MillerKnoll Inc (MLKN) 2012 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Herman Miller Incorporated third-quarter fiscal-year 2012 earnings results call. This call is being recorded. This presentation will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These risks and uncertainties include those risk factors discussed in the Company's reports on Form 10-K and 10-Q and other reports filed with the Securities and Exchange Commission. Today's presentation will be hosted by Mr. Brian Walker, President and Chief Executive Officer; and Mr. Greg Bylsma, Executive Vice President and Chief Financial Officer. Mr. Walker and Mr. Bylsma are joined by Mr. Jeff Stutz, Treasurer and Vice President, Investor Relations. Mr. Walker and Mr. Bylsma will open the call with a brief presentation which will be followed by your questions. We will limit today's call to 90 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. Please begin.

Good morning and welcome. Given the pension-related action we outlined in last night's press release, our prepared remarks on today's call will take a bit more time to cover than usual. In order to accommodate this, I'll keep my introductory comments brief so we can reserve as much time as possible to answer your questions. I'll open with some thoughts on the macroeconomic backdrop to the business, which in recent months has shown some encouraging signs of improvement. Despite ongoing concerns relating to Europe's sovereign debt crisis, the US economy appears to be gaining traction. The overall employment picture has continued to trend upward, albeit slowly. Both business and consumer confidence measures have improved in recent months and corporate balance sheets remain flush with cash. More recently, longer-range indicators of our industry's health, including nonresidential construction and architectural building activity have moved into positive territory.

Our financial results this quarter reflect a somewhat mix pattern of demand. Within our North American business segment, order activity was muted by year-over-year decreases within both the federal government and healthcare sectors. Adjusted for the impact of dealer deconsolidation, order entry in the remainder of our core North American office furniture business was up 9% from last year, with the growth coming from the majority of the industry sectors and geographies we serve. In all, despite the pockets of slowing demand we experienced this quarter, I'm optimistic that the improvements we're seeing in today's economy signal a positive direction for our North American operations in coming months. We again enjoyed solid year-over-year order growth within our special and consumer segment in the third quarter. This was highlighted by a double-digit increase in our consumer retail business.

In December I described for you the launch of a new initiative we're calling the Herman Miller collection, which we previewed at Art Basel in Miami. The feedback since the show has been incredibly positive and our collection team made real progress this quarter on a number of new products and marketing initiatives planned to roll out in the coming months. Our international results were clear bright spots in the numbers this quarter with orders increasing 12% over the third quarter of last year. Consistent with the past several quarters, the largest percentage increases came from within our Asia Pacific and Latin America regions.

This quarter we also announced two actions that we had been working on for some time. First, we announced the plan to significantly alter our pension offering and further strengthen our balance sheet for the long-term. Second, we announced the plan to complete the acquisition of Hong Kong-based POSH Office Systems. During the third quarter, we finalized the terms of the purchase, setting a net cash purchase price of approximately $50 million to be paid at closing in early April. The acquisition of POSH represents a significant investment in our emerging market growth strategy. They offer a dedicated dealer network that reaches across China, an established brand with market-appropriate price points, an experienced management team, and efficient product development capabilities. Together we will offer one of the most extensive product portfolios in the Asia-Pacific region. In all, the acquisition represents a key milestone in our growth strategy, and we are thrilled about the opportunities it is sure to bring.

Many of you have been asking us what we intended to do with the large cash balance we had built up over the past several years. These two actions are key reasons we have been building those cash balances and begin to show you the insight into what our intentions were. We've tried to keep you informed along the way of where we were headed. And this quarter, we were able to bring those things to the final point to announce exactly when those action would take place. With that brief introduction, I'll turn the call over to Greg to cover our third-quarter results in more detail.

Thanks, Brian. On a consolidated basis, net sales in the third quarter of $400 million were 4% below the same quarter last year. New orders in the period, which totaled $361 million, were down 2% on a year-over-year basis. Factoring in the effect of dealerships sold earlier in the fiscal year, pro forma sales in the third quarter grew approximately 1% on a year-over-year basis. On the same measure, pro forma orders in Q3 increased 3% over last year's level. On a sequential quarter basis, sales in Q3 decreased 10% from the second-quarter level. Orders were down 18% from Q2, an amount that is consistent with historical seasonal order patterns for our business.

I'll now review sales and order performance by business segment. Sales within our North American reporting segment of $280 million were down 10% from the prior year. Orders in the third quarter, which totaled $247 million, decreased approximately 7% on a year-over-year basis. Adjusting for the impact of dealer deconsolidation, net sales for this segment decreased 4%, while orders were flat in relation to last year. As Brian mentioned, we experienced a softening in order activity this quarter relative to the prior year within the government and healthcare sectors. While orders in both of these categories posted year-over-year decreases, we did see solid growth over the last year across the remainder of the customer groups within this reporting segment.

On a sequential basis, sales in our North American reporting segment decreased 13% from the second quarter level, while new orders were down 19%. Our international operations again posted strong results with double-digit increases in sales and orders versus the prior year. Consistent with the past several quarters, the largest percentage growth came from within Asia and Latin America. In total, our non-North American business segment reported sales of $78 million in the third quarter. This represents a 15% increase from the year-ago period. Segment orders in the quarter of $79 million were up 12% on a year-over-year basis. Sequentially, sales and orders in Q3 decreased 11% and 15% respectively from the second quarter of this fiscal year. Net sales in the third quarter for the specialty and consumer segment were $42 million, up 15% from the prior-year period. Segment orders in the quarter were 8% higher than the third quarter of last year. And on a sequential quarter basis, sales were up 15%, while new orders decreased 17% from the second-quarter level.

Moving on to gross margin, which showed solid year-over-year improvement. In total, our gross margin in the third quarter of 33.6% was 150 basis points above the prior-year level. Nonrecurring accrual adjustments recorded in the quarter increased our gross margin by approximately 60 basis points as a percentage of net sales. In addition to the impact of these adjustments, benefit captured from recent price increases and a decrease in employee bonus expenses drove improvement in the period. These items were partially offset in the quarter by higher commodity costs, which drove a relative increase in cost of sales of approximately $2.5 million compared to last year. Excluding the non-reoccurring accrual adjustments in the period, our sequential quarter gross margin decrease was approximately 110 basis points, an amount right in line with our expectations at the start of the quarter.

I'll now move on to operating expenses and earnings in the period. Operating expenses in the third quarter of $109 million were $7 million higher than the prior year. Roughly $5 million of this increase was driven by adjustments made in the prior year to contingent liabilities associated with the Nemschoff acquisition. We also recognized $2 million in expenses this quarter related to unusual adjustments made to certain reserve balances. On a sequential quarter basis, operating expenses were $2.5 million below the level reported in the second quarter of this fiscal year. Operating earnings this quarter were $25 million, or 6.3% of sales. This was slightly above the 6.2% of sales adjusted margin reported in Q3 of last year. The effective tax rate in the third quarter was 30.3%, an amount slightly below our expectations coming into the period. Our rate in Q3 of last fiscal year was 24.4%, which was driven by benefits from R&D tax credit legislation that was signed into law in December 2010. Finally, net income in the quarter totaled $15 million or $0.26 per share on a diluted basis. And with that I, will turn the call over to Jeff to give us an update on our cash flow and our balance sheet.

Thank you, Greg. Good morning, everyone. Operating cash flows in the third quarter were a solid $44 million. This marks a significant rebound in cash generation from the first half of this fiscal year and is double the level we reported in the third quarter of fiscal 2011. Changes in working capital drove a $27 million source of cash in the quarter, the largest contributors of which were decreases in trade receivables and inventory. Capital expenditures in the third quarter totaled $6 million, and we paid just over $1 million in the period for dividends. We ended the quarter with total cash and equivalents of $218 million, up approximately $37 million from our Q2 ending balance. We remain in compliance with all debt covenants, and as of quarter end, our gross debt to EBITDA ratio was approximately 1.4 to 1, a substantial improvement from the level we were running at this time last year. The available capacity on our bank credit facility stands at $140 million, with the only usage being from outstanding letters of credit. Given our current cash balance, ongoing cash flows from operations and our total borrowing capacity, we're confident in our ability 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 give the call back to Greg to cover the Q4 sales and earnings guidance.

Okay. As we indicated in our press release, we are expecting net sales in the fourth quarter to range between $415 million and $435 million. Earnings in the quarter are expected to be between $0.28 and $0.32 per share on a diluted basis. At the midpoint of our sales range, we would expect our gross -- Q4 gross margin to approximate 33.6% and operating expenses between $112 million and $113 million. Our guidance includes revenue from POSH in the quarter of approximately $10 million, and we expect operating earnings from POSH to be breakeven in the period. Finally, we expect our effective tax rate in the fourth quarter to be between 31% and 33%.

Before we turn the call back to the operator to take your questions, we want to spend a few additional minutes outlining some details behind the planned actions we announced in last night's press release related to our employee retirement programs. In order to aid in your understanding and analysis of these planned actions, we are offering supplemental slide materials in connection with this webcast. These slides were filed with the SEC last night on Form 8-K along with our press release, and are currently available for download on our investor webpage at HermanMiller.com.

I'll first begin with some context for the discussion. Our retirement benefit programs at Herman Miller is comprised of a variety of plans which vary for employees based on factors such as legal entity affiliation, geographic location, and date of employment. These plans can generally be divided into two categories, defined contribution and defined benefit programs. The actions we are discussing with you today involve our defined benefit pension programs, of which we have three separate plans around the world. Slides 2 through 4 of the supplemental materials provide a high-level summary of the situation we are addressing. At the end of last fiscal year, these three plans were collectively underfunded by $42 million on a GAAP accounting basis. Since that time, these plans have fallen further behind from a funding perspective. Today we estimate the combined funding deficit to be approximately $50 million on an accounting basis.

As the graph on slide 3 indicates, erosions such as this in the funded positions of these pension plans has been a chronic problem over the past 10 years. This is largely due to lower-than-expected investment returns and adverse experience in other key actuarial assumptions. As a result, the Company's cash commitment to these plans has been significant, averaging $23 million per year over each of the last 10 years. This average funding level has far exceeded the related employees' service costs under the plan over the same period. Slide 4 of the supplemental materials presents the history of our defined benefit plan funding between fiscal years 2000 and 2011. From a P&L perspective, the expenses associated with these plans have increased over the past decade and are currently running around $10 million annually. Left unchecked, these are expected to keep rising into the future.

Perhaps most relevant to this discussion is the fact that the cash funding and the expense demands of these plans have proven to be the highest at precisely the wrong time for our business, during the down cycles of the economy. Slide 4 of the supplemental materials illustrates this by showing the inverse relationship between cash funding and net sales over the past two business cycles. For these reasons, we intend to begin the period of transition in the structure of employee retirement programs. This transition will move our plans to a defined contribution format, and will ultimately result in the funding, closure, and termination of our US-based defined benefit pension plans.

Slide 5 of the supplemental materials provides a summary of the actions we are planning. As a first step, we intend to significantly improve the funded positions of our existing defined benefit plans. The majority of this funding will take place in the fourth quarter of this fiscal year, with a small portion to follow in the first quarter of fiscal 2013. We estimate the total cash outlay to complete this funding to be in the range of $40 million to $45 million net of related tax benefits. Concurrent with this funding, we will modify the investment risk of our plan assets with the goal of reducing market risk exposures. At the end of August, we will freeze ongoing benefit accruals within our US-based defined benefit plans, and at that point all active participants in these plans will begin receiving equivalent replacement benefits under our defined contribution plan structure. Later in the year, we will begin the process of formally terminating our US defined benefit pension plans. We have been advised that this process can be somewhat lengthy, ranging anywhere between 12 and 24 months. When the process is complete, we will be required to fund any remaining shortfall in the plans. We currently estimate this final top-off payment will range between $10 million and $15 million net of tax.

At this point, some of you may be wondering why we would contemplate these actions at a time when market interest rates are at such low levels. Why not wait for future interest-rate increases to lower the overall value of our pension plan liabilities? The reality is that the majority of our pension liabilities in the US are determined under what is called a cash balance formula. Simply put, the cash cost of terminating this type of pension plan does not change significantly with movements in interest rates. In fact, waiting for interest rates to rise in the future could hurt us in two ways. First, it would increase the interest component of our annual pension expense. And secondly, a rise in market interest rates would drive down the value of our investments in fixed income securities, further hurting the funded status of the plans.

Having described for you the major elements of our pension strategy, I'll ask Jeff to cover the expected near-term impact on our P&L and importantly the long-term benefits we expect to receive once the actions are completed.

Okay. As our comments in the press release indicated, these actions will cause our income statement to be a bit messy as we move through the transition period. To help you understand why, I first need to explain an important aspect of pension accounting. GAAP accounting requires the Company to measure and report the assets, liabilities, and P&L impact of a defined benefit pension plan on an annual basis. The assets of a plan are measured at fair value based on their quoted market prices. The liabilities and expenses of a plan are more difficult to determine and require a plan sponsor to make a number of assumptions about the future. As time goes by, the actual performance of a plan will differ from these assumptions. For example, the sponsor of a pension plan may estimate its investment portfolio will return 7% each year, whereas actual asset performance may be far different than this. These differences, known as actuarial gains and losses, are accumulated and tracked over time. Eventually, the plan sponsor will be required to recognize these differences in the P&L. However, GAAP accounting rules allow for these differences to be recognized in the income statement over a relatively long time period. Until they are recognized in the P&L, these accumulated differences are carried on the balance sheet as a component of stockholders equity.

Like many traditional pension plans in existence today, our defined benefit plans have accumulated significant actuarial losses over the past several years. As we indicated on slide 6 of the supplemental materials, these totaled approximately $150 million on a pretax basis as of the end of last fiscal year. In an ongoing plan, these losses would be amortized as a non-cash component of pension expense over several years. However because we intend to terminate our US plans within the next couple of years, we will be required to recognize these losses much more rapidly than the normal allowable amortization period.

Slide 7 summarizes what we believe the P&L impact of this will be over the next couple of years. While the exact timing of these charges will ultimately depend on when the related liabilities are settled, our current expectation is that we will recognize pretax expenses of around $25 million during fiscal 2013 and $125 million in fiscal 2014. Importantly, these expenses will be non-cash in nature and will have no impact on total stockholders equity or our financial debt covenants. Further, the expenses are not expected to have a significant impact on our effective tax rate going forward. Throughout this transition period, we will quantify our expectations for these pension-related expenses when providing forward earnings guidance, and will also of course ensure that such non-cash expenses included in our actual results are clearly identified each quarter going forward.

Despite the near-term discomfort we will experience from these pension charges, we're confident there's a host of meaningful long-term benefits to be gained in completing the actions we've outlined for you today. These are summarized on slide 8 of the supplemental materials. Conversion to the new benefit structure will eliminate the Company's exposure to the investment risks associated with sponsoring defined benefit retirement plans in the US. Secondly, the ongoing cash and expense demands of the new structure will be more predictable and much less volatile throughout economic cycles. In effect, the elimination of the defined benefit pension liabilities will remove a volatile form of interest-bearing debt from our capital structure. We believe this enhanced control and visibility over the future economic cost of our benefit plans will ultimately free up cash flow that can be used for strategic investment and/or return to shareholders in the form of dividends or share repurchases. And finally, we think these actions will allow us to maintain market competitive retirement benefits for our employee owners. Well, we've covered a lot material with you this morning, so at this point, we will pause and I'll turn the call back to the operator and we'll take your questions.

Thank you.

(Operator Instructions)

Our first question is from Budd Bugatch of Raymond James. Your line is open

I guess I understand much on the pension and I actually agree with your actions. So I'm not going to concentrate my question or questions on that. I really want to talk a little bit about revenues and what you see going forward now with the ABI turning or challenging positive territory, and talk about customer visits and what you're seeing in terms of project versus day-to-day business? And maybe if you can separate that between I guess what you would call the core or even with healthcare and government? And give us a feel of what the future looks like over maybe the next 6 months or 12 months from your view?

Jeff, you want to start maybe giving some of that background statistic stuff, and then we'll put some color around that? So we got the numbers out there for everybody?

Sure, Budd, in total customer visits, we were flat year-to-year in the quarter. Pretty even. I don't have, off the top of my head, the breakdown between the different sectors, Budd, certainly can follow-up with you after the call. I'll have to look that up.

Okay. Project activity versus non.

Total project activity, we were 44% mix. So not altogether different than where we were I think last year at this time. We were 47% we estimated, and about similar, about 45% last quarter, so it hasn't changed a great deal.

Budd, this is Brian. I'm just going to have some qualitative stuff around that. I think we're always in this period of time where it's a little harder to get -- and you have been around a long time, so you know this. It's harder in this three-month window to get a great view about where the next year is going to be because it gets so bumpy around the Christmas holidays. And we always go into this period -- Greg and I laugh every year and say December, January we're going to be really nervous. We will feel a little better in February, and we'll get to March before we really know where things are going. Certainly this year was no different than that typical pattern that when you look at it overall, it certainly has been flat.

My gut still, and this is much more of a feeling, is that we're feeling as an industry two macro things that have cooled the industry down a little bit. First of all, -- maybe three. First of all, I think the bounce off the bottom was stronger than what we would have anticipated, and that was probably a lot of pent up demand that was out there. The second thing that certainly has happened, I think the nervousness that came in the general economy last year in April and May took about six months before we began to see it. And the third factor has clearly been that there has been a difference in the magnitude of what's going on, particularly in the federal government. That's in both healthcare and non-healthcare. I think some of that, by the way, is probably the government right-sizing itself, although that's probably an optimistic view. I think some of it is also we are nearing the end of some major changes the government was making around [BRAC] relocation and some of those things, as well as some of the big buildup that happened in DC. So probably it is partially cyclical as much as it's a change in their long-term tone.

If you look underneath our numbers and you get some of that noise level out, the underlying strength of what's going on in the core of the industry looks better when you get down to what's happening on the commercial side. Now, I say better. It's still not at the same growth we saw a year ago even in some of those areas. But it's clear that some of the bounce back was fueled by the government. So you've got -- if you pull government out on both sides of it, it's better in terms of its overall strength. It's not as good as it was a year ago. Although I think again, that's partially related to what happened in the economy probably 12, 13 months ago. And as the economy continues to build, I think we'll continue to see strength in the industry. I think most folks believe that will come on the back half of the calendar year, which should be probably part way through our next fiscal year.

International continues to be very strong, particularly in emerging markets. Despite all of what you hear about China and other parts of Asia, we continue to see really good activity there. Europe has been good, although I would say for us, we're a small player. So it's not as much about market share in the general market as how fleet of foot we are. That did -- we did start to feel a bit of the impact of the European slowdown, if you will, that you're hearing about, although it wasn't a huge significant factor in the numbers. So overall, we remain very optimistic about what we're seeing on the consumer side. That looks strong. We still feel really good about what we're seeing in the brick or the emerging markets. That's really pulling a lot of our international business. The core on the commercial side looks good, and we think building.

If there is an area that I have less -- we have less visibility right now to understand the tenor of it is probably healthcare. The funnel side of healthcare looks quite good, although there seems to be a lot of stuff that was put on hold, and a fair amount of people ordering their investments around IT and other things before facilities. Having said that, there's quite a strong belief, if you look at the overall trends in healthcare that there is still a fair amount of construction in front of us, and we're very driven on the construction side. I hope that gives you the broad color.

Okay. I am a little surprised to hear China is strong. We heard some pockets of weakness there and so, but you're not seeing that as of yet. And of course, you're adding POSH just at the same time.

Yes. And POSH has had -- has been -- it's not, I think you hear from everybody, you're right, China is probably not as strong as it was a year or two ago in terms of growth rates, but it is still comparatively strong compared to what we see globally.

Okay. And did I hear you say POSH in the guidance is $10 million or $5 million a month? Is that the way to read that?

It's $10 million for the last two months, Budd.

So about a $60 million annual run rate for POSH?

Yes.

Okay, and one last question for me is on the operating expense line, I think you have about $2.1 million of reserve increase on that, so does that mean the run rate for expenses is more like $105 million or $106 million on the OpEx line other than the stuff we're going to see with the pension accounting and what you're going to have to book for that?

Well, you've got to add POSH into there. So what we gave in our guidance represents the $112 million to $113 million, Budd.

So that puts POSH about $7 million a month or something like that? $7 million a quarter?

Well, the fourth quarter represent, Budd as you know, the Q4 number usually jumps up a little bit as we get ready for NeoCon. So that's probably a little higher. The $112 million includes POSH, but it's probably a little higher than what you would have on the run rate on a four-quarter basis.

And POSH will be accretive first year? How will that be?

We think that number in the first year, because of the arrangement, the improvement, there's a lot of discussion about how the manufacturing takes place, Budd. But the net of it is over a three-year period margins will slowly increase. We think accretive in the first year is $0.05 to $0.06.

Okay. Thank you very much.

Thank you. Our next question is from Leah Villalobos of Longbow Research. Your line is open.

I was wondering if you could talk a little bit more -- it sounds like you're optimistic for the back half of the calendar year. But and it sounds like the leading indicators are headed in the right direction. But customer visits, which seems like a pretty important leading indicator were flat during quarter. Was that flat consistent throughout the quarter? Did you see some improvement? Could you reconcile those two?

I don't know that you can read anything into interim -- how the quarter moved around with visits because that all depends on projects and that kind of stuff. So I think we're trying to -- if you go there, you're trying to take a fairly macro thing and try to analyze it too micro. You won't get much of that, to be frank. Overall, I think if you look at the general industry in the last four or five months, it's been fairly flat, and I think customer visits have reflected that. On the other hand, what you hear from the team out there and you can watch it in the macro data, is hiring continues to increase. People are beginning to talk much more about redoing even their corporate headquarters, and there's a fair amount of activity on that side. So we just think that as the economy continues to improve and companies have cash, and employment continues to gain traction, we'll see a stronger industry in that the underlying data and drivers of the industry look like they'll head in the right direction at that point.

Okay. That's helpful. And then just in terms of your exposure to federal government business this quarter, maybe back half of the calendar year versus first half of the calendar year, do you have less exposure, or is it pretty consistent throughout the year?

First of all, the federal government is a little bit lumpy. You'll tend to see a fairly heavy order pattern for federal government when you get to more the fall timeframe where typically, we would have seen a lot of shipments hangover from the fall and be in the third quarter, which we didn't have as much of this year, given the lighter order entry in the last -- in the second quarter. So it does move around a little bit by quarter to quarter.

Okay. But it sounds like for the May quarter there would be less exposure. Is that fair?

When you say less exposure, less exposure in terms of total dollars versus a second quarter, or are you talking year-over-year change?

The mix, I guess, how much of it is the second quarter versus your overall exposure for the year? Excuse me, not the second but the fourth quarter?

Leah, this is Jeff. If you go back, I'll take you back a year ago, we were 14% in fiscal 2011. Federal government, we're certainly going to be lower than that this year. And I would say yes, given what we saw last quarter, what we saw this -- in Q3, that's probably fair, that it's going to be a bit lighter than what it had been in the first part of the fiscal year.

Okay.

In terms of percentage mix.

That's helpful. Thanks so much, best of luck to you.

Thank you. Our next question is from Matt McCall of BB&T Capital Market. Your line is open.

So in the release, I think that the quote was something along the lines of outside of government healthcare, I think it said most of the other areas in North America were up or strong. I can't remember the exact words. What was not strong? What was down besides government healthcare? What was the reference there?

I think really, Matt, we -- you're probably parsing the words more than we meant it to be, to be frank.

Okay.

I think the two areas that were particularly where we saw softness was going to be in healthcare and in government. The general commercial side overall, now not going down to SIC code and all that detail, but generally healthcare and the government were the areas that were weak. The others were flat to actually up. So I think those were the two that we saw the most difficulty in.

Matt, the reference, if there was one, was reference state and local, which was down slightly.

Got it. And I know we've talked in the past about the spike in government activity a year ago. Was there a similar spike, and I'm sorry if I missed it, was there a similar spike in that healthcare activity? I know you've talked about those two being related, healthcare in the government being a big driver of the weakness. Or is there something broader going on there with the slowdown? Is it a tough comp issue just like with government or is it a slowdown?

I think if you look at it year-over-year, both of them were down. There's no doubt about that. Spike is always an interesting word. Both our government business had jumped up a lot, the core government business had jumped up a lot the year before. We didn't see as big a jump, so when we looked year-over-year. Healthcare had been on a fairly strong building sequence over a number of years. It gets a little clouded by the fact that we've done some acquisitions on top of it, Matt, to get to that level of what's a spike versus us bringing things into the business that wasn't there before.

Okay.

But there's no doubt that when you look at the government sector of healthcare, it has been lighter than what was 12 months ago.

Okay. So you are making some moves and you talked about the importance of the international or some of those emerging markets, obviously POSH is a big part of that, you also called out Latin America. What's your goal, Brian, for that non-North America segment if we talked three to five years out as a percent of your total business? And are there any margin implications that we should keep in mind as it becomes a bigger part of the total?

Well, let me start with margin. Overall, my answer to that is no. I don't see it as being wildly different in terms of operating income. Right now it's actually a little bit better than our average. Some of that's because of the mix. It's got -- today has a heavier mix towards product lines that are further up the margin curve. Some of that, Matt, will move around a little as we go through this POSH integration, as Greg mentioned. In the beginning, for the first two to three years, they will be acting as a contract manufacturer for us. Because of that, obviously we'll give up some of the margin back to that manufacturing entity. Over time, we will reintegrate that. So we're going to have a bit of -- a little bit of a dip in the overall margins as we go through that period. That was to give us enough time to get it transitioned to a new location. We think that's the smart thing to do. But we didn't really buy any of the manufacturing assets, so that's how we're going to play our way through that.

Longer-term when we get out there, I would imagine the margins overall will not be greatly different than what we see in the business in total. I say margins, I'm talking about operating margins. Some of that will depend on how good we are on the mix side. If we continue to drive a heavy mix towards seating and towards higher-end consumer products, that will help on the margin side. But some of what we're trying to do is broaden out our offering so we can capture more of our global accounts by having the offering that they need globally. So some of it I think will come back a little bit towards the average.

In terms of total mix, we today we're a little bit ahead of what we thought we would be at this point, actually, if you look at the mix of international to the total, longer-term. If you look out in that three- to five-year horizon, I can see the non-US business being somewhere up in the 30% to 35%, would be probably the number we'd like to see it get to. That would make it a fairly sizable part of the overall business.

And then I guess the final part of that is what does the mix by country look like relative to today? I guess the first part is what does it look like today, and how would that change when we get to 30% to 35%?

I don't think I would talk about it by country. I think you've got to think about it by region, because when you look at each individual country, no one country is that much. I think the mix is clearly shifting. Even when you just add in POSH, the mix has always been heavily towards where EMEA was more like 50%. It's probably getting today already to where it's more equal across the three. And leaning towards Asia and Latin America. The first lean will be towards Asia. Longer-term, it will lean towards Latin America as well is my guess.

So right now, roughly one-third each?

Yes, Matt, this is Jeff. If you look at our total, non-US sales represented about 26% of revenue in the quarter. Just to give you an idea. That breaks out about, of that total pool of dollars if you will, Europe represented about one-third of that amount. Asia about 25%. Latin America a smaller portion, obviously 7%, and then Canada and Mexico combined about the balance 35% or 36%. And that's not too far off, those percentages are not wildly off of where we were for all of fiscal '11. So it's actually shifted slightly towards Asia Pacific as that's grown that growth is outside the rest of the international business.

Got it. Okay. And so POSH is going to obviously help that Asian component, but Brian, you seemed to reference that Latin America was going to move much higher. Is that -- are you planning to grow that organically and increase that piece of the pie organically?

Yes.

Okay.

Will we look for potential partners, no doubt about it. Right now I would say the most likely scenario is we see additional investment in Asia from an operational standpoint as well as in Latin America.

Okay. Thank you all.

Thank you.

(Operator Instructions)

Our next question is from Todd Schwartzman of Sidoti. Your line is open.

Can you maybe on the healthcare side compare and contrast if you will, the commercial private sector of healthcare customers in North America versus the government business that represents healthcare?

In terms of what? You want numbers or are you just asking tenor of who they are?

Ideally if you could quantify, that would be great. But if not, the tenor would certainly be helpful. I'm just trying to get my arms around when you cite government and healthcare and within the healthcare sector, just how much of that is mutually exclusive? And how much of that is overlap, so to speak?

Well, Todd, first of all, I don't know if I can quantify sitting here today, and I don't know that I would go into that level of detail. But let me just tell you from a qualitative standpoint. Our healthcare business has a heavier mix of federal government business than our total business, i.e., it's heavier weighted towards federal government. So when you look at what's happened in healthcare for us, the government is down generally. The impact on the healthcare business has been greater because of the pullback in the federal government. That of course, is somewhat I would say cyclical. I don't mean cyclical in the sense of it runs through business cycles, but it depends on what projects are out there and what's hot right at that moment in time. The healthcare business certainly was feeling a lot of benefit from a lot of the BRAC realignment where they're building major new healthcare facilities tied to that. The change that's going on in the federal government is a lot of the investment going forward is much more going to be driven by how they convert to clinical environments that are not at the acute care hospitals. Which means the project sizes are going to change probably as well, and they'll be more spread out, meaning rather than one giant hospital, you might do 100 clinics. And that's where we're going to have -- we will even have to change the way we think about how we're going to capture that business because it won't be singular location. So some of that is changing.

Certainly the commercial sector of healthcare has also been off in terms of purchasing. I know if you look at some of the other people who play in this space, even the non-furniture companies, a lot of them have been talking about the shift in capital spending towards IT. So it's not as if healthcare isn't investing, they just have reprioritized some of their investments in the interim. Now we think, if you look at some of the forward data, that starts to work its way through, and that there is construction stuff on the horizon. It's just going to be a period of time until we get through some of that building starting to come out of the ground.

Got you. Thanks. Also, Brian, I'm not sure if I heard you correctly, but I think in making a comment earlier regarding the general commercial business, I thought I heard you say that things are better, but while at the same time, growth is not what it was a year ago. If you did make that type of qualitative comment, I'm just wondering what that comparison, what point in time that comparison was with where things are better now versus some prior period?

Well, if you remember last year we came out of the fourth quarter -- or out of the sorry, out of the calendar fourth quarter, out of our third quarter, and we began to see a fair amount of momentum in March, April, and May last year which actually was a little faster, not last year, the year before, right? Yes. When it really started to pick up, and we were seeing growth rates that were some of the highest in the Company's history. If you look back to our fiscal year '11, we had one of the fastest growth rates the Company's ever seen year-over-year in terms of dollars and percentage, and that really began in the year before's fourth quarter. So I'm just talking about the sheer tenor of overall growth rates aren't at the same percentage as they were back then. That's not unusual that you come out of the downturn and you see a little bit of a jump for pent-up demand. I think this time, it was a little stronger coming out of the chute than we had typically seen where we saw a up couple year build. This time it seemed like we went up stronger in the beginning, and then it's just flattened out a little bit.

Got it. And lastly, with the pension shift in structure, has there been any change thinking long-term not one or two years out, but as far as your ranking your future uses of cash?

Certainly once we get this pension thing behind us, we've talked for the last couple of years deliberately coming out of the downturn that we wanted to reset the balance sheet to give us more flexibility through cycles. And we did that now in two steps. The first step was last year's action to pay down debt. The second step was to get the pension plan taken care of. We always said look, we wanted to get that done first. We wanted to hold cash for strategic investments, and then we wanted to look at other things. I would say the resetting of the balance sheet when we get through the next 12 months or so and that cash goes out the door for the pension plan, we finally get it behind us. There will be a period of time where we won't know -- and we think we know what the cash is going to be, we'll hold on to a little bit to make sure that that final payment that Greg talked about we know stays in the right zip code.

And then of course we're now down to what we need to do strategically, and if anything, what else do we need to around cash return to shareholders? I would tell you, still our belief is the first thing we've got to do is make sure that we have the money to go grow the business. That means we've got to have the money to fuel the stuff that was asked about earlier, like how do we get our presence built that we need in Latin America? How do we do what we need around Asia? In particular, we've got a fairly robust package of new products coming that resets what the offer looks like. We have to make sure those things get done first and foremost, building out our consumer footprint that we think is really important to the future. Now, does that mean that we won't have the ability to return cash in the interim? I wouldn't say that. That's something we're looking at. We're constantly looking at it and updating ourselves in terms of where it's at. Now that we've got these first couple of things behind us, Todd, we'll go back and relook at all that stuff again.

With respect to dividends, is the fact that your yield is significantly below the rest of the group, is that -- how much of a concern has that been? And how much of a consideration has that been for the Board? And how will that change, if at all, going forward?

Certainly the Board looks at the whole package. I think what you've got to do is prioritize where you want to spend your money. So it has not been our primary driver. But it's something they're constantly asking, what does that mean not only the short run but the long run? So will it be a consideration for them? Certainly they look at everything, and we look at everything in the whole basket of what it takes to drive shareholder value. And we will. But we'll always make sure we're prioritizing it for what the right decision is for the long run, not for what it's going to be in the next quarter.

And right now, we knew where we had to go to reset the balance sheet. We think we feel pretty good about that and get some of the strategic stuff done. We're still really focused on can we find the strategic investments we need. If we can, we'll prioritize that first. If we can't, I think we've shown over the last 15 years that I've been talking to this group that we've been really good about returning cash to shareholders. I think if you look over that period of time, since Mike Volkema became CEO, if you look at the total cash return to shareholders by us, it's an order of magnitude greater than anybody else in the industry. So I think you guys know that our track record is we do what's right in the long-run.

Great. Do you target any specific long-run dividend payout ratio?

We more focus on what our total cash returned is so that we can pick the best methodology for doing that, whether that's share repurchases or dividends, and one of the questions we're asking ourselves is, what's the best way to do that longer-term, beyond like I said, trying to do it through making good, smart, strategic choices.

Got it. Thanks much.

Thank you. There are no further questions at this time. I'd like to turn the call over to Management for any closing remarks.

Thanks, everyone, for joining us on the call this morning and for your continued interest in Herman Miller. We're excited by the progress we've been able to share this morning and confident in our ability to continue to execute our strategy. For now, we wish you a great spring and look forward to talking to you all again in June.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.