus Q4, we would expect to accrue some level of expense in the quarter for both the wage recovery and the incentive bonus programs. Considering these factors, we are expecting Q1 operating expenses are between $94 million and $96 million.

Finally, we expect our effective tax rate in the first quarter to be between 29% and 31%.

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

(Operator Instructions). Mark Rupe, Longbow Research.

Just trying to get an idea, was there any factors behind the inflection in the order strength in the final seven weeks? I am trying to get a sense of what the run rate was in the back half of the year on a weekly basis, and whether or not those trends have continued in the first couple weeks of June.

This is Brian. There was no specific driver. It was fairly broad-based. We saw it geographically broad-based. We saw a fairly broad-based product line and by vertical market. We had some -- we had a few large contracts, but I would tell you even factoring those out, we saw a definite uptick overall. A lot of it was base returning, from what we can tell by the numbers.

So it was broad-based, not one particular driver that we can point to. It is early into the next quarter, but I would say what we have seen is so far the trend rate has continued based on what we see in the first few weeks.

Okay, perfect. As it relates to the price discounting and stuff, I know you had commented that you expect the gross margin to be, I believe you said at or slightly above. Is that factoring in the benefits from the factory production and the absorption there? Is the benefits from -- I mean, with the raw materials going up a little bit is there any chance there is risk to that gross margin going forward?

I would say that, obviously, with the expected increase in volume that we will have efficiencies. What is hard to determine is, given the higher number of -- or the increased project business obviously with an increase in orders, is to say that you probably have some incremental discounting relative to Q4, which is hard to determine this early in the quarter.

Can you put a number on what the amount of the 5% comeback on salary is?

It is about $2 million a quarter.

Okay, perfect. Thanks guys. Good luck.

Todd Schwartzman, Sidoti & Company.

Greg, your comment on the gross margin outlook for Q1, you were speaking relative -- I think you kind of dropped out for a second. Were you speaking sequentially or year-over-year?

Sequentially.

Okay. So flat to slightly higher from Q4?

Correct.

Okay. Could you speak to the project, the North American project business activity in particular, and any pockets of geographical improvement that you're seeing now?

I don't think there is any difference than what we have been seeing throughout the year. I would say we continue to see some large projects from the government sector, for sure. As I said to you though in my opening comments, and when someone asked this question earlier, there were no -- there was a couple of large projects, but this -- the business is actually been fueled more on the day-to-day business rather than a few large things.

What we haven't seen is many of the sort of midsized projects. If there is an area that when we look underneath the numbers, we would say that $1 million to $5 million of projects are kind of -- end up being your bread and butter. That has been here has been a lighter than what we may have thought overall, considering the total strength in orders.

But nothing geographically in the US that we can specifically point to, other than the trend that has been out there for some time that, for sure California, particularly Southern California, has been a difficult market, continues to be.

So any of the areas that were fueled heavily by the housing boom, you still continue to see them under stress. Financial services has not been great; therefore, you haven't seen a lot of New York City, although that has gotten, I think, better, although nowhere near what it used to be. So geographically from that perspective, but I would say it is probably driven more by industry sector than it is driven by geography.

On the government side, how is the municipal business holding up versus GSA, Federal?

It has actually surprisingly held in there to date relatively similar. Certainly it is down compared to where was historically, but still is surprisingly okay.

For the quarter and for the year, in fact, how much did you spend to develop new products and launch those products versus the prior year?

This is Jeff. In total, design and research, which includes royalties of about $41 million for the year, and that is -- I want to stay up just slightly from last -- no, down in dollar terms, but up slightly on a percentage basis from last year.

And is there (multiple speakers).

But there was not a significant driver of a bubble in terms of expenses in the quarter related to that. Certainly there is always a bit of an uptick in the fourth quarter, as we are trying to push a lot of products out to introductions in NeoCon, but it wasn't super significant.

Where does R&D go in fiscal '11?

Generally, we keep R&D at a fairly tight range as a percentage of sales, so it will go up a bit next year as volume rises. But I don't see it as being a particularly large thing.

What we will see more next year is probably on the capital side, because we will have more tooling related to some bigger platform investments. This year, of course, we had a lot of new products, but a lot of them were through -- were products that were not heavily -- didn't require a lot of tooling. Next year some of the introductions we have will be more heavily tooled.

Got it. Lastly, did you give any outlook for CapEx for 2011?

We didn't. I think it will be up somewhat, but we didn't -- I would guess today in that $30-ish million to $35 million range.

Perfect. Thanks guys.

Budd Bugatch, Raymond James.

You had talked about be order pacing for the quarter being about $28 million and up -- $28 million a week on overall. Can you give us what the range was, and how did it end in the quarter?

It ended the quarter -- Greg -- we were -- well, I would say, Budd, our average in the first few weeks after the quarter has been pretty close to the quarterly average.

It has been right on actually, $28 million. (multiple speakers).

Say again, Budd.

What was the high water mark during the quarter? (multiple speakers)?

By month, Budd, we average on a weekly basis about $24 million in March, about $28 million in April, and about $30.5 million, I believe the number is in --

$31 million.

$31 million in May.

As you (multiple speakers).

Typically it is a little bit higher. Even though we don't have a lot of entities of pay based on orders, you do see folks running towards the finish line. So is always a little bit higher in that last month.

Thd $94 million to $96 million of OpEx for the first quarter, you said $2 million would be what you would expect from the reinstatement of salary opportunity. What do you think the variable part of that is, or what is the variable incentive comp part of that $94 million to $96 million?

It is probably in that same neighborhood.

So without those two, about $90 million to $92 million?

Yes.

As you look for the full year, what do you think the tax rate will be?

This is Jeff. We are looking at an estimate right now of about 33%.

For the full year?

Yes, on the full year. 29% to 31% in Q1. We've got some expected foreign tax credits that we are going to be able to benefit from in Q1, that is what is going to bring it down.

As you look -- you gave us revenue outlook for the quarter. I know the crystal ball as you go out father is a little more cloudy, but how are you feeling about the overall health of the industry and of your particular verticals in terms of revenue for the year?

As you say, it is a really interesting picture, because of course, we saw better acceleration than we thought coming into the quarter. We thought it would be better, but we didn't think we would see that big of a rise. But I would say right now we think high single-digits looks doable to us for the year.

Okay, and (multiple speakers).

I think some of that is going to depend on -- if you look at the BIFMA data, which I know you look at, they weren't calling for much improvement until you got into 2011. Of course, we get a bit of that into our year, so we are going to straddle the two years that they forecast.

So I think it is really going to depend on whether we continue to see the international side not cause problems over here, and what do we see in the general development of the US.

Well, your international has been very strong. What are you seeing there and the outlook of where is the international strength coming from?

You know, like I say, it is actually fairly broad. It is not one particular place. Asia has done well, and we have made a lot of investments in Asia; that has done well. But Europe has done almost as well, if you look at it in terms of year-over-year changes. I think the question is how does that continuous as we move on with all the austerity measures that are going on.

In particular, Europe, the UK, specifically is the one place outside the US that we've got a fairly heavy government mix in the business. That is probably the one that if we were sitting around as a management team, we would say the one we are watching the closest, to say what do we do to offset what is probably going to be weaker in that sector.

We think there are some opportunities with the things we can do with some of the investments we have made, as well as some of the verticals that we haven't been as aggressive about internationally that look like maybe there are opportunities in those markets.

So we are sticking that we think high single-digits is doable, and we are going to have to be fleet of foot and go figure out how to create opportunities.

In talking about verticals, you talked about education and healthcare as two good verticals. I haven't heard anything about financial services and government, how are they looking?

Government, I would say is fairly steady. We have a decent position there. That business has been fairly steady. Of course, state and local is down, as I said earlier. But so far the government has continued to be a reasonably good spot. Financial services on a historical basis is still -- is significantly lower than what we have seen historically.

There are signs out there of some reasonable projects there. There is a lot of movement in that business. You guys know more about it than I do, to ask what are you going to do with fixed cost structures going forward?

We think that in some cases that will be beneficial to us as folks are trying to reconfigure themselves for the future. And if we can be part of that, as people are doing rebranding efforts at branches, those kinds of things, but it is certainly nowhere near what it once was.

Both financial services and business services are the two areas that have taken -- by far the hardest hit through this whole period. I think there are signs of life out there for those folks, but it is nowhere near what it once was.

Even year-over-year now, Brian, I mean, you're comparing against pretty much the low watermark from last year, so I would have thought that would have been relatively better.

The difference for us in is last year in Q4 we had a big project with a financial service player that ran through the fourth quarter. (multiple speakers).

You don't have that again -- that is not an obstacle going forward though? That was (multiple speakers). That project was pretty much over last year in fourth quarter, was it not?

It was. So when you look at the comparison it is still doesn't look like it yet, but I think you're right, it certainly has flattened out and is on the rise. I would agree with that comment.

I think that is true overall is you're not seeing falling anywhere, so you're beginning to see across most of the verticals, if you will, year-over-year increases, because we are bouncing off of the bottoms for sure. And then you can see particular areas that are actually have remained strong, like government, healthcare and some of those.

So that is why I think as you look at this quarter and you began to see a more broad-based improvement was that base business started to come back. So I think your point is right. You are seeing some of that turn.

Typically I ask about project business versus ongoing business, and you have a percentage that you --?

This is Jeff. Same as Q3 really on an overall percentage basis, 43% -- between 43% and 45% in the fourth quarter. I guess Brian mentioned, we had seen an increase in -- a general increase across the business in order entry, and it has hit both the project side as well as base, so that overall relative mix has stayed pretty consistent.

Finally, can you parse for me the cost of goods sold between the direct labor, material, overhead and D&C?

Sure can. I think Greg mentioned on his prepared remarks direct labor was 6.4%. We had direct materials of 41.3%, manufacturing overhead of 13.7%, and freight distribution of 5.8%.

Thank you very much. Good luck on the year and on the next quarter.

John Emrich, Ironworks Capital.

Just three requests for a repeat. One is a further explanation. You talked about the impact of Forex in the quarter not being as bad as some might have predicted it. Given where spot rates are today, and I don't know what hedging you do, when you look out the next few quarters, what would you anticipate the impact would be?

On topline?

Profits.

I guess woven into our operating guidance, our performance guidance in prepared remarks, kind of is embedded in there. We don't do a huge amount of euro-denominated sales. Most of our costs on the Europe side are spent in pounds. The net impact, we don't expect to be significant.

Great. What was the funded status of the pension fund at year-end?

Hang on one second. We'll get that for you.

We had an underfunded position of about $114 million. That is total across all our plans. If you look underneath that we had, as you might expect, a pretty significant increase in our overall asset performance in the year, including the contributions we made. But obviously as we have talked to folks when we have been out, the interest rates moved against us, and so that offset a lot of that benefit.

Yes, okay, I was going to say was 121 to 114 isn't as much of an improvement as I was thinking you might have gotten out of the big return in the stock market, but (multiple speakers).

We had almost a $30 million improvement in our plant asset values. The discount rate moving in the other direction.

Second to last. Can you repeat the comment about sales and 80% of it was either backlog or --?

So we typically look and try to predict and estimate that on average 80% of our backlog will be recognized as revenue in the following quarter. Then on top of that we take a look at the first six weeks of order entry and add those two numbers together, and that is typically a pretty good indicator of where revenue is going to be.

Got you. Then you did it once already, I apologize for asking it one more time. Can you clarify that comment about price discounting? I am a generalist as a portfolio manager, so if you could explain sequentially what is going on, that would be helpful.

Sure. So in Q4 our discounting was deeper, reducing net sales, if you will, to the tune of about $1.5 million. That is -- was worse than Q3, but more in line with our second quarter. So just discounting got a little bit better for us in Q3 and then back to where it was -- had been prior in Q4.

Keep in mind generally this is driven by the mix of project. That doesn't necessarily mean you had more big projects, it just means the pricing on those particular projects in that quarter. So you really got to look at that as a long-term trend. And I think what Greg's comments in the opening was, pricing has been more aggressive overall for the year, but fairly reasonable in the big scheme of things.

And that remains consistent in the current period, if you will?

Yes.

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

I want to jump on that last question. If I look back at my old notes, it used to be 85% of the backlog shift, and then you counted seven weeks of orders. Is there -- is it just conservatism? That definitely changes the math a little bit. I am just wondering why the change, or has there always been a range there that I haven't known about?

It all depends. I think we have talked internally 80% to 85% and 6 to 7.

I think the other thing you get, Matt, when you're coming -- at the beginning of hopefully an up cycle, you do end up with -- you end up with projects that the timing -- folks are actually coming out of a period where they got a little bit more time, if you will, between deciding to go forward with projects and when they actually need the product.

So we are trying to account on the fact that we do think people probably got a little bit more time essentially from a leadtime perspective, not our lead time, but their leadtime for making decision to take full projects back on to when they actually need the product.

So we are in a bit of that startup phase, if you will, at least that is what we hope is happening in terms of demand. So I think that is part of the reason we pulled some of those percentages back a little bit.

The other piece (technical difficulty) if there are any long lead times for orders that may not ship in the quarter, was that number larger than normal in the quarter?

Just as we analyze the federal government backlog, that is really why we picked the 80%. It is hard to predict exactly when that invoicing is going to trigger.

We had one large order from a government agency that we may ship it, but we may not be able to recognize the revenue in the quarter.

That's right.

Then you talked a little bit about the strength in health care, specifically for Nemschoff. Can you talk about the performance there, the percent of maybe orders, shipments or what is in the backlog, how that is progressing?

And also, from an integration standpoint I think last quarter -- I believe it was last quarter -- you talked about some -- maybe some inefficiencies with the integration how everything is progressing there?

Let me start with a question about inefficiencies. The fact is we still had a fair amount of inefficiencies this quarter, and we really started to turn the corner in that regard in the month of May, where we had two things come to us.

A., we had better demand, which was helpful, as well as we began to get behind us a lot of the combination work, if you will. That virtually is done today. We still got a little bit, but most of it has been relocated, so now it is the daily grind, if you will.

As we begin to get more focused on longer-term Herman Miller productivity system improvement -- Jeff, do you have the number for what the increases were at? I don't know the answer to that.

Now you're looking for the Nemschoff sales?

Yes, just any -- the backlog, the orders, the sales, what percentage of that was -- because we are not yet anniversaring the acquisition so this is still incremental, right?

Yes, if you look at our total (inaudible) orders here -- total healing -- total healing business, our orders were up almost 60% year-to-year in the quarter. And ex-Nemschoff we were up about 15% -- 14% or 15%.

One of the things that is a little hard now to tell, Matt, already is that since we have combined Brandrud and Nemschoff together, they have product lines that were in many ways complementary. They also had similar product lines. And now that we are producing at all out of Nemschoff, it is a little harder to tell whose order with which now. We have really integrated them that far to this date that -- and we are trading back and forth with what the best solution is for the customer.

So actually when you look at the two of those it is not a pure science to know which was the new stuff versus the old stuff any longer between the two of them. Nor are we, quite frankly, all that concerned with it, to the question.

Right, right, right. Okay, just trying to make sure I understand the organic side, but I guess your point is it is all becoming organic. Back to that inefficiencies comment, any more clarity on what the impact was in the quarter from a dollar perspective?

It is hard -- it improved so much during the quarter. I think the labor number at the Nemschoff facility improved 170 basis points as it moved through the quarter. So it is hard to predict how much of that is going to come out in -- that came out in Q4 or versus Q1.

Okay, all right.

Also we had a bit of mix, Matt. Some of that was in restructuring, so we had -- some of the costs shows up in the restructuring costs and some of it ends up in inefficiency in the operating side that you just can't completely get a peg on.

We have talked about in the past customer visits. I know it sounds like you guys are pretty optimistic about the rest of the year with the high single-digit growth expectation. It sounds like there is a good pipeline. Any other metrics you can put around that, the pipeline, growth -- visits -- growth, any of those messages you provided in the past?

Sure, this is Jeff. In terms of West Michigan customer visits, they were up 33% year-to-year in Q4. Sequentially they were up big. We were up over 90% in terms of total customer visits in Q4 versus Q3.

I think the other thing is you know, because you were there. I think everybody in the industry was encouraged by the level of participation in NeoCon. It is always hard to tell at that show whether you've got lookers or buyers. But I know that even from talking to our sales team, we saw significant increases in the amount of pre-booked visits, which rather than looking at people wandering around, the question is who is coming there specifically in theory to make a decision. We know that number was up more like our customer visit increases.

In the show, overall, attendance was up, I hear, around the 15% range. So I think there are signs that at least -- I wouldn't say we've got a runaway train or anything to that effect, but certainly it looks like there are more people beginning to say, hey, I haven't spent money on this area in a long time, and I am going to have to do some of that, especially as well we haven't seen a lot of improvement in the employment numbers yet. We certainly aren't seeing them deteriorate like they were either.

So we are getting to a point that probably there is going to be some replacement. There is folks trying to get themselves reconfigured to their new size, scale, where they're going to be as a business, where they were before. Hanging onto every penny, because they were nervous about the ability to finance. I think some of those fears subside, we are getting a little bit of that second derivative.

Then final question. We talked about Convia on this call. I just wanted to know, I assume we are still in the building stages of that relationship with Legrand, but maybe an update there. And have you ever talked about what the financial impact of that endeavor is on a quarterly basis?

We have not, but I would say it is not super significant in terms of what it does to any one period when you look at it after tax. There is only -- I think we have 20 people involved in that whole operation, and we have a small facility in Chicago, so it is not as if there's lots and lots of dollars involved in that. Although, I would say to you, we look at little dollars and big dollars exactly the same. If we are not going to get a return we get excited about it.

I would say to you overall -- you and I talked about this a little bit in Chicago. We are still enthusiastic that when we talk to customers about a total bundled solution that includes both our knowledge of how to help them envision a space that will let them attract and retain the best people. How we in fact can help them through some of the other technology we have developed, like occupancy sensing, find ways to more efficiently lay out their space and know what space they need, as well as our ability to help them with the cost of the energy in managing your facilities and the cost of changing through some of the things we have done, that bundle, we believe, is an important differentiator.

And we can see where we have been able to capture real customers by talking through that entire suite. Having said that, the specific revenue to Convia is clearly not where either we or Legrand would have hoped for at this point in time. I was actually just talking to the team about this yesterday.

On the other hand, Legrand team would say they've got their best set of prospects in front of them right now. So we've got 40 some -- 47 total customers installations with Convia today. But when you look at it, the value of each installation is actually fairly small dollars. So you need a lot of installations on a regular basis to get it up to the level that would meet our expectations.

So I would be less than straight if I didn't say it not where we would like it to be. But we do still see -- we still remain encouraged that our ability and need to offer a bundle to our clients that includes, for sure, furniture, hardware, but as well as technology and intellectual capability to help them create facilities that not only let them get the people that they need, but that are as efficient as possible to run, is something our customers are asking for. We think with the combined investments we have made in Convia and other things that we have some unique capabilities to actually to be able to deliver that to them.

Thank you guys.

I am showing no further questions in the queue. I would like to turn it back over to the speakers for any closing remarks.

Let me close by saying thank you to all of you for joining us today. It has been certainly an interesting year, or 18 months, as we look back to when this financial crisis started.

I couldn't be happier with the way that the Herman Miller employee base has responded. They did exactly what we would expect them to do, they acted like owners. And every step of the way they made difficult choices. They joined us in sacrificing to make sure that we could remain financially strong and invest in our future.

I think as we came out of NeoCon we all walked out with a sense of accomplishment that, in fact, many of the strategic things that we outlined four or five years ago we can see that vision starting to become real for us and our customers. And we are optimistic that if the economy continues to see some turnaround, the combination of that turnaround would be deliberate investments we've made and the continued spirit of the Herman Miller employee base to win, will carry us back to where we need to be.

We appreciate all of your support and confidence as we take that journey. We look forward to seeing you at the end of the first quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.