MillerKnoll Inc (MLKN) 2011 Q4 法說會逐字稿

Good morning, everyone, and welcome to this Herman Miller, Incorporated fiscal year-end 2011 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 10K 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 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 questions to allow time for all to participate.

At this time, I'd like to begin the presentation by turning the call over to Mr. Walker. Please go ahead, sir.

Good morning, and welcome, everyone. Last week we gathered in Chicago for NeoCon, our annual industry trade show. As always, the event gave us the opportunity to showcase our knowledge, products, and brand message for a broad audience. The theme of our showroom this year was Working Together, and we made it our goal to demonstrate, in clear form, how our products combine to offer choice and flexibilities in the ways people work, learn, live, and heal. Attendance at the show was reported to be up approximately 10% from last year, and the feedback we received on the look and feel of our showroom was very positive.

In addition to 2 Best-of-NeoCon Product awards, we received the OFDA 2011 Manufacturer-of-the-Year Gold Award. This is the fifth time in 6 years we've received such recognition from this group of independent office furniture dealers throughout the US and Canada, and it's a tremendous honor for our entire organization.

In many ways, the Working Together concept represents an appropriate theme for what we accomplished as a business through this past year. As I look back on fiscal 2011, I see many examples of how the Herman Miller family worked together to drive remarkable results. Before we take you through the details of the quarter, I'd like to take just a few minutes to share some perspective on what we have achieved over the course of the year.

I'll begin with some important steps we took in the area of employee compensation and benefits. As you know, the economic recession forced us to make a number of difficult decisions in order to weather the industry downturn. These included temporary wage and benefit reductions at all levels of the Company. Such reductions were necessary, however, we knew this could only be a short-term measure. While wage and benefit reductions are never welcome, our employees didn't simply hunker down. Rather they stayed the course, working together with the spirit and dedication unique to the Herman Miller view of a better future.

In the second quarter of this fiscal year, business conditions had improved to a level that allowed us to return employee salaries and wages to their full levels. This was followed in the third quarter by the reinstatement of our employee 401(k) matching benefit. I'm also pleased to report that our employees have earned a well-deserved EDA incentive bonus and profit sharing payout based on our improved financial results for the year. These benefits are fully accrued in fiscal 2011, and will be paid to employees in July. I felt it was appropriate that I open with this positive news for our employees, since it's their hard work that has moved the business forward. And move they did, achieving a number of strategic milestones along the way.

Perhaps none of our efforts over the past year had a more near-term impact on the business than what we call our Metropolitan Statistical Area, or MSA, strategy. Our focus in this area has driven significant improvements in how our sales teams and dealers collaborate to win new business, and in the process has improved our market share in North America. This initiative has involved clarifying lines of accountability, improving the flow of communication, renewing our focus on sales training, and tracking and evaluating performance measures across individual markets. This blocking and tackling has heightened the discipline of our selling process, and while there is always room to improve, I'm incredibly pleased with the results we are seeing.

Last June, we launched the Thrive portfolio of ergonomic solutions. Thrive includes technology support products we acquired through the purchase of Colebrook Bosson and Saunders in May 2010. The Thrive team made tremendous progress this year, integrating the CBS product offering into our existing systems, as well as hiring, training, and developing a dedicated sales force. A year after its official launch, Thrive represents an integral part of our strategy to earn a larger portion of the business transacted each day within our dealer network.

This past October, we formally introduced the SAYL family of chairs, and in doing so, took a bold step in our commitment to further our leadership position in office seating. Since its launch, SAYL has received an outpouring of immediate coverage and critical praise for sustainability, comfort, and distinctive design, all at an equally distinctive price. The early commercial response to SAYL has been remarkable, with order entry levels outpacing even our most aggressive estimates.

Following the launch of SAYL, we introduced the Advo family of work and side chairs, and in December began taking orders for Swoop, our new lounge seating collection. Last week in Chicago, we introduced Sotto, our new executive chair under the Geiger brand, which earned a Silver Award in the Best-of-NeoCon competition. Together these additions to our product lineup represent an aggressive step toward our goal of remaining the industry leader in office seating.

Of course, we didn't limit our new products to just seating. In January, we launched Canvas Office Landscape, a collection of workstation desking and storage elements that work in harmony to address multiple space applications from open plan to private office. Canvas represents a step forward in our ability to offer customers, designers, and architects choice and flexibility in creating a consistent aesthetic across an entire floor play.

Our healthcare team made a number of significant advances this year, including new product introductions, impressive new showrooms, and a coordinated marketing plan. We commercialized our award-winning Compass patient room system, and introduced a host of new products and product extensions at recent trade shows. We opened 2 dedicated healthcare showrooms this fiscal year, 1 in Chicago last summer, and another in west Michigan this quarter. These new spaces provide powerful venues for demonstrating the Working Together theme across our healthcare brands. Earlier this year, we refined the architecture of our 4 healthcare brands, and are now rolling out the new campaign through a coordinated marketing effort.

Growing our market presence outside the United States continues to be a key element of our strategy, and we've made solid progress in this area. Sales outside the US increased $93 million in 2011, ending the year with 23% of our consolidated total. Of course, we continue to see enormous growth potential internationally, particularly within Asia and Latin America.

Last quarter we announced plans to acquire Posh Office Systems, a leading manufacturer of quality office furniture with an extensive network of distribution throughout China and Hong Kong. Our acquisition team has spent the past quarter working towards establishing a legal structure necessary to complete the purchase. This has proven more time consuming than originally expected, but we remain confident the deal will be completed, and we are now targeting a closing later this calendar year.

We are also taking steps to build other international business relationships. Earlier this month, we announced a new partnership with Magis, one of Italy's leading furniture designers. Beginning in September, we will have exclusive distribution rights to Magis' products within the US and Canada. The Magis portfolio, with its array of beautifully designed, lightweight seating, stools, tables, and outdoor products, will significantly enhance our ability to address community spaces within work, education, health care, and hospitality environments. The partnership will also complement a much broader initiative planned for later this year, and is serving customers through a collection of both new and classic product designs.

Importantly, we reach each of these milestones while delivering solid financial results for the year. Our year-over-year improvement in sales and order rates has been dramatic. For the full year, we generated net sales of $1.6 billion, an increase of over 25% from the prior year. In dollar terms, this $330 million improvement represents the largest single-year revenue growth in our Company's history.

Despite the add back of incremental costs related to employee compensation and benefits, the top-line growth helped drive a $70 million increase in operating earnings, and an earnings per share improvement of almost 150% over last fiscal year. We generated $91 million in cash flow from operations, and achieved a return on invested capital of 27% on the full year. We also increased our financial flexibility by paying down $50 million in outstanding debt, and contributing $52 million to our employee pension plans.

As you can see, it's been a busy and productive year at Herman Miller. I believe these results are a true testament to the momentum that can be achieved when talented people work together effectively. This leaves me confident in our ability to reach even greater heights in the year ahead.

With that, I'll turn the call over to Greg to cover our fourth-quarter results in more detail.

Thanks, Brian, and good morning, everyone. Consolidated net sales in the fourth quarter were $442 million. This represents an increase of 37% from a year ago, and a sequential quarter improvement of 6% over the third quarter of this fiscal year. Consolidated orders in the fourth quarter of $449 million were up 23% on a year-over-year basis, and improved 22% sequentially from Q3 of this year.

Our North American business operations again posted robust sales and order growth this quarter, as overall customer demand remained broad based across geographic regions and industry sectors. Net sales in Q4 in our North America reporting segment totaled $344 million. This is 40% above the same quarter last year, and up 4% sequentially from Q3 of this year. New orders in the quarter of $356 million were 21% higher than the year-ago period, and 25% above the Q3 total.

International business levels were again up through most of our regions this quarter. Consistent with our experience through this fiscal year, the largest percentage gains in sales and orders were seen in Asia and Latin America. In total, net sales within our non-North America business segment were $83 million in the fourth quarter. This represents a 28% increase from Q4 of last year, and a sequential period growth of 23% relative to the third quarter. Orders for this segment improved 32% relative to last year, and 12% sequentially.

We estimate the translation impact from changes in currency exchange rates increased our consolidated net sales in the quarter by approximately $6.5 million, relative to the fourth quarter of last year. This results from the general weakening of the US dollar against major world currencies compared to the year-ago period.

Moving on to gross margin performance for the quarter. Our fourth-quarter gross margin of 33% improved 20 basis points from Q4 of last year. This was largely due to the relative increase in net sales and factory production levels between periods. Price discount levels, which have remained generally deeper on a year-over-year comparison, partially offset the benefit of the higher sales and production volumes. In total, we estimate this increase in discounting reduced our Q4 gross margin by between $7 million and $8 million compared to the prior year.

The price of key, direct materials, including steel and steel components, also remained above last year's levels throughout the fourth quarter. This drove an estimated $2 million increase in cost of goods sold compared to Q4 of last fiscal year. Finally, cost of goods sold this quarter included $5 million in expenses related to employee incentive bonuses, whereas no such expenses were accrued in the fourth quarter of last year.

On a sequential quarter comparison, our gross margin percentage improved 90 basis points over the third-quarter level. Here again, we benefited significantly from improved labor and overhead efficiencies, as a result of higher sales and production. We also benefited from a moderation in price discount levels this quarter relative to Q3, a factor which we estimate drove a sequential gross profit improvement of approximately $1 million. As expected, we did feel the effects of higher commodity costs this quarter, which drove an estimated $2 million reduction in gross profit relative to Q3. Additionally, incentive bonus expenses were approximately $1 million higher sequentially.

I'll now move onto operating expenses and earnings for the quarter. Operating expenses in the fourth quarter totaled $114 million. This is $23 million above last year's level, after excluding the adjustments related to Nemschoff purchase contingencies and bad debt expenses associated with our Australian dealership, both of which were reduced and recorded in the fourth quarter of last year. Variable expenses resulting from the increase in net sales and profitability between periods drove much of the year-over-year increase. This includes employee incentive bonus expenses, which totaled just under $6 million, at the operating expense level in the fourth quarter. By comparison, we had no such expenses in our results last year.

Our prior-year operating expenses also reflected comparatively lower base compensation and benefit levels as a result of the temporary wage reduction that was still in place at that time. On a sequential-quarter basis, operating expenses in the fourth quarter increased $12 million above the Q3 level. Approximately $5 million of this relates to favorable adjustments in Q3 related to the settlement of the Nemschoff purchase contingencies. The remaining increase in expenses was driven by variability and sequentially higher net sales, and the seasonal ramp up in spending on marketing and new products in advance of NeoCon.

Overall, operating earnings this quarter were $32 million, or 7.2% of net sales. This percentage is more than double our performance in the year-ago period, and represents a full 100-basis-point improvement from our adjusted operating earnings in Q3 of this fiscal year. This puts our adjusted sequential period contribution margin at 22%. On a year-over-year basis, our adjusted contribution margin of 18% was reduced by the add back of employee compensation and benefits during fiscal 2011. I think it's important to note that had we not pursued the temporary wage and benefit reductions last fiscal year, our operating earnings in that period would have been markedly lower. This would have made our current-year Q4 contribution margin 25% on a year-to-year comparison.

Our effective tax rate was 36.4% for the fourth quarter, and 30.9% for the full year. Year-end tax true-ups related to manufacturing deductions and our mix of international earnings drove the rate for the quarter above the level we had expected coming into the period. Looking ahead to the first quarter, we expect our effective tax rate to be in the range of 32% to 34%.

Net income in the quarter was $17 million, or $0.30 per share on a diluted basis. On the full year, we reported diluted earnings per share of $1.06, which includes a $0.03 per share in restructuring-related charges.

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

Thanks, Greg. Good morning, everyone. Cash flow from operations in the fourth quarter was $38 million. We benefited in the period from favorable shifts in working capital balances, primarily reductions in inventories and increases in accrued liabilities, including bonus accruals which will be paid to employees in Q1. Together, these changes drove a $5 million source of cash in the quarter. Our operating cash flows in the period also reflect outflows associated with the funding of our employee retirement benefits.

One of our primary capital structure priorities throughout fiscal 2011 was to improve the overall level of financial flexibility in the business. During the fourth quarter, we took two important steps toward fulfilling this objective. First, in March we paid off our remaining $100 million of public bonds, using a combination of existing cash and $50 million in proceeds from newly issued senior unsecured private placement notes. The completion of this refinancing reduced our total long-term debt balance to $250 million.

In addition to reducing debt levels, we made further progress this quarter toward our goal of fully funding our defined benefit pension plans. During the period, we contributed $23 million in cash to our primary domestic plan. We also contributed 582,000 shares of Company stock to the plan. The market value of these shares on the date of issue was just under $15 million, an amount fully deductible for income tax purposes. In total, this cash and stock contribution drove a cash tax benefit of approximately $12 million. On a combined basis, our defined benefit pension obligations ended the fiscal year 89% funded, up from 69% just a year ago. Together, these actions improve both our ability to pursue strategic investment opportunities, and to remain healthy through future business cycles.

Capital expenditures in the fourth quarter were just under $9 million, bringing our full-year spend to $30.5 million. Dividend payments in the quarter and full year totaled $1.3 million and $5 million, respectively. We ended the quarter with total cash and equivalents of $149 million, which is down $16 million from the end of Q3. Of this amount, approximately $48 million is held within our international entities.

We remain in compliance with all debt covenants, and as of quarter end, our gross debt-to-EBITDA ratio was approximately 1.7 to 1. This represents a significant improvement in the ratio, which was running at roughly 2.7 to 1 at this time last fiscal year. The available capacity on our revolving credit facility remains at approximately $140 million, with the only usage being from outstanding letters of credit. Given our current cash balance, ongoing cash flow from operations, and borrowing capacity, we remain confident that we have sufficient flexibility to meet the financing needs of the business moving forward.

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

Okay, thanks, Jeff. I'll begin with two important factors that you should consider in developing your models for our first quarter. First, you should bear in mind the fact that our fiscal 2012 will include 53 weeks of operations. The addition of this extra week is required approximately every 6 years to realign our fiscal periods with the calendar months, and as a result, our first quarter will include 14 weeks of sales and expenses.

The second factor involves the sale of two dealerships at the start of this period. On May 29, we competed the sale of two dealers, one in Denver and the other in Dallas. These transactions were the culmination of our long-term plan to transition ownership to the Presidents of the respective dealerships through an earn-in program. This allows the executives at each location to accumulate and bank incentive compensation over a period of time, and eventually apply this as consideration in the purchase. In total, we estimate the sale of these dealers will reduce our consolidated net sales in the first quarter by approximately $9 million.

Considering these factors, along with recent order pacing, we anticipate our first-quarter sales to be in the range of $440 million to $450 million. We expect gross margins in the first quarter to be at or near the Q4 level. Comparatively higher commodity costs in the first quarter will likely be offset by continued moderation in price discounting, lower incentive bonus, as well as we should begin to feel the effects of our price increase, which as a reminder, became effective in the beginning of May.

The extra week of operations in Q1 will add incremental operating expenses for salaries and wages, however, we expect this to be largely offset in the period by the dealership sales, which will lower the operating expense run rate going forward. Additionally, we anticipate first-quarter bonus expenses will be lower in comparison to Q4. Given this variety of moving parts, we expect the total operating expenses in the first quarter to be at or slightly below the Q4 level.

And finally, as I mentioned earlier, we expect our effective tax rate in the quarter to be between 32% and 34%.

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

Thank you, Sir. (Operator Instructions). And our first question comes from the line of Budd Bugatch of Raymond James.

Good morning, Brian, Greg and Jeff. This is actually Chad pinch hitting for Bud. First let me offer my congratulations on the strong quarter and continued positive order growth. My first question is, in terms of the sales and orders in the quarter, you mentioned, I think, Greg, $6.5 million of favorable currency. Was there any acquired revenue? I just want to try to get at the organic growth rate on the ex currency?

Very minor, if anything, Chad.

Okay. And in terms of the guidance, just doing some very rough and very quick math here, it looks to me like the implied year-over-year contribution margin is sort of in the 12% to 14% range. Is my math reasonable there, or how should we think about the leverage in Q1 and then how that kind of plays out for the rest of the year?

Chad, I assume that when you look at Q1, you're talking about year-over-year?

Yes.

It's probably a lot easier for us to talk about it going forward, sequentially, because of the layered-in cost.

Okay.

So we hadn't fully layered in. When we started the Q1 last year, we were at 95% of wages. So again, we'd reiterate what we said last quarter that moving forward, on sales growth we should see leverage in contribution margin to the 20% to 25% range, forgetting big swings and things like currency and other things -- commodities and other things.

Got you. And, you talked about some moderation sequentially in price discounting, both in the current quarter and looking ahead to Q1. How much of that is mix? And how much of that is maybe an improvement in the competitive environment? Just what ever thoughts you have there.

Chad, this is Greg. I would just say that the big -- the big piece of that moderation is really, we had some very large projects in both -- all the way from Q1 to Q3 of this past fiscal year that were, I'm talking $10 million plus projects, and those level of projects have not worked their way to the backlog, and so we are seeing fewer of the super large projects, and that's where we're seeing a moderation in discounting.

It's important to note those projects were both -- those projects were won during the height of the downturn as well. So I think you're getting kind of the impact of when everybody was probably at there most competitive stance to win projects of those sizes, Chad. I also think by -- if you look, almost everybody in the industry has announced, if not one, for sure, but more often, multiple price increases in the last 6 to 9 months, which is a signal that everybody realizes we have to get more price realization in the industry given what's going on with commodity costs and those kinds of things. And as the demand picture is at least stabilized and picked up a bit, folks are bleeding that actually we are going to have to capture some dollars in price going forward as an industry.

Okay. And last question for me. Obviously we've had a bit of a slow patch in terms of the recent economic data. We've got a pretty nervous stock market. Appreciating that this will is -- or tends to be a later cycle industry, what can you share with us in terms of what you're seeing in your leading indicators like customer visits, mockups, et cetera. And if we do slow meaningfully down the road, where would it show up first in your business?

Chad, this is Jeff. Specific your question on customer visits, we did see an increase year-to-year, 17%. And sequentially from Q2, they were up significantly, 67%. But keep in mind, Q3, we still had some hangover effect from some of the construction projects we had here in West Michigan, so be a little careful with that percentage growth. But up by both measures.

And I think, Chad, I am not sure if you remember a few were at the NeoCon show or not, we heard d from our sales team, good, not only in terms of the general traffic numbers that the folks at MMPI reported, but also in terms of scheduled visits, they were pretty good. I think our industry has tended to lag both going in and coming out, so where we will probably see it first is we will see folks starting to pull back on major projects that they have planned. Now, we haven't seen any real change in any of that tone as of yet, other than I would say some folks that are more related to the automotive industry that as the issues in Japan came up, we saw a few people saying hey, I'm going to pull back a bit until I see that work its way through the system. Most of those were delays rather than cancellations. So other than what you would expect for a lot of those folks, we haven't seen anything so far.

Okay. Well thanks, for taking my questions. Congratulations again on the great performance in the quarter.

Thanks.

Thanks, Jeff.

Thank you, Sir. And our next question comes from the line of Todd Schwartzman from Sidoti and Company.

Hi, good morning. First off, could you speak a little bit more in-depth on the day-to-day versus the project business for the quarter?

Todd, this is Jeff. In terms of the overall mix, same as last quarter, about 47% of the business. So we're still running roughly half project business here in North America. So no market change in that measure.

And what about demand, just slicing and dicing by the size of the enterprise on the commercial side? Maybe if you could give some more granularity on the customer base by number of employees, for example, rather than just small versus large. Is there any pockets of strength when you look at it in that respect?

We don't have anything to that level of granularity, Todd, that I can give you off hand. I think, for sure, this ties into what you are hearing in the general economic data. Certainly, larger, multinational companies are more likely today to be moving on facilities and those things, and I think that is partially because they still feel very good about the impacts of what is happening globally, and they are building their businesses both for the US and globally. So if there's a skewing, it would probably be around those lines, but I don't know if I can get as granular as giving it to you by number of employees.

All right. And Brian, obviously service sector employment, which is what you look at most closely, doing a bit better than manufacturing, of course. But still, I think fairly sluggish across the US. Certainly there have been pockets of strength and financial services recovering early and so on. However, are you seeing, in terms of this ongoing demand pickup, is there any evidence, anecdotal or otherwise, that pent-up demand may also be contributing to some of these recent shipments?

Yes, Todd, I think you got a couple of things happening. One, I do think you've got, generally, people held back long enough that we are going through, if you will, sort of the replacement cycle. Value is adding on to kind of what I would call mini-normalized demand, stuff that was put up for a period of time. I also think we've benefited, as an industry, although it's hard to find the data, from the fact that as companies have made their changes at the height of the downturn, and now they sit there and they have opportunities to maybe combine facilities together where they used to have three, and they've made changes, and they can put everybody into two, and rental rates are still pretty good, and there is available space to move, they are having a tendency to move to go put those folks together. I think there's a fair amount of that stuff happening. I also think, you have to remember when you get underneath the labor data, that in fact, unemployment rates for people that are college-educated are actually quite low. And I think employers are realizing that ultimately, there is still a battle for getting talent. And if I'm going to get those people, I've got to have facilities that they are attracted to work in. And as we look to the future, they are beginning to ask themselves what does the future of the office look like and how do I put the right tools in place for those people to attract them?

So I think we have sort of those three factors that are stepping over. And the last one, which we've always said is the most important in the early stages of recovery, is what does profitability look like? Therefore, what does the ability to spend on CapEx look like. And certainly, while employment hasn't picked up, companies are more profitable than they have been in a long time. They've got cash. And I do think you see folks saying, I'm going to spend money on things that maybe I've put off, and I've got the money to go do that. And that maybe one thing before we step the movement in employment.

Okay. And regarding acquisitions, what should we look for? Where we are focus be? Where is it now?

Well, we've been really clear that we've got four areas that are sort of our focus point for growth between the North American work business, our healthcare business, international, particularly when we look to Asia and Latin America, and then last, our consumer and specialty business, which includes both our retail business as well as Geiger and some of the other business that are more specialty nature. When we make acquisitions, they'll probably be related to those -- to those business segments and/or finding a way for us to get into new product categories we've not been in in the past or finding acquisitions that, in fact, enable us to expand our overall distribution footprint globally and into the segments that we see the best chance for growth.

Okay, and just looking out long-term, this may be one or two more cycles or maybe even beyond, just looking at the trends out there. For the past few years, moving more towards collaborative work environments and such and toward smaller workspaces, can you give us a glimpse aside from the new product launches that you've already announced, just big picture, how your offerings are going to look, what your mix is going to likely look like well on down the road due to the changes in how people work?

Well first, remember, our mix is changing for two factors at least. One of them is, as we get into a more definitive way to serve each of the vertical market segments we have gone after, like healthcare, by definition, our product mix is changing because we are developing products specially for that segment, like the Compass product line that we introduced a year ago. It doesn't fit any general industry category within office furniture. As well as, as we get further into areas like specialty and consumer, we are developing products that are much more tuned to that, not only customer, but to that channel.

So for instance, we've got two or three different products we've even -- we've launched and/or did alliances with in the last six months around outdoor furnishings, which is an area we haven't played in the past. Those kinds of categories will certainly grow for us as well as product specialty tuned areas like education. In the general office arena, there is no doubt that our product offering will grow in terms of products that support group work and the accommodation of technology, and there will be as much growth there as there is in the seating and systems world. So that is a lot of our emphasis right now in R&D is on those arenas as well as continuing to invest in our leadership in seating. So you will see some shifting going around in the mix. I think it's too early to protect how fast that will happen and what it would look like. But as you look at our business overall in the last five years, the mix of where our sales are coming from by customer segment, whether that's the growth in healthcare or international or education, we've seen a pretty good sized shift already toward those new categories and certainly the products have followed, and our R&D investments are following that path as well.

And in a lot of your European markets, how similar is the shift, if there is and has been one as yet, in terms of workspaces and how people work productively, vis-a-vis what you are seeing in North America?

It's different, but certainly in some ways, the European market has been in a world of smaller footprint offices for many, many years, so in fact they probably lead going to smaller workstations. I think the same trend of people saying simply putting people in smaller spaces is not a complete answer, that putting them in smaller, better spaces, with additional spaces to let them do their work coming together, is something that the companies have to attend to because if all we are going to do is shrink their space, give them smaller space to do individual work, they are going to go other places to get their work done. The problem with doing that is that you don't build any sense within the company of connectivity. You often have to have a leak in your own information and IP, and I think companies are starting to recognize that investing in the productivity of your people and attract them back so they come to your space is worth doing. And, that's what's driving this next sort of round of investment.

Great. Thank you very much.

Thank you Sir. And our next question comes from Mark Rupe the of Longbow Research.

Hi. Great quarter. I'll try to keep it brief here. How did the orders flow through the quarter, particularly toward the end of the quarter. I know that April (inaudible) data out, but just curious to see how May wrapped up relative to the preceding two months?

Hi, Mark, this is Greg. Orders were as typical, strongest in April. We did our price increase the first week of our fiscal May, and as a result, we rammed a bunch of orders, $20 million or so of orders, more kind of pulled out of the latter part of May, so May gets a little funky when you just look at it, especially the latter part of May.

That makes sense.

But I think the average for May was $33.8 million, so the lower. But that, in part, was that pull I had of orders. The $34.5 million average for the whole quarter.

Okay. And then as far as the outlook, I know you gave your guidance for the quarter, but any kind of unusual trends that are happening as we get through June? Or is it pretty similar trends you saw through the -- if you blended April, May together?

Mark, I think it's a little early to tell. We only got three weeks worth of data, so any conclusions you draw off of those three weeks -- you would be drawing straws really. You get all kinds of funny things going on in the first couple of weeks of June. You got NeoCon going on and other things. I think it's too early to pick any big conclusion at this point.

On the backlog, is the mix any different than what it maybe was this time last year? I know you had those big shipments you referred to in the last three quarters or so --

When you say "mix," do you mean mix like product line mix?

Yes product and the margin implications, what I'm actually try to get at.

Got you. No, we don't see anything in the backlog per se that would tell us that margin will be any different -- that different sequentially. We are pleased with the softening of the steel prices, but as you know, Mark, we kind of have a three month lag, so we will have a little bit higher price in the first part of the quarter than the last part of the quarter. So we think the margin number is going to be real similar to the fourth quarter.

Hi, Greg, maybe the only thing we would say is a qualitative -- was a qualitative factor in how we did our look forward is, we do have some large healthcare related projects that came in towards the end of the year, beginning of the new year that often -- healthcare projects, while they take a long time to get from the point of customer making a decision, getting them in order entry, at times, because we're much more involved in the construction cycle, it also stretches out little bit. The revenue recognition period is little harder to predict because the projects tend to be a little larger in size and much more involved in the construction end. So, if there's anything that is a little different in this year's backlog maybe than last year, and that's not necessarily just backlog, but maybe the first few weeks in June as well but we would say, we don't know yet how those will play out in terms of timing.

Okay, and then just lastly, just big picture here on incrementals in your new fiscal year versus last year. You've got Posh that's going to close at some point soon. You've got the Magis relationship. You've got the SAYL chair. Am I missing anything else from a top-line standpoint that might be incremental?

The only other thing that should have a bigger impact this year than at last, it's not just SAYL, but we've got SAYL, Canvas, and I probably point out, more importantly than Canvas even, Compass, which is the new product we introduced a year ago at NeoCon in the healthcare side. And because again, that product is very involved in sort of the construction side of the world, this year, we built up a lot of project activity and customer introduction and dealer training. We didn't have a large amount of orders until we started to get towards the end of the year, so if there's anything that could be an important factor in next year, and particularly in the healthcare business, will be how well does that take off.

Perfect. Thank you. Good luck.

Thank you, Sir. (Operator Instructions). Our next question comes from line of Matt McCall from BB&T Capital Markets.

Morning, this is actually Jack Stimac filling in for Matt. I guess, with a similar mix to last quarter, from project day-to-day, but an improvement in discounting, is it safe to say that the federal government share of that is decreased? And if so, what was that during the quarter?

Hi, check. This is Greg. Clearly, the two big projects that we refer to that really have helped the discounting were government projects for sure. I don't know off the top of my head, I know the mix of government sales and orders in the quarter. I do know that the state and local actually, surprisingly, was up year on year, but off the top of my head, I don't know the federal number.

But traditionally, this quarter would have a little less government business anyway just because of the time of year.

That's true.

So, in the backlog, you said the discounting should ease, is that -- are you looking at that in improvement in day-to-day or still just less federal government going forward?

I really think is the last -- I don't want to -- it's less big projects. The ones happened to be -- the ones that we had in our backlog before that we shipped back in the first part of the year, those were government. It's not to say that commercial, large jobs aren't deeply discounted as well.

Okay, so the mix might stay similar, but you expect more commercial versus federal, and their discounts are not quite as much. Is that the way to read that?

Yes.

Okay. And then at the inflationary outlook, and I know you have talked about it, is that -- I mean -- with still moderating but still up year-over-year, when do you think it will actually not -- when will be anniversary to the point that it won't be in incremental penalty year-over-year?

If it stays at the current level that if that, Jack, it won't really be until March or April of next year.

Okay.

Because we wouldn't really see all of it even in the fourth quarter. So we only saw a month or a month and a half of it in the fourth quarter, so you really got quite a ways to go before it's anniversary.

It went up super fast, Jack. So it went from like $660 a ton to $1,000 in a very short period of time, like maybe four or five weeks. So it went up quickly, so it's not like it had a smooth incline over the course of the whole year.

And with the price increases and the reduced discounting, do you feel comfortable that you have the pricing in place to handle that? Do you expect that to have any impact on margins going forward?

Well, Jack, this is Brian. Certainly, the price increase we did is a helpful step towards it as well as some of the pricing. But since you've watched, most of our competitors have announced not only one price increase but a second. And our view is, if steel and other things stay up to the level they are, we, like everyone else has already made a decision or many of them made a decision, will have to look at additional pricing to be able to cover the increased commodity cost. And while it has eased, it has not eased back to where it was at the point that we made the other price increase. So as I said to you even on the last call, we are continuing to look at it, and we will make a decision if we don't see any further deterioration. We've seen most of our major competitors already make multiple price increases, and I think that's a sign that everybody is predicting right now that those commodity costs are here to stay a higher level.

Okay.

I don't think they are transitory I guess is a better way to say that.

Okay. And lastly for me, a housekeeping question. With regards to bonus accruals and everything, are all SG&A costs back in at this point? Or is there anything else that would -- other than variable comps I think that what kind of come into play this year?

As of this quarter, everything is in. Remember, the only thing you won't see is that fully anniversaried until we get to the second quarter, third quarter, because we didn't bring back some of the things, particularly parts of the pension plan, until we got into the third quarter of this year. So there is still a little bit of noise in the first and second quarter. It gets a little bit less each quarter, and by the time we get to the third quarter, for sure the fourth quarter of next year, all the noise is gone.

Okay. Thank you much.

Thank you, Sir and I see no further questions in the queue at this time. I'd like to turn the conference back over to management for any further remarks.

Thank you all for joining us on the call this morning and for continued interest in Herman Miller. We hope today's presentation adds to your knowledge a perspective of Herman Miller, and we look forward to talking again in September. Have a safe and enjoyable summer.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.