MillerKnoll Inc (MLKN) 2013 Q4 法說會逐字稿

Good morning everyone, and welcome to this Herman Miller Incorporated fiscal year end and fourth quarter fiscal year 2013 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; Mr. Greg Bylsma, Executive Vice President and Chief Financial Officer; and Mr. Jeff Stutz, Treasurer and Chief Accounting Officer. Mr. Walker will open the call with brief remarks, followed by a more detailed presentation of the financials by Mr. Bylsma and Mr. Stutz. We will then open the call to your questions. We will limit today's call to 60 minutes, and ask that the 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. Sir, you may begin.

Good morning, everyone. We appreciate you taking time to join us. As usual, I'm going to open our call with some color commentary and leave the more detailed financials to Greg and Jeff. For my part today, I want to focus my comments on the strategic actions we've taken in both the fourth quarter and over the past 12 months, as well as a sense of what we see ahead. To begin, this has been a quarter and a year that has confirmed our strategic vision, and our ability to execute against those plans. A year ago at this time, we shared new details of our strategy and a set of very specific goals. We declared that 2013 would be a year of significant investment, with the aim to strengthen and accelerate our diversified growth, while continuing to enhance our balance sheet. We also pledged to increase the cash we returned to shareholders, even as we funded those additional investments. While we still have work to do, I'm proud to say that we have been making good progress on those promises.

Last June we told you we were investing in an array of products aimed at creating the office landscape of the future with multiple global platforms as well as new seating and a further expansion of our collection portfolio, time for introduction at NeoCon of 2013. As we close this fourth quarter, we delivered on all points, while strongly reinforcing our reputation for global leadership in workplace design, knowledge, and insights. This month in Chicago, we unveiled Living Office, a holistic new vision for the modern workplace, resulting from more than three years of global research and design investment. Altogether, this NeoCon represented Herman Miller's largest introduction of new products in decades. These new designs and the presentation of our living office research and knowledge are the first public step in our launch of an even larger workplace portfolio of products and services.

While we are proud of the awards that we were presented at the event, we were even more pleased that we made a powerful impression on specifiers and customers. In our meetings and conversations, it was clear that they connected with our Living Office vision, they attended our knowledge sessions with independent experts, and they saw the performance and value in the unique designs and applications throughout Herman Miller space. Their centerpieces for those settings were three new major product platforms created to address unmet needs in the emerging office landscape. Each is uniquely powerful in solving tomorrow's workplace with performance, comfort, beauty and versatility to suit the needs of individual teams, as well as groups and community spaces.

When we combine these new platforms with our existing portfolio of systems and freestanding furnishings, and add the enhanced Mirra 2 Chair and our best-in-class [work-sing] portfolio, and complement the whole with new Geiger designs and a growing Herman Miller collection of new iconic pieces, we have all the ingredients to create an inspiring high performance office landscape. Altogether, our Living Office portfolio is naturally compelling. True to our mission, Living Office inspires and enables people and their organizations to perform at their best. Customers can see that potential architects and interior designers are clearly intrigued and eager to work with the ingredients, and our dealers and sales teams are energized, and we have much more still to come. In summation, we followed through our commitment to secure and grow our position as a leader in global work environments, and the core business has a great future.

A year ago we also said we would be making targeted investments aimed at strengthening our higher margin, especially in consumer business, across both commercial and retail markets, and in this past year we've done it, expanding our total offering and building our brand and channels. The Herman Miller collection continues to grow in reach and quality with multiple newly reissued iconic designs, including innovative new material options. In the last year, we've also introduced wholly new designs through both our Herman Miller and Geiger brands. Our Italian alliances with Magis and Mattiazzi are another source for new products and enhance our brand with customers and specifiers. We've also been developing our channels to market, with new shop in shop merchandising initiatives in the retail channel, as well as continued investments in our online marketing and fulfillment capabilities.

Then in late April, we reach another major milestone with our acquisition of Maharam Fabric Corporation. Maharam is a premier design brand in commercial interiors, and is recognized internationally for the highest quality textiles and wall coverings. The addition of Maharam to our specially consumer segment is a powerful strategic accelerator for our entire business on multiple levels. We instantly became a North American market leader in their core product areas with the ability to leverage our resources to further Maharam's reach into new markets. Maharam's existing business offers strong margins that will be accretive to earnings in the upcoming fiscal year, and with this deal we gained great talent in both Maharam's leadership team and the highly qualified experienced people across their organization. We've made it clear that Maharam will continue to be Maharam, maintaining their independence in the design and operational excellence that made them a successful business, but we are also excited by the mutual brand reinforcement we gain in bringing the companies together.

Turning to the international markets, at the start of the year we said we would improve our existing production capabilities and prepare for new growth in emerging markets. Those plans are underway, including the integration of POSH manufacturing in China, and beginning next spring the construction of a new facility to consolidate our UK operations serving EMEA. We also have plans in development for India and Latin America that hold further promise for growth in those markets. Combined with our recently enhanced R&D capabilities outside the US and our growing global product offering and brand position worldwide, we are very optimistic about our international strategy and the potential for further faster growth in the years ahead.

Finally in 2013, we committed to further strengthening of our balance sheet while returning greater cash to shareholders. Let me address the latter first. Fiscal 2013 we are pleased to have implemented two dividend increases, raising our annualized payout from $5 million in fiscal 2012 to today's run rate of approximately $29 million. With this enhanced dividend, we remain confident in our (inaudible) financial position, and our ability to fund further strategic investments going forward. That confidence is due in part to the strategically important action we began more than a year ago to terminate our legacy US pension plans in favor of defined contribution retirement program. As we follow through on this initiative and complete the transition this fiscal year, we will significantly reduce balance sheet risk and enhance our retention of future cash flows. We expect the process to be complete by November of this year.

While this has been a lengthy and complex undertaking, the finish line is within sight, and getting there will provide a number of important benefits to the business. First, the move will eliminate our exposure to the investment risk associated with sponsoring defined benefit retirement plans for our US-based employees. The termination of these plans will also dramatically improve the predictability of future cash flows and expense requirements associated with our ongoing retirement programs. Importantly this enhanced control and visibility will ultimately free up cash flow that will be used for further strategic investments or redistribution to our shareholders. Looking at the totality of all these actions, I hope you will agree that we have been successfully executing a strategic agenda that has begun to deliver powerful results and promises much more.

To be sure, we still have a lot of important work in front of us, and the domestic and global economy continues to be a challenging backdrop. As we continue to monitor conditions and data, like you, we see a patch work of mixed indicators with areas of regional and industry weakness, and other economies experiencing significant growth. Our own current business pipeline has good activity, but the project intensive nature of our industry can create a choppy picture, particularly month to month, but taken on the whole we remain optimistic for the continued improvement in the macro US and international markets through 2014, and we have great confidence in our own position and momentum for the new year ahead. With that, let me turn the call over to Jeff and Greg.

Okay. Thanks, Brian. Consolidated net sales in the fourth quarter of $460 million were 9% higher from the same quarter last year. Orders in the period totaled $462 million, an amount 4% above the prior year level. The acquisition of Maharam, which closed on April 29, contributed $10.6 million of sales and orders to our consolidated results in the quarter. Excluding Maharam and the impact of dealer deconsolidation, sales and orders increased 8% and 3% respectively from the fourth quarter of last year. Sequentially, sales in fourth quarter increased 9% from third quarter level, while orders improved 21%. On an organic basis, orders in the fourth quarter grew sequentially by approximately 19%. This increase aligns with the average seasonality we've experienced in the business over the past 10 years.

Sales in our North American reportable segment of $312 million were up 9% from the prior year. New orders in the fourth quarter totaled $316 million, reflecting a decrease of 1.5% from the same period last fiscal year. Adjusting for impact of dealer deconsolidation segment sales up 10% and orders increased 1% relatively to fourth quarter of fiscal 2012. We again experienced relative weakness in the US federal government sector this quarter, which saw sales and orders declines of approximately 12% from last year. Activity levels outside of the federal government remained generally strong this quarter, with strengthened business services, manufacturing, and energy more than offsetting softer demand within the financial services sector. Relative to the third quarter of this year, sales in the North American reportable segment increased 9% from the third quarter level, while segment orders were up over 18%.

Our non-North American reportable segment posted net sales of $99 million for the quarter. This represents a 2% increase in the same quarter last year. This sales growth was driven by the Company's acquisition of POSH Office Systems, which contributed only a partial quarter of revenue in the fourth quarter of fiscal 2012. Segment orders were up 11.5% over last year, while reflecting a contrasting regional demand picture. Within Asia, and excluding the impact of POSH, sales and orders decreased relative to Q4 of last year, due in large part to weakness in Australia, and the negative impact of currency translation. In the EMEA region, demand remains mixed with weakness in the UK and Continental Europe being offset by continued growth in the Middle East. The same can be said for our business in Latin America where relative declines in South America were more than offset by a ramp-up in project activity in Mexico.

On a sequential quarter basis, non-North American segment sales and orders increased 9% and 16% respectively from third quarter levels. Beginning this quarter, our specialty and consumer segment incorporates the operating results of Maharam. In the fourth quarter, segment sales of $49 million were up nearly 32% from the prior year. New orders in the period totaled $52 million, reflecting an increase of 33% from the same period last fiscal year. Sequentially, sales in the specialty and consumer segment increased 4% from the third quarter level, while segment orders were up almost 54%. On a pro forma basis, excluding Maharam, segment sales in the fourth quarter increased 3% from the same quarter last year. Orders were up 6% from the prior year level. Relative to the third quarter of this fiscal year, pro forma segment sales in Q4 decreased 18%, and new orders were up 22%. The sequential sales decrease was predominantly driven by the timing of projects within our Geiger subsidiary.

We estimate the translation impact from changes in currency exchange rate decreased our consolidated net sales and orders in the quarter by approximately $2 million relative to the fourth quarter of last year. This results in the general strengthening of the US dollar against major currencies compared to a year ago. As expected, our results this quarter reflect expenses associated with our strategy to close and terminate our legacy domestic defined benefit pension plans. In total, our fourth quarter includes approximately $3.7 million in pretax expenses related to the plans scheduled for termination. Of this amount, approximately $2.2 million is recorded in operating expense. The remaining portion is included in cost of sales.

Our consolidated gross margin in the fourth quarter was 35.4% compared to 35.7% in the same quarter last fiscal year. Last year's percentage was favorably impacted by year-end accrual adjustments and a pension-related curtailment gain, which together increased gross margin by approximately 40 basis points in that period. Excluding the impact of these adjustments, our consolidated gross margin percentage was roughly flat on a year-over-year basis. Sequentially, our gross margin improved this quarter from the level reported in the third quarter, driven by the addition of Maharam and improved fixed cost leverage on significantly higher levels of factory production. I'll now move on to operating expenses and earnings in the period.

Our operating expenses in the fourth quarter were $127 million. This represents an increase of approximately $12 million from the same quarter in fiscal 2012. $5 million of the increase relates to the inclusion of a partial quarter of result from Maharam. In addition to this and the legacy pension impact, the year-over-year increases in operating expenses were driven by higher incentive accruals and a ramp-up in spending on marketing and new product initiatives, several of which were unveiled earlier this month at NeoCon. Excluding the impact of Maharam, operating expenses in the fourth quarter increased $5 million from the third quarter of this fiscal year. This was generally in line with our expectations coming into the period. Operating earnings this quarter were $36 million, or 7.8% of sales. This represents a 70 basis point improvement over our consolidated operating margin in Q4 of last fiscal year.

Excluding legacy pension expenses recognized in the period, adjusted operating earnings were $39 million, or 8.6% of net sales. By comparison, we reported adjusted operating earnings of $35 million, or 8.4% of sales in the fourth quarter of Fiscal 2012. The effective tax rate in the fourth quarter and the full year 2013 fiscal year were 24.4% and 29.8%, respectively. The rate for the quarter was lower than previously forecast, due to the release of a valuation allowance triggered by the improved profitability at one of our international subsidiaries. The effective tax rates in the prior year fourth quarter and full year fiscal year were 53.4% and 37.1%, respectively. Finally, net earnings in the fourth quarter totaled $23 million, or $0.40 per share on a diluted basis. On an adjusted basis, excluding legacy pension expenses, diluted earnings per share in the quarter were $0.43. For the full year, we posted $1.16 in diluted earnings per share, or $1.47 on an adjusted basis. With that, I'll now turn the call over to Jeff to give us an update on our cash flow and our balance sheet.

Okay. Thanks, Greg. Good morning, everyone. We ended the quarter with total cash and cash equivalents of $83 million, an amount down approximately $115 million from where we ended last quarter. The decrease was driven by the acquisition of Maharam, though this was partially offset by strong cash generation in the fourth quarter. Cash flows from operations in the period were $59 million. Net changes in working capital drove a $22 million source of cash in the period, with the largest contributor being increases in trade payables and accrued liabilities. For the full fiscal year, cash flows from operations were $137 million. Capital expenditures in the quarter were $11 million, bringing the year-to-date total to just over $50 million.

Cash dividends paid in the quarter and full year were $7 million and $19 million, respectively. These amounts are significantly higher than our dividend payouts last fiscal year, which totaled just over $1 million in the fourth quarter and $5 million on the full year. We remain in compliance with our debt covenant, and as of quarter-end our gross debt to EBITDA ratio was approximately1.3 to 1. The available capacity on our bank credit facility remains at $142, million with the only usage being from outstanding letters of credit. Given our current cash balance, ongoing cash flow from operations and total borrowing capacity, we are confident we can meet the financing needs of the business as we move forward.

Now before I turn the call back over to Greg, I do want to provide an update on the status of our plans to terminate our domestic defined benefit pension plans. As Brian mentioned, we made good progress on this project during fiscal 2013, and are now nearing its completion. Earlier this fiscal year in the second quarter, we completed an important step in the process by moving current employees to a new retirement program based on a defined contribution format. Concurrent with that move, we ceased ongoing benefit accruals under the legacy defined benefit plans. Following that transition, we began the process of systematically settling portions of the legacy pension obligations by distributing benefits to certain plan participants. While none of the benefit distributions made this fiscal year have required us to contribute additional cash to the plans, they have triggered the recognition of settlement accounting expenses. These charges are the largest component of what we refer to as legacy pension expenses.

We're now in the final legal and administrative phases of our plan termination calendar, and are on schedule to complete the process later this fall during our second quarter. The final step in the process will be to distribute benefits to the remaining plan participants. Doing so will settle the remaining pension obligations associated with the plans, and the process will be complete. Before the final distributions can be made, we will be required to contribute cash to the plans in order to cover any remaining unfunded balances. We estimate this remaining cash contribution will total approximately $55 million, though the final amount will depend on factors such as the form of benefits selected by participants and the market price of annuity contracts.

As a reminder, these final benefit settlements will trigger the recognition of additional settlement accounting expenses, and these expenses will be significant. We currently estimate these charges will range between $165 million and $175 million before tax in the second quarter of Fiscal 2014. While these are large numbers, I think it's important to note that the recognition of these settlement expenses will have little impact on shareholders' equity, since the large majority of the losses are already reflected at a component of other comprehensive income on the balance sheet. As always, we'll continue to provide you with updates on our progress as we move through these final phases in the coming months. With that, I'll now turn the call back over to Greg to cover our sales and earnings guidance for the first quarter of fiscal 2014.

Okay. Thanks, Jeff. We expect sales to range between $455 million and $475 million in the first quarter. This guidance implies total revenue growth between 1% and 6% over Q1 of last fiscal year. On an organic basis, this range would be approximately minus 2% to a positive 2% growth. There's a number of moving parts that we consider to arrive at this range, so let me try to unpack this. Our guidance assumes Maharam sales of between $24 million and $26 million in the quarter. The impact of dealer deconsolidation will, by itself, reduce revenue by approximately two percentage points relative to Q1 of last year. While we were pleased with the level of order entry throughout the majority of the quarter, we did have a stretch of about four weeks where order pacing dipped. Given this order pacing, we took a deep look at the project funnel and noted unusual levels of delays within the funnel. To be clear, this does not mean we had actual orders cancelled or delayed, but rather these represent delays in potential project opportunities.

Together, these factors cause us to arrive at our first quarter organic revenue estimate. More broadly, we expect order pacing to increase as we move forward, based on a number of encouraging factors, including the level of customer visits and inquiries, and the timing of known project wins that have not yet entered our backlog. While we expect Maharam's revenue to be between $24 million and $26 million in the first quarter, the earnings on these sales will be limited due to the recognition of certain expenses related to the to the valuation of inventories in our initial purchase accounting as required under GAAP. These expenses will not recur beyond the first quarter; however, they will reduce our first quarter pretax earnings by approximately $1.5 million.

As Jeff outlined, the majority of the remaining legacy pension expenses will likely be recognized later this fall in the second quarter. With that said, we estimate the first quarter will include approximately $2 million of these costs. At the midpoint of the revenue range provided, we anticipate the first quarter adjusted gross margin to be at or near 36%, excluding legacy pension and the special Maharam inventory charges I just mentioned. In total, adjusted operating expenses in the first quarter are expected to range between $127 million and $130 million, excluding legacy pension expenses. Adjusted earnings per share in the quarter are expected to be between $0.36 and $0.41. This estimate excludes the impact of legacy pension costs and the expected special charges relating to the sale of Maharam inventories in the period. On a GAAP basis, diluted earnings per share in the first quarter are estimated to range from $0.32 to $0.37. This guidance assumes an effective tax rate of approximately 34%. And with that, I'll turn the call back over to the operator so we can take your questions.

Thank you.

(Operator Instructions)

Our first question comes from David MacGregor from Longbow Research.

Hi, Brian, Greg, and Jeff. This is Josh Borstein in for David MacGregor. Thanks for taking my questions. Just looking at the SG&A for the year, you've commented on higher expenses related to several initiatives that you're currently making. What should we anticipate in the way of additional SG&A expenses in fiscal '14 versus fiscal '13?

I think David, or Josh, sorry, you can look at the run rate that you see in the first quarter. We would expect, given things that aren't variable to pace fairly consistently acrost the quarters, with maybe a slight uptake by the time you get to Q4, but as a general rule, I think you see historically the first quarter tends to pace a little lighter than the second quarter, and the third quarter is a little lighter than the second quarter, but as a general rule, you can take a number and that's fairly flat. We don't see a significant change right now from quarter to quarter, but as always, we'll keep you apprised as we move from quarter to quarter.

Okay, great. Thanks, and then the contribution margin on that incremental revenue, should we expect it to be. I think you mentioned in the 15% range versus the more normalized 25% range? Is that the right way to think about it?

Yes, those are the numbers we've been talking about, yes.

Okay great, and just last, what do you have baked into guidance for the specialty consumer segment in the quarter coming up here?

As far as revenue?

Well, if you can do either top line, and then maybe on the EBIT line as well.

I think when you look at the revenue side of it, I mean, obviously this is -- now that Maharam is in the specialty and consumer, you're going to see, like we said, we're going to see roughly about a $16 million lift in the revenue line sequentially, right? I mean, give or take.

Okay.

And you're going to see probably EBIT margins that are probably fairly similar. I mean, you're adding a bunch of revenue at a number that we've talked about as being kind of between 9%, 9.5% on the operating income line. So that growth isn't coming with an 18% leverage, as you would see in the other part of the business.

Okay. Thanks, and then just one final one, if I could. With Maharam, does that affect your 2015 goals at all?

No. This is Brian. No, because we always assume we were going to have to have some acquisitions to get to that number.

Okay, great. Thanks for taking my questions, and good luck.

Thanks.

Thank you. Our next question comes from Budd Buggatch from Raymond James.

Good morning, Brian, Greg, Jeff.

Hi, Budd.

Congratulations on a solid quarter. A couple of questions, make sure I understand it, and maybe you'll forgive me if I'm being my normal stupid self. Maharam, the accretion of Maharam for the going forward is we have about $100 million worth of revenue, right, and that will be the net revenue for Maharam on a --

Yes.

And what's the accretion on that to operating income?

We've been talking about a 9.5%, 9% to 9.5% operating income number, Budd.

So that is on Maharam?

Yes.

For operating income. Is that before or after the purchase accounting amortization?

That excludes, Budd, that excludes the $1.5 million we referred to in the -- as we talked earlier.

And is that the only purchase accounting adjustment that you have to amortize?

No, but that's the one that's going to roll through the fastest, that number Greg gave you is kind of the long run number as we roll off, because we're going to have typical intangible amortization. That one just happens to turn very fast.

Yes, I understand that, Brian. And so it's $1.5 million of the inventory was written up, and that will come off in the first quarter. It looks to me like you added $55 million or so to goodwill, or something in that range, in the quarter sequentially. Is that right?

Yes, but I think that's in the hunt. I'll get back to you in a second here.

Total intangibles are bigger than that. Total intangibles are bigger than that, Budd, but the way they do the purchase accounting of that stuff gets spread around, right?

Well, I understand. That's why the only one I really get to see is the goodwill one. So I know that there are other intangibles sitting in other spots of the balance sheet, and I'm just --

Yes, they are.

Budd, this is Jeff. So the actual, the goodwill number is closer to $80 million, and we had some other intangible adds as well that totaled probably on the order of $30 million.

So $30 million. So they had about $40 million of hard assets?

I think that's (multiple speakers).

Pretty close, yes.

With the majority being inventory and receivables, right?

Yes.

Okay. Now in the first quarter, your guidance has got at the midpoint $25 million from Maharam, and I guess a dealer sale would reduce it by $10 million. So the net of the dealer deconsolidation at Maharam is like $15 million for the revenue in the quarter?

Yes, you're on track, that's on track, Budd.

Okay, just checking to make sure I'm on that.

Hey, Budd. Just for a second on that intangible thing, and I don't have all of the details sitting right in front of me, but essentially what you're going to have is, you're going to have this first, I'll call it the first wave of stuff that turns fast, this inventory amortization, and there are other stuff that will amortize like over the first three years.

I understand, Brian, dealer (multiple speakers) and all that kind of stuff.

Well, and we've got some additional comp and things like that that happen in those first couple of years that were part of the purchase that will then roll off after years two and three. So you'll kind of see a step up in this thing over the next two to three years.

Is that Mr. Maharam's contract for three years? Is that what that is?

It's not just him. It's several members of the management team.

I see, and okay, and is there a buyout with it, or an earn-out agreement at all on Maharam?

Nope, there is not.

No earn-out, okay. And is there going to be an 8-K filed, or an pro forma 8-K adjusted on the accounting?

No, Budd. We'll have all of the required disclosures in our 10-K in July.

So, but that will include a pro forma statement as it would be in an 8-KA?

Well yes, assuming we conclude it's material enough and required to do so, yes.

Okay, all right. Just a couple of other questions, if I could. You talked about the non-North American business, and you again pointed to Australia, and I thought we had a situation last year where we had one, a dealer issue in Australia, and a fire in a supplier, not your supplier but a major supplier to the Australian market last year that affected Australian business. So I thought we would be recovering from that, and I was confused by that comment.

I think that's just timing, but I believe that that fire and timing was a Q2 into Q1, maybe start of Q2 shipment issue. The dealer issue was a few years back, The dealer, the Living Edge who we owned, the dealer that we own there, that was a few years back.

I think Greg's comment generally, Budd, on this whole thing about what's going on in Asia, what you've seen, if you been reading the news, the Australian economy has got an interesting issue. They are coming out of the recession. There wasn't a very big improvement on the consumer side, but they had a pretty big take-up on business, and if you look, consumer spending in Australia was practically pretty flat from the bottom of cycle until now. What's happening, though, is as you're beginning to watch the mining sector cool off in Australia, as the other parts of the emerging markets are not using as much raw materials, you're just seeing the general activities levels in Australia drop on the business side.

So deflation has a really not a great impact in Australia? I mean, has a pretty severe impact in Australia?

Yes, because you've got to look at it. That's how that economy is driven, and we talked last quarter, we were seeing some of this, and I'll call it the major money centers were starting to feel that, places like Singapore were a little lighter. Where we are seeing good activities in kind of the more, the new emerging markets were pretty good. That kind of trend has sort of continued. Australia is one that I would say last quarter we didn't see yet, but we've started to see a little more softness there, and I know talking to folks from other industries, that's not just us that you're seeing that kind of more broad-based.

And POSH supplies them in Australia, correct?

A little bit.

Is that where you're going to supply them out of Ningbo?

Well, we actually supply Australia in really three ways. A fair amount of what we supply in Australia comes out of the US, because the shipping lanes are actually easier. So if it's Herman Miller branded product, it generally comes out of the US. We do ship POSH products from China down there as well. So it's a two-pronged approach.

Okay. Just a couple of other quickies. On the defined benefit termination, have you received all of the letters you needed to receive from the IRS and the PBGC? Have you got all of the approvals regulatory, or is that part of the process in the second quarter?

Budd, we have all of the green lights that we need to move forward.

So you don't need any more of those?

No.

Yes, the way this works, Budd, is it actually, you file it, and unless you get a letter, it's presumed that you've got approval.

Okay, terrific. All right, terrific. And finally, can you quantify for us project business versus day-to-day business?

In terms of the mix, Budd, it's actually not wildly -- project business was up a bit this quarter as we define it, it was just under 50% of the business, and I think last quarter, we had it pegged at about 45%. So up a bit sequentially.

Okay. All right, I've got a bunch of other questions, but I'll let others in the queue. Thanks much.

Thanks, Budd.

Thank you. Our next question comes from Todd Schwartzman from Sidoti.

Hi. Good morning, folks.

Hey, Todd.

First on the revenue guidance. At the low end, it kind of suggests that you would see a sequential decline from Q4. I think if you could discuss that, it would be helpful, I think particularly in light of, if I heard you correctly, Greg, you talked about unusual project delays. I wonder if you could just give, maybe add a little bit more color to that, and let us know when that four week period where you saw that little slip, and just kind of look at that factor in the context of the guidance, and how it fits in there?

Hey, Todd, this is Brian. First of all, what we -- the four weeks were a couple of weeks prior to the end of the year and the first couple weeks of the New Year. We just saw a little bit more softness, which got us to go back and look not at our projects we've won that are in backlog or anything. We started to look at the funnel activity to see whether we were seeing anything happening in the funnel, and while the funnel itself actually stayed fairly consistent, as we looked underneath it, we do track things that the sales team is working on, if you will, prospects and what's happening with our prospects. And what we saw was the number of prospects that were -- that the decisions were being delayed on, that was higher than what we had seen in recent months, and we think that's a little bit of what lead to some of that softness in that four-week period. Now, we've seen a little bit of that turn back around, and as we've gone and talked to the sales team, nobody seems to think this is a pattern that they expect to continue, but it is one that as we looked out, especially at the first quarter, we made sure that we thought through in terms of our range of our forecast.

And Brian, was that, those delayed decisions, was that kind of across-the-board with respect to verticals, or was it concentrated in any one or two areas?

Well, there's kind of a continuing pattern. The place we saw the most was in the government, but I would say there were others as well, and with the government, you've got to believe some of this is probably still the hangover from sequestration and all that stuff, right, where they are prioritizing things. And I say government, particularly federal government. We did see some in some other industries. Again, nothing seems to be, like projects are for sure coming off the boards completely. It just seems like decision timelines are longer and people are delaying actually making the final call.

And delays of this magnitude I would imagine occur from time to time, not totally uncommon?

Yes, it's not uncommon. It was just as we started to try to get our own minds around where we see in a pattern that we thought was going to be protracted, or was it something that was more transient was going to work its way through. Now again, it will affect, we think it could affect the first quarter but has been true in this business over the last couple years, more and more of it turns on very fast cycles. So I think we'll have a better idea as we get through the balance of the next six, seven weeks what's going to happen. Longer term, as we look out for the whole year, we still think if the GDP predictions come true, and that will drive (technical difficulties) to the numbers, and we feel pretty good about that. So we don't see this as anything that's going to change dramatically our plans for the year, but we'll manage our way through the first quarter.

Okay, because just looking back a decade or so, ex the recession, you really have not shown sequential top line decline, plus if you factor in Maharam contribution for a full quarter, adjusted to kind of rule out you just being conservative with the low end of that guidance.

Yes, not trying to be overly conservative, just trying to be realistic about what we can see.

Okay, fair enough. With regard to Maharam, are you still expecting accretion of $0.09 to $0.11 for the full year?

Yes, right in that range, Todd. I mean, ex the number we talked about, the $1.5 million on the inventory side.

In terms of the earnings contribution?

Yes, correct.

Okay. On the Herman Miller collection, is there any portfolio turnover, if you will, that you guys target as far as refreshing those items, maybe on an annual basis or some other frequency?

Todd, we've always had this longstanding thing. We try to have 20% of our sales of any of our businesses be from products introduced in the last five years. I think over time we'll want to have a higher turn on the collection business, particularly on the consumer side, but I would say that business is still sort of chugging along in terms of getting its development queue out there. So because it's kind of a mix of products we've had for awhile that we started to market differently, as well as new products, we're still kind of coming up the curve on that. So we have a lot of work to do in getting new products out. So today I would say we have less concern about things stopping as much as getting new things into the market.

Okay, and lastly, two items. What do you see as far as raw material costs, and what's the outlook for CapEx for fiscal '14? Thanks very much.

Sure. On the raw materials side, Todd, you're continuing to see, especially on the steel side, prices be flat to down. I know mills are trying to get increases, but I think they are struggling to get those increases. We should see a slight improvement in commodities for us as we look into the first quarter relative to the fourth quarter. It's not a big giant number, but it does help a little bit. And again, what was your second question, Todd?

CapEx?

CapEx. We've got three or four good-sized projects that we're working on, and timing of that is difficult to say when we start, when the money flows. We spent $50 million this year. We'll be up. We think that is in the neighborhood of somewhere between $65 million and the low $70s million.

Okay, thank you very much.

Thank you.

(Operator Instructions)

Our next question comes from Matt McCall from BB&T Capital Markets.

Thank you. Good morning, everybody.

Hey, Matt.

So first for you, Greg. A couple of clarifications. You gave some color on non-North America. What was the overall organic order and revenue number? I don't know if you gave it or if I missed it.

The overall organic on the international segment, Matt? Is that what you're asking?

Yes, orders and revenue.

Matt, just to clarify. Are you asking for the North American segment or the international bit?

Non-North American.

We'll figure that out for a second, Matt. I've just got to find it.

That's fine. So another clarification. Did I hear your gross margin range and SG&A range for next quarter, or did I miss that? Because you've given it in the past. Maybe I missed it.

Yes, we gave a gross margin number of 36%.

Okay.

And we gave an operating expense number of $127 million to $130 million.

Okay, sorry about that.

And those are, Matt, just so you're clear, those numbers are ex the Maharam inventory thing we discussed, as well as ex the pension legacy.

Okay, ex the $1.5 million, okay. And then anybody that wants to take it. Following up on Budd's question about the project versus day-to-day. It did tick up a little bit. I'm curious, you had positive things to say about visits, mock-ups. As you look at those customers that are coming in, can you talk about the makeup of those customers? What type of projects are they working on, and specifically I'm curious about any pick-up in activity related to new buildings, new space. Are you seeing any activity pick up there, and maybe talk about your construction outlook a little bit.

Yes, I mean, it's always a mix of folks that are refurbishing. I would say over the last couple years, you have seen a fairly good size activity in folks that are building new corporate headquarters, and you guys I'm sure are all reading about all of those out there from Facebook's got a new headquarters going up, to Apple to ExxonMobil. So you're seeing a lot of folks come through. On that end, we're seeing a fair amount of healthcare customers coming through who are beginning to ask how are they going to house all the folks coming through with healthcare reform. Of course, they've got a double-edged sword. They've got to, a, figure out how to house them all, and they've got to also figure out how to do it all for less. So you've kind of got both sides of that thing happening. But I'd say it's a fairly normal mix between folks that are refurbing and folks that are building new. I don't see anything that is significantly different than a normal pattern.

And so nothing really has changed. What about your outlook? There's the debate I talk about, maybe it's just a debate that I have with myself, but it's a debate about the outlook for the construction and completion of new space. Are you expecting that mix to shift toward more new space over the next few quarters?

I don't have any data that would tell me it's going to shift in the next couple quarters. I don't know that we even see the data in that way, Todd.

Okay.

I mean, construction typically is a longer cycle issue, rather than a short cycle issue.

Okay, got it. And then just one more clarification about the slowdown. Is it still ongoing, or was it something you saw and it's picked back up? You seem pretty confident that it was short-lived, but have you seen kind of recovery from that?

Well, I wouldn't say we've seen enough yet that we can tell you we've got a definite trend, Matt. We've only had a couple of, I mean, we only had what, three, four weeks since the end of the year. So it's a little early to call anything a trend. I just think as we look out at what's happened in the broader economy, and to me, while it's always difficult to say a economic forecast is accurate, as you know, I think the predictions of where GDP is going in the country, and therefore where business forecasts are going in the kind of mid- to long-term, they just, they feel like they are in the right zip code to me. And I think if that happens, we'll see good activity in the industry, and we think we'll get our fair share of that. So I think that's only tempered by, it's a little hard to figure what's happening globally in the other markets. I mean, Europe is still hard to figure out, and what is the drag on the US from those other places is one that is just a little difficult to predict.

Okay. Thank you.

Matt, on your question on sales and orders organic and international, the sales number in Q4 was flat. The order number was up about 7%.

Perfect. Thank you.

Thank you. I'm showing no one else in queue at this time. I'd like to hand the conference back over for any closing remarks.

This is Brian. Thanks again for sharing your time with us this morning, and for your ownership and continued confidence in Herman Miller. I hope you can sense our excitement in the progress we're making. We're building a powerful portfolio of top brands backed up by best-in-class product designs, operational capabilities and channels, with momentum and financial strength to take us even further. We're optimistic about the year ahead, and look forward to giving you another update on our progress in September. Have a great day.

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