MillerKnoll Inc (MLKN) 2014 Q1 法說會逐字稿

Good morning everyone, and welcome to the Herman Miller Incorporated fiscal year 2014 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 risks factors discussed in the Company's Reports on the 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; Mr. Greg Bylsma, Executive Vice President and Chief Financial Officer; and 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 for your questions. We will limit today's call to 60 minutes and ask that callers limit their questions to allow time for all to participate. At this time, I would like to begin the presentation by turning the call over to Mr. Walker. Please go ahead.

Good morning, everyone. We're glad to have you with us here today. Herman Miller's performance this past quarter demonstrated that our strategy is working and gaining traction. The increasing diversification of our business to include new higher-growth, margin-rich categories and channels contributed to the top line and drove strong gross margins. We also saw signs of improvement in areas of the business that have more recently been lagging, helping us to achieve our best quarterly operating earnings since 2008. And the enthusiastic response to our new innovative designs and applied workplace knowledge has continued to build since the unveiling of our Living Office concepts in June.

I'll expand on these highlights in my overview of our reporting segments, which varied widely this quarter in terms of sales and order growth. I'll go on to briefly review the final actions we will take this quarter as we complete the termination of our defined benefit pension plan and the advantages this will give us going forward. Then I'll turn the call over to Greg and Jeff, who will cover the consolidated results and balance sheet in a bit more detail.

To begin, our specialty and consumer segment was once again a standout story this quarter, with sales up more than 96% and orders increasing better than 60%. Maharam was the single largest contributor to that great performance, but it's important to note that the Herman Miller collection, retail, and Geiger all experienced double-digit year-on-year sales gains. The consumer channel was also a particularly strong source of order growth. This segment best illustrates our success in strategically diversifying our business into areas that offer new growth and higher margins. While it is very early in the life of our combination with Maharam, we're very pleased with the results, the reaction from the market, and the contributions of Maharam's leaders and employees. I also want to recognize our Geiger subsidiary for its improved operating performance during the quarter. The team there is working hard to enhance efficiencies and control costs, and this quarter showed they are making great progress.

Net sales within our North American furniture segment ended the quarter slightly ahead of our expectations, driven by improved demand from the healthcare sector, including government healthcare entities, and modest growth in the core commercial office business. This growth was consistent with recent economic data, which remains mixed, but seems generally supportive of improving industry condition. This includes sluggish but continued job growth, higher architectural billing index, and nonresidential construction indices, and improving business sentiment, all of which is reflected in BIFMA's recent projections for this year and next. This is an appropriate point to review the good news coming out of Herman Miller healthcare. For the first time in eight quarters, we had growth in both sales and orders. This, coupled with the healthcare team's concentrated efforts to manage costs and enhance efficiencies, led to higher margins and improved operating performance. That good work continues, and if we could continue to generate higher volumes, those gains should accelerate.

Although we did see an improvement in activity from government-related healthcare agencies, the remainder of our Federal Government business was again a weak spot on the numbers this quarter. This had a significant influence on overall order activity on North American segment, which posted organic growth of less than 1% from last year's Q1 level. The magnitude of this multi-year decline in government furniture purchase is dramatic, and has been felt across our industry. While we have certainly participated in that pain, we do believe our government market share is stable relative to competitors, and our sales team is earning the business that is available. Despite this clear challenge, we believe Herman Miller is well-positioned, as more customers, both in the US and abroad, search for a new office landscape that better serves the needs of their people and the performance of their business.

Our new Living Office portfolio of products and workplace insights are resonating with customers and specifiers, and we are fueling those conversations with a comprehensive training program for our worldwide sales team and dealer network. To date, we have held seven large scale events in North America, Asia and Europe, reaching more then 1,000 sales, dealer and corporate staff. We will hold four more before the close of the calendar year, with smaller regional events and targeted marketing activities ongoing through 2014. The response of these activities has been terrific. Our dealers and sales teams are genuinely excited, and they are taking the Living Office solution set forward with a real sense of pride and purpose.

Now let's look at the international segment, where the pattern of demand differed sharply from what we saw in North America this quarter. Net sales for this segment came in lighter than we expected at the start of the quarter. The top line miss was driven by the challenging economic environment in Europe, Australia, and to a lesser extent, other markets in Asia. The top line miss was also exacerbated by the timing of orders, which were much stronger in the second half of the quarter. As a result, we built backlog this quarter, which will ship over subsequent periods. In total, segment sales, adjusted for currency translation, were down 12% from last year. By comparison, adjusted orders were up almost 3%, with the strongest order performance coming from Mexico and the Middle East.

We also saw modest order gains across the markets we serve in Continental Europe. Recent data coming out of the UK, Europe and China signaled improvement in those economies. In fact, our folks reported increased activity levels that should translate into a more positive operating environment as we move through calendar 2014. While we are disappointed with this segment's results for the quarter, our international team has had a strong track record of good operating results, and we continue to believe the demographics of the emerging markets will result in long-term growth and opportunity for Herman Miller.

Finally, I want to briefly review a major milestone in further strengthening our balance sheet. Over the past several quarters, we have provided you with regular updates on the termination of our US-based defined benefit pension plans. Early last fiscal year, we transitioned the majority of our US employees to a new defined contribution retirement plan structure. At the same time, we closed the legacy defined benefit pension plans, and began readying them for termination. Now in its final phase, the project will be completed on schedule during our second quarter.

Although this has been a complex undertaking, the resulting benefits will be significant. The move eliminates 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 our future cash flows and expense requirements associated with our ongoing retirement programs. The last step in the termination process involves distributing the benefits earned to each of the plan participants. These contributions -- or these distributions will be made during October and November, and will require that we contribute additional cash to the plans in order to cover the remaining unfunded balances. This final cash contribution will total approximately $53 million. Completing the termination process in Q2 will trigger additional expense, which we estimate will total approximately $170 million before tax.

This is a large number, but it's important to note that the recognition of these settlement expenses will have little impact on shareholders' equity, as the large majority of this charge will be non-cash and is already reflected within other comprehensive income on the balance sheet. If you've been following us for the last five years, you will recall as we emerged from the Great Recession, we outlined four priorities for our cash flow. Number one, fully fund our pension liability. Two, reduce our debt leverage. Three, invest in our growth strategy. And last, increase our cash returned to shareholders. With the completion of this work, we will have accomplished each of these goals. As a result, our financial flexibility is much improved. We have enhanced the cash flow and returns to our investors, and we have significant new capabilities, such as Maharam, Thrive and Posh, to accelerate our growth. With that, let me turn the call over to Greg and Jeff.

Thanks, Brian. To begin, I want to point out that starting this quarter, we have provided supplemental financial information specific to the quarter on our investor website at Hermanmiller.com. This information includes details relating to our performance by segment, organic growth calculations, and reconciliations of non-GAAP financial measures. We posted this data last night, and our intention is to continue to do this in the future quarters. This new practice is based on feedback from some of you that additional data like this will help assist you as you prepare for the conference call. We hope you find this helpful. I'll now move on to details for the quarter.

Consolidated net sales in the first quarter of $468 million were 4% higher than the same quarter last year. Orders in the period totaled $471 million, also 4% above the prior-year level. The acquisition of Maharam last April added approximately $27 million of both sales and orders to our consolidated results in the first quarter. On an organic basis, excluding the impact of Maharam, dealer divestitures, and foreign currency translation, sales and orders both increased 1% from the first quarter of last year.

Sequential sales and orders each improved by approximately 2% from the fourth quarter of 2013. This growth is attributed to the addition of Maharam, which had only a partial quarter of revenue in Q4. Sales in our North America reportable segment of $318 million were down 1% from the prior year. New orders in the first quarter totaled $299 million, reflecting a decrease of 3% from the same period last fiscal year. Adjusting for the impact of dealer divestitures and foreign currency translation, segment sales and orders increased almost 3% and 1% respectively, compared to the first quarter of fiscal 2013.

We again experienced relative weakness in the US Federal Government sector this quarter. While sales were flat with the prior year, GSA orders declined 18% from last year. Activity levels outside of the Federal Government were mixed this quarter, with strength in healthcare and financial services, offsetting softer demand in other sectors. Relative to the fourth quarter of fiscal 2013, sales in the North American reportable segment grew 2%, while segment orders were down 5.5%. Our non-North America reportable segment posted net sales of $82 million for the quarter.

Adjusting for the impact of currency translation, this represents a 12% decline from the same quarter last year. Segment orders of $99 million were up 3% from the prior year on a currency adjusted basis, but again reflected a contrasting regional demand picture. Within the Asia-Pacific region, sales and orders decreased relative to Q1 of last year, due in large part to weakness in Australia and China. But we were particularly encouraged to see modest order growth in the EMEA region, with growth in the Middle East and Continental Europe more than offsetting weakness in the UK.

Year over year order increases in Latin America were led by strong project activity in Mexico, partially offset by weakness in Brazil. On a sequential quarter basis, non-North American segment sales decreased 18%, while orders increased 6% from the fourth quarter of 2013. Net sales in the first quarter within Herman Miller specialty and consumer segment totaled $68 million. This represents a 96% increase over sales in the same quarter last fiscal year. Segment orders increased 60% on a year over year basis.

The acquisition of Maharam in the fourth quarter of fiscal 2013 was the largest contributor to the sales and order growth in the first quarter. On an organic basis, excluding the impact from the acquisition, segment sales increased 18% relative to last year, driven by double-digit percentage increases in each of our Geiger collection and Herman Miller for the home retail businesses. Organic order growth in this segment totaled 2% relative to Q1 of last fiscal year. Sequentially, sales in the specialty and consumer segment increased 39% from the fourth quarter of 2013, while segment orders were up 41%.

The full quarter of Maharam results drove the majority of the sequential improvement. However, we also benefited from improving demand from our Geiger subsidiary and seasonal increase in retail stocking orders. We estimate the translation impact from changes in currency exchange rates reduced our consolidated net sales and orders in the quarter by approximately $2 million and $3 million respectively, relative to the first quarter of last year. This resulted from the general strengthening of the US dollar against other major currencies compared to a year ago.

I'll now review gross margin performance for the quarter. Our consolidated gross margin in the quarter was a clear highlight, reflecting a number of positive factors, including a full quarter of margin contribution from Maharam, better-than-anticipated net pricing, and improved operating performance at our Nemschoff and Geiger subsidiaries. In total, our gross margin in the third -- in the quarter was 36.3%. This represents a 300 basis point improvement over Q1 of last fiscal year.

In addition to $1 million in legacy pension costs, our gross margin this quarter reflects $1.4 million in expenses associated with the step-up valuation of Maharam inventories under purchase accounting. This valuation adjustment was charged to expense this quarter, as the related inventory was sold. Consequently, we will not have a similar adjustment in our upcoming second quarter. Collectively, the legacy pension and the inventory step-up expenses reduced our Q1 gross margin by 50 basis points. By comparison, legacy pension expenses reduced the Company's consolidated gross margin by approximately 20 basis points in the first quarter of last year. On a sequential quarter basis, gross margin in the first quarter improved from 35.4% in the fourth quarter of last year.

I'll now move on to operating expenses and earnings in the period. Our operating expenses in the first quarter were $131 million. This represents an increase of approximately $16 million from the same quarter in fiscal 2013. The majority of this increase relates to the acquisition of Maharam. The remaining increase was driven by higher incentive accruals and a ramp up in spending on marketing and new product initiatives. These increases were partially offset by our year over year reduction in product warranty expenses.

Operating earnings this quarter were $39 million, or 8.4% of sales. This represents an 80 basis point improvement over our consolidated operating margin in Q1 of last fiscal year. Adjusted operating earnings were $43.6 million, or 9.3% of sales. By comparison, we reported adjusted operating earnings of $36.5 million, or 8.1% of sales, in the first quarter of fiscal 2013. The effective tax rate in the first quarter was 34.7%. This compares to an effective rate of 33.5% in Q1 of last year. Finally, net earnings in the first quarter were $22.5 million, or $0.38 on a diluted basis. On an adjusted basis, diluted earnings per share in the quarter were $0.43.

And with that, I'll turn the call over to Jeff to give us an update on cash flow and our balance sheet.

Thanks, Greg. Good morning everyone. We ended the first quarter with total cash and cash equivalents of $110 million, an increase of approximately $27 million from the end of May. Cash flows from operations in the period were strong, totaling $38 million, driven principally by net earnings adjusted for non-cash depreciation and amortization. Net changes in working capital this quarter were modest, yielding a positive $3 million impact on cash flow. By comparison, cash from operations in the first quarter of last year totaled $29 million. Capital expenditures were relatively light in the first quarter, amounting to $6.5 million compared to $16 million in the same quarter last fiscal year. This difference is really one of timing, and as we move through the balance of the year, we expect capital spending to ramp up, particularly in support of several planned manufacturing facility and equipment initiatives, new products, and showroom investments.

We anticipate our full year capital spending to range between $55 million and $65 million. Cash dividends paid in the quarter were $7 million, an amount significantly higher than last year's first quarter level of just over $1 million. We remain in compliance with all of our debt covenants, and as of quarter end, our gross debt to EBITDA ratio was approximately 1.3 to 1. The available capacity on our bank credit facility stands at $143 million, with the only usage continuing to be from outstanding letters of credit. Given our current cash balance, ongoing cash flows from operations, and our total borrowing capacity, we're confident we can meet the financing needs of our business as we move forward, including, in the near term, the final cash funding necessary to complete the termination of our US-defined benefit pension plans. With that brief overview, I'll now give the call back to Greg to cover our sales and earnings guidance for the second quarter of fiscal 2014.

Thanks, Jeff. We expect sales to range between $460 million and $475 million in the second quarter. This guidance implies total revenue growth between 4% and 8% over the second quarter of last fiscal year. On an organic basis, excluding the expected contribution from Maharam and the impact of dealer divestitures, this range suggests flat to 3% growth over the prior year. I should also point out that, while orders related to the large energy project are expected to begin entering in the second quarter, the related net sales impact will not begin until the third quarter. From that point, we expect the order and revenue impacts of the project to layer into our numbers evenly over a 14 to 18 month period.

As Brian described, we plan to complete our US pension plan termination in this upcoming quarter.

This will require a cash contribution of roughly $53 million, and will result in a final legacy pension charge of approximately $170 million before tax. We estimate this expense will drive a net loss in the quarter of between $1.43 and $1.39 per share on a GAAP basis. Excluding the impact of this legacy pension charge, we would expect adjusted earnings per share of between $0.38 and $0.42. Gross margin in the second quarter is expected to range between 35% and 37%, excluding legacy pension expenses. And while we don't anticipate any significant change to the competitive pricing environment, we do expect average pricing discounting in our second quarter to be a bit deeper due to the mix and size of projects currently in our backlog. We also are expecting to feel some margin pressure this quarter from higher commodity prices, primarily in the steel category.

In total, adjusted operating expense in the second quarter are again expected to range between $127 million and $131 million, excluding the impact of legacy pension expenses. Finally, our adjusted EPS guidance assumes an effective tax rate of approximately 34%, excluding the tax impact of legacy pension expenses. On a GAAP basis, which includes the pension charge, our effective tax rate is expected to be between 36% and 38% in the quarter, though it's important to note that the anticipated pretax loss will drive a book income tax benefit as opposed to expense. As a result, due to the mix of earnings expected in Q2, our GAAP effective tax rate will be higher than what we're guiding, when you exclude the legacy pension impact. Now with that, I'll turn the call back over to the operator so we can take your questions.

(Operator Instructions)

Josh Borstein, Longbow Research.

On the GSA business, I think you mentioned it was down 18% year over year in the quarter. Can you tell us what you're hearing from your customers regarding the outlook for GSA? And when comparisons for you may get easier?

Josh, it's Brian. I'll let Greg jump in with details, if he wants. I think the number -- the size of the drop in the Federal Government purchases through the GSA over the last two to three years is very big. You got to believe -- I don't know that -- I think part of the problem is, you can't really ask somebody in the government what's happening. I know, talking to some of my friends and neighbors, I think everybody's feeling a similar thing, that we just simply have a market that's dropped dramatically from what was over a $1 billion to $1.5 billion segment at one point in the industry, that is significantly smaller than that now.

It would seem that they're down to a level that all they're doing, really, is replacement work now. I do think we probably felt a peak back in that 2010/2011 era, when there was a lot of work going on for BRAC realignment, a lot of forward things happening around things like embassies, when we were doing a lot of, if you might say, nation building. So, I think we're probably at a low point. Or if we're not at a low point, we've certainly got to be getting close to that, because the purchases are quite small.

So, comparisons, I think, Josh, we should start to see those get better as we get into calendar 2014, would be my guess. That business is never evenly paced throughout the year.

Okay, thank you. And ex-government, what were shipments like in the quarter?

Josh, this is Jeff. We're not going to quantify the government impact to our North American segment, but what I can tell you is that when you look sector by sector across the past, you'll see financials and banking were actually up year on year, healthcare was strong, as Brian and Greg alluded to. State and local government was strong. And that was a bit offset by manufacturing, and, of course, the broader GSA picture. So, all in all, it was up ex-government, but we're not going to quantify that for you.

Okay, thank you. Switching to non-North America, you had mentioned a few markets which fell short, which were performing nicely. Could you just go over again some of the European geographies, especially where you're seeing some of the strengths, the weaknesses?

I think, as you hear from almost everybody, Europe in total is down, I think, across almost any industry sector. We generally, in Europe, and we're usually talking about EMEA, the place that was strong for us in EMEA was actually the Middle East, from -- especially from a revenue perspective. And I say strong -- it was relatively strong compared to the rest of international.

What we did start to see is some pick-up in activity levels and order levels in places like the UK, and even in Central Europe. Now, again, you got to be careful. I wouldn't take anything we talk about related to the continental markets as being a sign of the market, because we are a fairly small player. And so, it's much more driven by what projects we're on than the general market activity over there. Where some of our competitors would have a much bigger presence on the continent, we really play in EMEA, primarily in the UK and in the Middle East, and a little bit in all the other countries.

What we have heard from our folks, though, in international, is they are seeing better activity levels throughout Europe than they've seen in a while. Now, when that will translate into orders and things is always a little bit more difficult to predict. But certainly, in the UK in particular, there's a lot of cranes in the air, and there's a lot of discussion about building starting to come out of the ground.

I would say the situation in Asia is a little bit different. Australia remains a very difficult market and economy, if you look at it. Given the pullback that's happened a bit in the Chinese manufacturing sector, they just don't have the underpinnings that they've had on the mining side. And that's caused the Aussie economy to pull back pretty hard.

Great. Thanks for that color there.

And then just one more from me. If you back out the contribution from Maharam, obviously you still saw some very nice growth in the high teens in the specialty and consumer. Can you just talk a little bit about what's going right for you in that segment right now, leaving Maharam aside for the moment?

I think there's two things that have been good for us, particularly if you looked at just the revenue number this quarter. We've introduced a lot of new products over the last 24 months. That's certainly a driver on both the retail and on the contract side, if you will, with the collection where we're selling the A&D community. And that plays in both the collection and in Geiger.

I think this quarter -- we have this measure we look at of what percentage of sales are coming from new products. The specialty and consumer segment had, actually, the highest level of sales from new products, which I think speaks to an effort we've had going on for the last 24 to 36 months to build up a product development capability there. So, it's generally new products.

The second thing that's really helping is the -- putting new feet on the street, particularly as it relates to the collection. So, you got almost essentially a new channel being developed, along with new products.

On the retail side, I think, to be frank, we've got some really good retail partners that are doing a good job in building their business. And I think the combination of what we've done with some increased marketing activities with them, as well as the resurgence in housing generally -- and we're going to play at the upper end. And if you read most of retail stuff, I think would say -- the upper end of retail and consumer is stronger. And so, our wholesale business to retailers has been quite good as well.

Terrific. Thanks for answering my questions, and good luck.

Todd Schwartzman, Sidoti & Company.

Wonder if you could elaborate a little bit on the strength of the new products within specialty and consumer? Maybe give us a sense -- or even if it's an older product, what is -- in particular, is being well-received?

Todd, I think it's several things. First of all, what you might describe as older product -- part of that business, especially on the retail side or the consumer side, is making sure you're updating those products on a regular basis. So, one of the things we found is, as we have been very diligent about new additions to things -- maybe one example could be the Eames lounge chair. As we brought out a re-energized Eames lounge chair, with new colors and finishes, it not only resulted in new sales of that product, but it created new market knowledge, if you will, about the total line. And so, we saw growth in both the new product, as well as the older material and finishes. So, that's an example.

And I'd say that's generally happening across some of the older classic lines, where we have continued to bring out updates, whether it's things like the recently announced re-issuance of the plastic shell chair that we're bringing out now again in fiberglass -- those kind of things. Now, that one hasn't -- haven't felt the impact of that yet, but it's examples like that.

In addition, one of the things we've been working really hard to do, on the contract side of the specialty business, is to make sure that we can fill out those other areas. We talk about it as creating your daytime living room. Some people say putting the living in living office. How do we bring out the kind of products that let us do those broader landscape areas that are beyond the workstation? Places like lounge areas, casual meeting areas, cafeterias and that. And as we continue to fill out that portfolio, we just have a broader presence than we had in the past.

And then, in addition to that, Geiger's had some really good results around some of their new casegoods lines. So, when you add the three things together -- now, none of these are individually super-large products. So, what's a little different here is, your $1.5-million annual product line is a big product line in this category. So, it's not one thing, it's not two things, it's four or five at a time.

Sure. And on the whole, just looking at specialty and consumer -- entire segment, how would you characterize, if you had just back of the envelope, allocate your customers, defining them by number of employees or maybe looking at individual or home applications? Maybe you look at zero -- or 1 to 20 employees, or 50 to 100, whatever it might be. How do you splice and dice that internally? And has there been any shift since you've accelerated the product launches?

You really got -- you really have two, maybe three different businesses within that Group. I guess, actually, maybe four if you add Maharam now. If you take out Maharam, you really have a wholesale business where we're selling to retailers. That's largely going to individual users for their home. There's some small business stuff in there. But it's largely going to folks to use in their homes, with some small piece of that being businesses. So, that's probably -- if you looked at the total business now, it's maybe a little less than one-third of the business is running through that sort of consumer world.

Then you've got one-third that is really facing the A&D community from a furniture perspective, and that is primarily going to go to our traditional customer base. The only difference is, we're getting there through the A&D channel much stronger than we would typically do, because a lot of those products are placed by the A&D community. So, it's a little bit of a channel difference, as well.

And then, of course, the remainder would be what we do with Maharam, which -- Maharam plays over a pretty wide spectrum of things, from the consumer to our core customers, again, through A&D, to even some areas that are outside of where we would typically play in areas like hospitality. But, for sure, the core of Maharam is really tied towards those same end users, if you will. It just plays in a much different channel construct, and in different areas of their purchases.

And Maharam sales and orders were both about $27 million?

Yes.

Yes.

Okay. What was the bottom-line contribution?

It was right in line with our expectations, Todd, what we talked about on the call last time.

Just to refresh?

We had said, on a go-forward basis, a 9% to 10% operating income business.

That's excluding the inventory move; is that right?

That's correct.

Okay. With regard to healthcare, you had mentioned it's really the first growth you've seen in eight quarters. What can you tell us about your take on how much of that is, quote-unquote, real growth versus some just bounce off the bottom?

I think what's happened, Todd, as you know -- I think somebody -- Josh asked earlier -- hey, are you at the bottom of the government? The truth is, we've been talking about this, that we had a heavier mix inside of our healthcare business of US Federal Government than we did in that Business in total. So, the impact of the government pulling back had a disproportionate effect on that healthcare business. So, I think, if there's a business that feels like maybe we've come off the bottom with the government, it's that one. As I think we noted in the release, we started to see some government order growth on the healthcare side, which is -- it's a great sign. So, part of it is that bounce off of the bottom.

We've also done some other things to make sure we're doing a good job with connecting with the GPO folks, and there was a little bit of price increase in there. So, it's, I think, relatively -- I guess if you -- the way you asked the question -- it's real growth, I think. It's fairly modest at this point, but the good news is we're starting to see it turn the other way.

Got you. On that large energy contract, what -- timing-wise, what was responsible for any shift in terms of your expectations in the initial shipment?

Construction. (laughter)

Okay.

That's the hard thing with these. Because they're trying to estimate when they're going to be ready with the building, and based on that, we're trying to estimate when we're going to start building product and ship it. And those things are moving all over the place based on weather and other things.

It's nothing related to them managing cash flow, I wouldn't guess. It's probably much more about the weather, of what's going on in that region. And when you do construction, you always find things you didn't expect.

So, they've essentially told you that they're running one to three months behind schedule, roughly?

We're very tied in with those guys. And I think that even that picture will continue to move around, and some of that is expectation of which building is open, when. Because we're really doing this building by building. And some buildings are even bigger than others. And so, trying to follow the whole project -- our guys are virtually there every week, talking to them about the cycle.

Okay. And has there been any change in your expectations as to over how many quarters, once it does start to ship, you'll be realizing the sales?

No, that's always kind of been in that 14- to 18-month period, Todd.

Got it. And finally, I hope you can just give a little more color -- quantifying what you're seeing now in terms of steel prices, and discounting as well?

Sure. On the steel side -- so, steel started to go up, Todd, in the summertime, around that $700 -- and this is on the cold rolled numbers -- $750. And that number has come down and gone back up since that time. So, it's still hovering right at about that number.

And as you know, we've got a three-month lag on how it impacts our numbers. So, that increase we saw in July really didn't affect us at all in the first quarter. So, as -- I think we paid probably, on average, about $690 or $700 in the first quarter. So, as we move through the backlog and into the second quarter, by the time we get to the end of the second quarter, we'll probably be all the way to that $750. And that's -- so, that's why you'll see a little bit of margin reduction in the second quarter.

On the discounting side, our methodology is that when we get to this point in the quarter, we always go and look at the backlog. You always have swings in discounting from product line to product line, from category to category. We try to take our best stab at it when we -- based on what we see, because obviously, as you know, there's a big part of our order pattern that's going to come in, in the quarter, that we don't see discounting on. We don't -- like we said in the prepared remarks, we don't see a big trend. We just see, at the start of the quarter, our backlog is a little bit deeper than it was at the start of last quarter. So, thus the guidance.

Is there anything else regarding timing that you guys haven't spoken to that we should be aware of, either with respect to Q1 or Q2?

Timing in what regard, Todd?

Deliveries.

There's nothing out there I think of that we haven't talked to you guys about. I think we did note in the comments that we had back-end orders in the international business that should ship in the next quarter or two. If there's any question right now in forecasting is exactly -- because like we've talked about with this large energy product, all of our business is somehow or another tied to a construction project. And that's always a bit of -- as you get into these longer-term orders that you take, making sure that the construction's done on cycle is a big driver.

Todd, this is Jeff. I'll just tag onto that, too. The only other thing that we did contemplate in coming up with the guidance is just -- what would we expect, if much of anything, from a fiscal -- or a Federal Government year-end seasonal bump, which, given the trends that we've been seeing, we didn't see a great deal of impact from that last year. We're not anticipating a big impact.

Whereas, in years past, as you well know, we've seen a seasonal bump in order entry. And some of that actually gets invoiced in the quarter as well, typically on a historical basis -- unknown this year, given where trends are going. So, that's another factor.

Yes, I think that is actually a longer-term change to what we've normally seen in patterns, Todd. We've always talked about the second quarter being the highest quarter because of that. And, as you know, we play disproportionately heavy in the Federal Government. That trend didn't happen last year, and right now we don't see it happening again. And that's probably one of the reasons -- as we looked at the quarter, when you take the move-out of the one large project, and then you look at what we've seen with the government, that's the thing that's probably caused us to move the guidance down a little bit from where we were coming into the beginning of the year.

Okay, thanks a lot.

Matt McCall, BB&T Capital Markets.

First, Jeff, one -- I'm sorry, Greg, one clarification. You gave an OpEx outlook. What was the operating expense outlook for next quarter?

$127 million to $131 million, Matt.

Okay. And so, along those lines, can you give us an update on the impact from some of the growth spending that you've talked about in the past? And clearly, it's shown some success in some of these new high-growth, high-margin areas that Brian spoke about. But just give us an update on the spending in the first quarter. What was the impact to margins, EPS?

And then the plan as we move out for the rest of this year? Really trying to get a handle on the incremental margin or the margin potential this year.

Sure I tracked with your question on how to -- is that -- are you talking about the elevated spending level, and how did that impact operating margins?

Yes, so you've talked in the past about how your incremental margin is going to be somewhat depressed in the near term as you focus on some of these growth initiatives. I'm just trying to get a handle on how that proceeded versus your plan? And how it should proceed? And what the impact can be for the remainder of the year?

Got you. So, I would say, for the remainder of the year, Matt, we wouldn't expect our incremental -- our leverage percentage that we've been talking about of 15% to 18%. Now, obviously, this quarter, we did see a much bigger jump than we had talked about. I think the adjusted operating margin leverage year on year was something like 39% or something.

So, you always can -- when you get stuff in small bits, and you get a margin performance -- the gross-margin performance that we saw, that gives us a one-time -- and we feel really good about it. I'm not sure that we'd now say -- hey, look, our leverage going forward. Until we get through some of these things that we're working on, like the Living Office -- some stuff we're doing on the new product side over in the retail and collection business. I don't think we're going to start to say -- we're going to get leverage above and beyond that, until we kind of get to the other side of '14.

As you know, we've said -- hey, look, we are going to -- our goal for '15 is 10% margins. I think 9.3% is a good start -- march on the way there. But like we said, we're probably not going to get to 10% until we get to '15.

Okay. Got it. Okay.

And maybe -- Brian, this might be for you. Just curious about your cyclical outlook. You mentioned the ABI. You mentioned some things. I'm specifically curious about the mix of construction-related orders, maybe, as you see them now, what you expect? How you expect that to progress as we move through this fiscal year? Are you seeing any of the ABI improvement, and the improvement -- some of those leading indicators start to show up in prospective projects?

I think, Matt, as you look -- you can't help but look that there's a number of -- of course, we have some large projects -- the one large project that everybody wants to talk about, which -- we need lots of large projects, ultimately.

Right.

We've got some good-sized construction-related things happening on the healthcare side. I think, when I look at what you see in ABI, and when I read the BIFMA data, the forecast data, it points to a pretty good 2014 -- calendar '14, and maybe a -- and still pretty decent in '15. The data seems to make sense when you get underneath it.

Of course, the thing that, as you know, is most difficult to predict about these is -- are we going to see some shock? We keep having these crazy things -- Syria, to budget wrangling, that go on that seem to always upset the apple cart. That every time you get good momentum, you get a pullback from other factors.

I think one of the things that -- in some ways, I'd say, I think the industry's probably a little better right now than it can appear on the surface, given what's happened to the Federal Government. It's been a big negative headwind that we've all been up against. I can say, I think if that is truly bottomed, or is getting near the bottom, and we get better economic activity in the general economy in calendar '14 and '15, we should be set up for those being pretty decent years for the industry.

Okay. And continuing on that thought, maybe when you look at the customer visits, the projects you see out there right now -- are you seeing any shifts? You mentioned a couple construction projects. But as these customers start to come in and talk about what they've got going on, are you seeing a shift toward more of those new construction projects?

And then the second part of the question is -- are you able to tell, from these customer visits, that there's any acceleration with the secular shifts toward that Living Office -- the new concept office? Are you seeing acceleration there -- any evidence that it's occurring?

Yes, certainly there's evidence of the Living Office -- move to change in the floor plate is happening. And I think a lot of people are talking about it. Those things -- this industry, as you know, is a slow evolutionary industry. So, a lot of times, trends take a while before they actually start to really impact things. But our view is, yes, we're getting people to resonate with the idea. And you'll all -- but at the same time, you'll also have big sectors of business that are quite conservative -- used to doing things the way they are. So, it will take a while for those things to play through the system.

In terms of customer visits and listening to the field -- I don't know, Matt. I know you have a very strong thesis around construction. I'm not sure I can tie it to -- geez, I think it's driven by construction. And I've always said -- yes, I get your thesis on construction, but in some ways, the industry often turns more, based on people doing re-stacks and doing reconfigurations, much before it does on the construction cycle.

So, as of now, I think we have seen better activity this summer than we've seen over the last couple, in terms of customer visits. Now, what I don't know, because there's some noise in that data, because last year we were going through a fair amount of our own construction, and whether some of the data, compared to last year, is a little skewed, if you will. Overall, activity levels feel pretty good. When I'm out talking to CEOs, people seem like they are confident, although cautious, because of all the other factors that are swirling around in the air.

Okay. Perfect.

Budd Bugatch, Raymond James.

It's Bobby filling in for Budd. Thanks for taking my questions, and congrats on the quarter. I just got one or two quick questions real quick. I was wondering if you guys can provide a little color on the order pacing in the America segment? And then also, can you provide your thoughts on why the increase in the order pacing in the non-American segment? And if you see this continuing going forward?

Bobby, first of all, I'd say the best way to describe it is, I think order pacing has been choppy overall. We see a lot of rotation around, meaning one segment of the Business will be up a week, and the others will be down, and it kind of moves around. So, there hasn't been one straight, easy pattern. And I think that's been maybe the hardest thing to get your mind around prediction-wise is, the overall looks reasonable, but you get a lot of movement up and down, and a lot of week-to-week fluctuations. I would say that's also true of the North American business is you've seen a lot of movement there.

On the non-North American side, one of the things that happened is, we took a fair amount of -- we shipped a fair amount of backlog in the fourth quarter of last year. So, we came in with a fairly light starting backlog. And with what was going on in Europe and other places, again, particularly places like Australia, we started off the quarter quite light, and picked up at the back half. I think it's a little early to tell whether that is a -- going to be an ongoing pattern or not. That business has been fairly lumpy, again, like everybody else.

So, I don't know that I've got anything yet, but I can tell you, I've had enough weeks in a row to be a very, very strong trend line. It was certainly good to see the stuff come in at the end of the quarter, and gave us a pretty decent backlog going into the next one. And if we can get a reasonable level of order pattern from there, that's what went into our thinking in the forecast.

All right. I appreciate you guys answering my question. Good luck.

Josh Borstein, Longbow Research.

Just one quick follow-up for you. On the Mirra 2 chair, could you give us an update on the initial sales there? How it's selling relative to expectations right now?

Josh, this is Greg. Yes, Mirra 2, as it stands right now, will begin first customer ship sometime in October.

Okay. And do you have any presales? How are they been?

The activity level has been very, very positive.

Okay. And just -- or putting it in the context of the predecessor, the Mirra, out of the gate, does this seem like it's going to be a better seller than the original Mirra?

The original Mirra is actually one of our -- one of the better product lines we've ever had. But I would say -- response to original Mirra was quite strong, and in fact, we're having a similar response to Mirra 2. So, I think it's a little early to tell -- bigger, better than Mirra 1. Certainly, if you could have -- your career was all about Mirra 1s, you'd actually have a very successful career. So, if it's that good or better, we'll be pretty happy campers.

Great, thank you.

And I'm showing no further questions at this time. I'd now like to turn the call back over to management for any further questions.

Thanks again for sharing your time with us this morning, and for your ownership and continued confidence in Herman Miller. I hope it's clear that our Organization and the leadership team are energized by the strategic advances we are making, and the opportunities that are still in front of us. We look forward to giving you another update on our progress in December. Have a great day, and we'll see you all then.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.