MillerKnoll Inc (MLKN) 2014 Q3 法說會逐字稿

Good morning, everyone, and welcome to this Herman Miller Incorporated third quarter 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 risk factors discussed in the Company reports on Form 10-K and 10-Q, and other reports filed with the Securities and Exchange Commission.

Today's presentation will be hosted by Mr. Brian Walker, President and Chief Executive Officer, and Mr. Greg Bylsma, Executive Vice President and Chief Financial Officer. Mr. Walker will open the call with brief remarks, followed by a more detailed presentation of the financials by Mr. Bylsma. We will also, will then open the call to your questions.

We will limit today's call to 60 minutes, and ask that callers limit their questions to allow time for all participants. At this time, I would like to begin the presentation by turning the call over to Mr. Walker. Please go ahead, sir.

Good morning, everyone. We appreciate you joining us for today's call.

As we noted in yesterday's release, Herman Miller's third quarter demonstrated solid performance across the business. We are pleased with our operating results and in fact, our reported sales, gross margins, operating expenses and EPS were all in line with the guidance we provided to you in December. Greg will share more of the specifics in his review. But I will open with a few highlights and some added context, including both recent industry indicators and the broader economy, as well as for our consolidated business, and within the reporting segments.

Our industries general backdrop, like the larger economy, continues to show signs of strengthening. The most recent BIFMA forecast calls for modest growth in calendar 2014, and outlines a more bullish outlook for 2015, with a growth forecasted at better than 10%. If you have been following this forecast, you will note that the timing of stronger demand has continued to shift out.

At the same time, the underlying driver of the demand look to be firming, and the downdraft in the federal government should have less of an impact as we move forward. In addition, the employment trends, the Architectural Building Index outlook and construction, and less focus on partisanship in Washington are all more positive than we have seen in several quarters.

There are still uncertainties in the global economy related to China's domestic economy, and more recently the geopolitical events unfolding in Eastern Europe. With that said, we are optimistic that we will see continued strengthening in the global business climate.

For Herman Miller Inc specifically, the clear headline for this past quarter was order momentum, highlighted by an improving trend that drove organic order growth of 11% compared to the same period of last year. Organic sales growth in the quarter was more modest, but if even at 4%, demonstrated acceleration from the levels we have reported in recent quarters. Likewise, consolidated gross margins and operating earnings were also up relative to last year. In short, no matter how you slice it, the organization performed well.

Looking back over the last couple of years, each quarter had a mix of pluses and minuses, within and across our operating segments that impacted our consolidated results. Cumulatively over that time, we have reported steady progress. But in any given quarter, there has been one or more areas of rough water to navigate. That is a reflection of economic conditions and operational challenges we have been working through in our respective segments, businesses, business units, and geographies.

While we have been steadily executing our strategy of investment and diversification, these headwinds have acted as a damper on performance each quarter. Simply put, this third-quarter Herman Miller was firing on virtually every cylinder.

To be clear, we are a long way from fulfilling our strategic vision. There is a lot more work to do on building the offer and optimizing our operations, and there are still economic uncertainties in front of us, both regionally and globally. As a Company, we will continue to be challenged, including in this current quarter. But our recent segment and consolidated performance is encouraging and we are working hard to sustain that momentum.

In North America, we had solid organic sales and order growth for the quarter. Both measures were helped by general strength in our core work business, including some large projects that have been in the pipeline. But we again experienced double-digit decline in sales for the federal government, which also had an impact on our healthcare shipments.

However, healthcare recorded strong orders for the quarter, in both the Nemschoff and Herman Miller brands. And for the first time in 10 quarters, I am pleased to report order growth within the federal government segment. To be frank, that gain was modest, and we are far from declaring a turnaround in government demand. But we told you in Q2 that we believe we are starting to see signs of a bottom forming. We will continue to take a cautious attitude, but it is encouraging to see the first real signs of stabilization in that sector.

Turning to our international segment, which we have renamed ELA to better reflect the geographic markets it describes, we reported solid sales and order growth across nearly every region, with the largest percentage growth in EMEA and Latin America. The Asia Pacific order growth was a particular highlight, given the year-on-year decline we have seen in recent quarters.

But here again, we still have work in front of us. We must work to expand our global brand recognition and product offer, and we are continuing to work through integration of our newly acquired POSH manufacturing operations. But I am pleased to see the progress made by our ELA teams.

In Specialty and Consumer, the segment's year-over-year sales gains were driven by Maharam, which offset a flat to modest sales decline in the Collection and retail, and a more significant drop in Geiger's more project-driven business. However, consistent with the third quarter's trend, the orders for Specialty and Consumer were outstanding segment-wide.

We recorded strong double-digit order gains in all of our year-over-year comparisons, and with the addition of Maharam, we achieved better than 110% growth in total segment orders. We believe some of the growth is a reflection of seasonal order pacing related toward our consumer channel and several important new product introductions. But even accounting for that influence, we still see momentum in this key segment.

In addition to contributing to strong margins and business diversification, the specialty and consumer segment continues to play a vital role in our overall brand strategy, enhancing our visibility and reputation among both consumers and key design audiences. As an example, in the latest furniture brand value scorecard study made by the Dwell Insights Group, which is an independent market research division of Dwell Media, Herman Miller ranked number one as the brand that best exemplified design leadership in a survey of affluent consumers and design professionals.

While we are gaining traction among consumers, Herman Miller also remains committed to our leadership position in workplace knowledge and setting exemplified by our award-winning Living Office initiative. And we continue to look further to wherever people learn, heal and live. This is our core of our strategy and ambition to be a lifestyle brand that crosses the human experience in virtually every application in the built environment. We are doing that both domestically and internationally, and with a practiced ability to respond to the currents of social change that we see unfolding in global culture.

As I have said earlier, we have a great deal of work still in front of us. But we believe this quarter showed the people of Herman Miller are making real progress in delivering our strategy. With that brief introduction, let me turn the call over to Greg for more details on the quarter.

Thanks, Brian. As a reminder, we have provided supplemental financial information specific to the quarter on the investor website at HermanMiller.com. And now for the details on the quarter.

Consolidated sales of $456 million were almost 8% higher than the same quarter last year. Orders in the period of $464 million were 21% above the prior-year level. At the beginning of February, we increased our general list prices an average of 2.5%. As a result, we estimate orders totaling approximately $22 million were pulled ahead into the third quarter, that would otherwise have been entered in the fourth quarter.

Excluding the impact of the Maharam acquisition, dealer divestitures, and foreign currency translation, sales increased 4% from the prior year. Organic order growth, which adjusts for the pull ahead impact of the price increase totaled approximately 11% in the third quarter.

Although our results in the quarter were again negatively impacted by lower sales to US federal government, we were very encouraged to see year-over-year order growth in this sector for the first time in 2.5 years. As Brian mentioned, while it is too early to reach any firm conclusions here, this is a welcome sign that the government headwinds are beginning to subside.

Sequentially, net sales in the quarter decreased 3% from the second quarter, a change consistent with average historical seasonal patterns for our business. New orders decreased 8% relative to our second-quarter, an amount that compares favorably to historical seasonality, due in part to the acceleration of the orders in advance of the price increase.

Within our North American segment, sales were $294 million in the third quarter. This represents an increase of 3% from Q3 of last year. Adjusting for the impact of dealer divestitures and foreign currency translation, segment sales were up approximately 6% from last year. New orders in this segment totaled $292 million in the third quarter. This result is 9% higher than Q3 last year, and is 6% higher on an organic basis.

Our ELA segment reported sales of $98 million for the quarter. This represents an 8% increase from Q3 of last year, with the largest contributors of this growth coming from the EMEA and the Latin American regions. Orders in the quarter were $101 million. This is up almost 25% from last year, and the increase was seen across nearly all the regions.

We were especially pleased with our order growth of approximately 10% in the Asia Pacific region, after seeing year-over-year declines in recent quarters. Adjusted for the impact of changes in foreign currency translation, ELA segment sales increased almost 10%, while orders were up 26% from the prior-year third quarter.

Within our Specialty and Consumer segment, sales in the quarter totaled $64 million, an increase of over 35% over the same quarter last year. This increase is attributed to the addition of Maharam which was not included in our consolidated numbers at this time last year.

Excluding the impact from this acquisition, segment sales decreased 16% on a year-over-year basis. The majority of the decline resulted from a relative decrease in large projects at our Geiger subsidiary. New orders in this segment were almost $72 million in the third quarter. This represents an increase of 111% on a year-over-year basis.

On an organic basis, excluding the impact from the Maharam acquisition and the estimated impact from the price increase, segment orders increased nearly 17% compared to last year. This order growth was broad-based across the segment, and included double-digit growth at Geiger, the consumer business and the Herman Miller Collection.

We estimate the translation impact from changes in currency exchange rates reduced our consolidated net sales and orders in the fourth quarter by approximately $4 million and $3 million, respectively, relative to the third quarter last year. This resulted from the strengthening of the US dollar against certain other currencies compared to a year ago.

I will now move on to expenses and earnings in the quarter. Our consolidated gross margin this quarter was 35.7%. By comparison, consolidated gross margin during Q3 of last year was 34.1%, or 34.3% after adjusting for the impact of legacy pension charges.

The year-over-year improvement in gross margin percentage is primarily attributable to favorable product and channel mix, improved labor, and other operational cost savings. These factors were partially offset this quarter by the negative impact of foreign currency exchange rates relative to Q3 last year.

Operating expenses in the third quarter came in line with our expectations at $128 million. This compares to adjusted operating expenses of $114 million in the third quarter of last year. The primary contributer to this increase relates to the operating expenses at Maharam.

Additionally, during the third quarter, we incurred restructuring expenses aimed at improving efficiencies in our North American sales and distribution channel and Geiger manufacturing operations. These actions focused primarily on targeted workforce reductions, and resulted in the recognition of pretax restructuring expenses of $1.1 million.

On a GAAP basis, including restructuring expenses, we reported operating income of $34 million or 7.5% of sales in the quarter. Excluding these charges, adjusted operating earnings were $35 million or 7.7% of sales. In the third quarter of last fiscal year, operating earnings totaled $27 million on a GAAP basis. In that same period, adjusted operating earnings were $31 million or 7.4% of sales.

Our effective tax rate in the third quarter was 33.3%, compared to 29.4% in the same quarter last year. The prior year rate was lower, primarily due to benefits associated with the extension of the R&D credit tax legislation which was signed into law last year. Finally, net earnings in the quarter totaled $19 million or $0.33 per share on a diluted basis. Excluding the impact of restructuring charges, adjusted earnings per share totaled $0.34, which compares to adjusted earnings of $0.32 last year in Q3.

With that, I will now move on, and give you an update on cash flow balance sheet. We ended the third quarter with a total cash and cash equivalents of $77 million, an increase of approximately $4 million from the end of November. Net cash from operating activities in the quarter totaled $23 million, while changes in working capital resulted in a net use of cash of $11 million. Capital expenditures in the quarter totaled $12 million, bringing the year-to-date total to $32 million, and we expect our full-year capital spending to be approximately $50 million.

Cash dividends paid in the quarter were $7.4 million, compared to $5 million paid in Q3 last of year. And the dividend increase we announced last December will be reflected in our upcoming April payment, and will increase our annual payout by approximately $4 million. We remain in compliance with all of our debt covenants, and as of the quarter end, our gross debt to EBITDA ratio was approximately 1.2 to 1. The available capacity in our bank credit facility stands at $143 million, and we are confident we can meet the finance needs of the business moving forward, given our cash position, expected cash flows from ongoing operations, and our available borrowing capacity.

With that overview, I will move on to cover our sales and earnings guidance for the fourth quarter of fiscal 2014. In determining the estimated sales range, we consider the volume of orders in our backlog scheduled to ship beyond the end of the fourth quarter. The percentage of these orders is bit higher than normal, and we anticipate seeing a similar scheduling pattern on some of the projects we expect to enter early in the -- early part of the fourth quarter.

Taking these factors into consideration, we expect sales to range between $485 million and $505 million in the quarter. This implies total revenue growth between 5% and 10% over Q4 of last year, and on an organic basis, it suggests year-over-year growth of 2% to 7%. Earnings in the quarter are expected to be between $0.43 a share and $0.47 a share, and this assumes an effective tax rate of between 32% and 33%.

We expect our consolidated gross margin in the fourth quarter to improve from the third quarter level, driven primarily by higher factory production levels and some initial benefit from the February price increase, and these positive factors will be likely partially offset by increases in some material costs. In total, we expect our gross margin to range between 36% and 37%.

We anticipate a sequential ramp-up in operating expenses this quarter driven by higher sales volume, and increased spending volume on program marketing in support of upcoming new product launches in the NeoCon trade show. In total, our fourth quarter operating expenses are expected to range between $134 million and $137 million.

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

(Operator Instructions)

And our first question comes from Josh Borstein from Longbow Research. Your line is open, please go ahead.

Hello, Brian and Greg. Thanks for taking my questions, and congratulations on the quarter. Just with respect to the GSA business, you noted it wasn't down as much as you had expected, and orders were actually positive for the first time in 2.5 years. I know you don't want to call it a trend here with one quarter, but what are you hearing from your customers regarding the outlook for GSA?

Well, I mean, there is no singular customer called GSA, is the difficult thing, and it is always going to be based on what is going on in projects. I don't know that I would actually put a lot of stock in what people tell you. I think what we are seeing is, and we saw this, and we talked to you about it in the second quarter.

What you are starting to see is a relative stability quarter-over-quarter, sort of on a sequential basis, of what we are seeing in order patterns. I would say right now, that is probably the best predictor we have, is actually looking at what the patterns are, and what the types of projects. Now again, this is a lower part of the year typically for orders, I mean, the really heavy time is late summer, early fall. So this isn't the meat of the quote, if you will, of the government selling season.

On the other hand, I think what you are starting to see, is a pattern where it looks like it has done some stabilizing. We also did some of our own work. We actually went out and looked at some kind of metric models, around the government particularly. And that actually is the pattern -- a lot of that detailed work told us, that eventually we would start to see the thing sort of normalize. And while I wouldn't go there yet, and we would love to say, it can't go further down than it has, until you get to zero, that is not really true. But we certainly have seen a much firmer pattern over the last bit here.

Okay, great. I appreciate that. And then, on the North American segment, you put up some nice margins in that business, and actually you have done a very nice job all year long. Is there anything structurally different in this segment of the business, to suggest that EBIT margins in the high single- or low double-digit margins are sustainable?

We think they are sustainable. I don't think there is anything that would tell us that they are not. We have -- we are constantly, as you all that always follow us closely, we are constantly working on, how do we get new products out that drive higher margins? How do we use view -- use our work in LEAN to actually drive cost out of the business?

And if we get volume increases, we will get good leverage on operating expenses. And that has probably been the hardest one to come by, is when you are growing at 2% to 3%, it is hard to get over the kind of inflationary costs that come into the business. As soon as we start to get up in to the 5% and above, you start to get better leverage on those costs for sure.

Okay, thanks. And then, just one more for me. On the BIFMA forecast for 2015, some nice strength there, strength that we really haven't seen for a while. Is that a-- an outlook that you subscribe to, and what you seeing or hearing that may suggest that 10% growth may be possible?

It is always hard, because you are using forecasted numbers to forecast numbers, which always makes you nervous. And so, I don't know that I would ever opine on the absolute number. I think that the factors, if you read the detailed report, and you look at the factors behind it, it makes reasonable sense that we should see a -- an improving picture for the industry. Particularly, when you take the negative downdraft of the government out -- and we probably, if you have looked at it,

I would guess is 1 to 2 points of growth that have been, you have got a negative headwind in the industry over last couple years from the federal government. So, and you just take that factor out, if that really is hitting a point of stability, that is going to be a big factor already on what we are seeing in the industry.

But if you look at the other measures that are underneath there, corporate profits, we are starting to getting to a spot, that employment is starting to pick up at one level. I think the other big question is, that there is a fair amount of activity of folks realizing that we are at this point, that a lot of the stock of furniture that was sold at the peak was in the late 1990s, and you can imagine that that stuff is now nearly 15 years old. We are now in the meat of the generational shift of the baby boomers ending their career, and companies realizing they have got to get to the next generation. And I think the question is, do those things catalyze together to start a kind of period of reenergizing the industry.

I would say the data underneath BIFMA looks reasonable. I don't know if I could tell you one way or the other, whether it is the exact number, is much as I would say, directionally, it feels like there is a good chance of having stronger dynamics in the industry through the second half of 2014, and as we get into 2015.

I think the other maybe big wild card out there is, we seem to always as a global population, constantly have these little things that show up like Ukraine, if that is a little thing, that you don't know if derail other positive trends. But assuming we don't see some other factor that we can't predict today, that looks pretty reasonable.

Appreciate the color. Thanks, and good luck.

Thank you. And our next question comes from Todd Schwarztman from Sidoti & Company. Your line is open. Please go ahead.

Hello, good morning, Brian and Greg. I wanted to ask for an update on -- timetable update on the shipping of the large [energy] project, and maybe you can give us a sense of what transpired in Q3? And how that is expected to ship over the next year or so?

Yes, sure, Todd. So like we said, this thing is going to start shipping in the second quarter, which it did in November, and it is going to really ship over 14 months. And for the most part, it is pretty stable over that time period, because the revenue will be recognized as the floors are completed and installed -- think about kind of orders into revenue on a one quarter delay. So the third-quarter was the first quarter where we had significant revenue, and I think that revenue will continue to be about the same amount over this kind of 14 month period. Does that help?

Yes, it does. Thanks. In terms of commercial construction, North America, any -- are you seeing anything different than three months ago?

I don't think we see anything different than we saw three months ago. I think if you read the BIFMA or the IHS forecast, maybe to be more specific. If you read the details of it, the one thing I picked out in there that I hadn't seen is, yes, they are talking about continued construction. And as I have always said, that is not as important as an immediate driver. It is longer-term, that you want to make people have places to move to at reasonable rents. That is a bigger driver.

But I think the thing that they noted, that was interesting to me was, they are expecting a good-sized uptick in healthcare facilities over the next 24 months in terms of construction. What they didn't break down, is how of that is hospital versus other things. My -- our belief is, a lot of that is going to be outpatient clinics and ambulatory things, doc practices and the like, that you are seeing, as people respond to, how does the whole healthcare system sort of reform itself?

Got it. With regard to raw materials, are there any headwinds pertaining to a specific input? Or maybe even in aggregate that you would want to address, maybe taking a six-month view of things?

Well, Todd, if you look at -- if you go back to the fall, there was a lot of noise that steel was really going to start increase, and the mills were sort of running down that path. You did see a little bounce up in Q3 in prices, not a big one. That seems to have tapered off a bit. And as you know, we kind of have a three month lag with prices. So we will see a little bit of an impact in our numbers in the fourth quarter. That really relates to the increases that kind of came around in January. That looks pretty level. Cap has come down here recently, and you have had some things like aluminum bounce up a little bit. But net-net, we think the pricing action that we took covers any risk we have on that front.

And could -- maybe you could remind us with the order pull forward from Q4 to Q3, what is the extent of the price increases?

Are you talking about the $22 million, Todd? I am not sure what you are talking about -- (Multiple Speakers).

Yes. So what is happening with ASPs?

So they went up on average 2.5%. And as you know, typically, whenever we do a price increase like this, we have a bulk of orders that kind of get pulled forward into the picture. And so, it is -- we get a big rush of orders that week and the following week, as we try to get things through the system, which came -- which was basically February 1.

And then, the way we do the math on the $22 million, is that we look at the schedule of the backlog right now, and say well, how much of this backlog is scheduled out farther than normal, and relative to historical trend? Then we basically subtract historical trends from what we have, and voila, you get $22 million. So is that a perfect different number? No. But plus a minus a couple million dollars, it is probably in the hunt.

And Maharam, what was the sales, and the EPS contribution for Q3?

Sales were up $24.8 million, I think Todd, off the top of my head.

And if you saw, I mean if you looked at the segment reporting, you will note that the special and consumer segment operating margins were lower than what we have seen, particularly from last year. There were two real factors on that, Todd, this will get your question about EPS.

First of all, Geiger had a very light quarter in terms of shipments, a good quarter terms of orders, but a light quarter in terms of shipments. So that hurt part of the profitability. The other thing that happened in this quarter with Maharam, their volume was lighter than we had seen in prior quarters. To be frank, some of this is -- I think we did not expect them to see as much seasonality. This is our first time going through a third quarter with them. In fact, their seasonality looked a lot more like what we see in our core business. And that probably shouldn't have surprised us, to be frank, but it did.

They also had a higher level of operating expenses related to a sampling and putting new SKUs in place that would lower volume. And you remember, when you got the kind of gross margins they have, when you drop a couple million dollars worth of volume out that business, it is a big impact. And we actually raised operating expenses a bit to get some marketing programs ahead of some of the new offers they are launching for this spring.

You will see a lot of activity around Maharam, with some new carpet, a new carpet offering from [Danskina], one of the companies that is part of the Maharam Group, and a joint venture that we have with [Quadrat], and then a bunch of new SKUs on the textile side. So actually the EPS addition from Maharam was quite small this quarter.

So with that in mind are you -- or have you adjusted your initial full-year contribution, EPS guidance?

For Maharam particularly?

For Maharam, yes.

Not a ton. It might be off, what Greg, maybe a penny or so?

Yes. That is probably about right.

And with Geiger, I know I think you said that orders were up in Q3. But regarding that shipment decline, was there something about the prior-year quarter that made the bar -- that set the bar abnormally high? What were the issues going on with regards to the Geiger shipments during the quarter?

I mean, that business always, given its size and the size of projects that can roll through there, you always get a bunch of lumpiness. There is not anything special, I mean, the Q3 was pretty good last year, and the orders in the fall that would, that drove revenue in Q3 this year weren't quite as good. But last fall, that team was saying, hey look, a lot of stuff in the pipeline, and that showed up in terms of orders in the third quarter. And so there is nothing -- it is always a very volatile lumpy business due to the size of the total business relative to the size of the projects that we win.

Sounds good. Thank you, gentlemen.

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

Thanks. Good morning.

Good morning, Matt.

So on the SG&A product, it looks like historically there has been about a $5 million or 5% -- I have looked at a couple different ways -- increase in SG&A spending in Q3 to Q4. Is there -- it looks like is a little higher than that this year on a little bit higher base. I am just curious as to what is driving that? You talked about new product introductions.

And then, as you look out into next year, I think we have talked about for a while now, the potential of incremental margins rebounding a little bit after couple of years of spending. So can you discuss the spending expectations and the incremental margin expectations next year?

Yes, Matt. The biggest thing that has the operating expense up a little more than what we would normally would see is, we are in a really heavy phase around the living office, and a heavy phase around some of the work we have been doing with the sales force, on rescaling them around solution-based selling. Those two things alone are probably the biggest drivers of it.

We have a lot of -- a lot of the products we launched last year at NeoCon was, I would describe it as a soft launch. We didn't have all the marketing materials out. One of the things we have got going on right now, is you are implementing those products in a lot of dealer showrooms, a lot of our showrooms across the country. So you have got a lot of investment to sort of restock showrooms, if you will. Not only just in terms of products, but also in terms of marketing brochures, those kinds of things.

So there is a really heavy marketing effort going on right now. In fact, in some ways while there is a lot of R&D work, which is another driver of the uptick as well, is as you are down to those final throes, you have got lots of work being done in R&D. Not only in the new product platforms for the living office, but as well we are trying to make sure the pipeline doesn't dry up, and we are starting to push into new areas that will build on the work we have done.

So to be frank, it is really -- it sort of we are at the end -- not, I don't want to say at the end. But we are near the end of the big snake of work around the living office, and that is a big drive for it. What was the second part of your question, I think?

Well, you kind of alluded to the -- you are going to continue to invest. So I think the -- my anticipation was that we would see a pullback some of this gross spending next year, as you started to reap some of the benefits. But it sounds like it is going to continue, or should we see the incrementals rebound further?

Matt, I would say it this way. That our thought process is, hey, look that -- I think year-to-date, our leverage is about 18% over the prior year. That is probably about what you would tend to see next year, if the average BIFMA growth rate is -- in our model when we put this together, we were thinking around 3%. Given the uptick, if you start the volume increases that go higher than, sort of like Brian described earlier, you will see better leverage than 18%.

Okay. And that kind of leads to the next question. You have got a, I think a target or a goal -- I don't know exactly what you would call it -- but for revenue to hit $2.2 billion and for EBIT margin to hit 10%. So maybe if you could reference where you stand there, and your view on that? But more specifically, I am curious about the segment margin target, given I think Brian you just talked about the ELA segment, specialty and consumer stepped a little bit lower. What is the target margin that you are looking for each one of your segments?

Well, first of all, let me talk about the broad goals that we set out three years ago. We have been pretty open. We have just put a thing out on our website, and we are going to update those in the fourth quarter. So we are in the process of finishing up our planning. So I don't know that I am --we are ready to tell you what the goals are going to be at yet, Matt. We are working on it, and we will have that stuff out when we release in the fourth quarter.

We actually have our Board meeting in three or four weeks, and I would be a little bit ahead of myself, if I didn't make sure they got their oar in the water on what they thought they should be as well. So we are kind of at the end of that process.

We always told folks that getting to those goals would have two big factors, what does the industry do, and where were we in terms of acquisitions If you go back and look at where we were -- and to be frank, the one thing I think that we did not anticipate when we set those goals, was the drop we have seen in the federal government. If that drop had not occurred -- and I would say, we are probably that, and one sort of acquisition away from our goals, if you go back and look at it.

Now the question of whether we will get there or not? I think that is going to depend a little bit on the conversation we just had around, what is the growth rate for next year for BIFMA? And I think the earlier question of be -- do we subscribed to their number? My answer is, I don't know if I subscribe to their number. I wouldn't plan our business around that level of an increase, because I think you would get ahead of yourself.

On the other hand, I think there are good signs that it is going to be on the upper end of what we have seen for quite a while. If we get really up to the more aggressive end of the BIFMA range, it would certainly have a big impact on our ability to get there. And we are -- we feel really good about the position of the balance sheet, and think there are other things that we can continue to look at, to build out, where we start to head from a strategy perspective.

So will we get there exactly on the date that we said? Maybe not. Now longer-term, our goal still remains -- I would say, mid to long-term, is we got to get to double-digit operating income. To get that, you can't have two segments that run at half of that rate.

So for long time, we had international and the consumer and specialty business both ran near to that corporate average number. I think we have got two things going on in the international side. One of them in our control, that is we still have got some integration work to get through with POSH.

The second one, that is not in our control, is what has happened with exchange rates. Exchange rates, if you look at and go through Greg's numbers, exchange rates have put a real dent in gross margin in the international side this year. So we will look at how much of that we can recoup through pricing, but you want to be careful of the lever between pricing and margins.

So longer-term, those two segments -- I actually think the specially and consumer segment, longer run should be higher than our average. It has higher gross margins than average, but we have got to figure out how to get it up there.

Now some of those gross margins also come up in higher operating expenses especially on the consumer side, and on Maharam, where you spend more money on the marketing side of things. But net-net, I would tell you longer-term, I think S&P should run higher than our average, and international should be right about our average is my gut. Now it will take us a while to get through the question of the exchange rates. And I think the other thing is, where we forward investing, and of course in the US, we have got a fairly stable base, a big thing to play off from, and we sort of are doing incremental growth.

When you get to the other two, we are investing in them -- and you take as an example, in international, this next year we are going to open a new assembly facility in India. Well, we are going to have costs setting up that assembly facility to be able to drive demand. But we are really not going to drive much revenue out that new facility until probably fiscal 2016.

So you are going to constantly have sort of lumpiness in those businesses, if we are making investments to open new capabilities. So I think the trickier question here longer-term is going to be, what is the sort of running profitability of those businesses, versus what we report when we go through kind of step-ups in investments, as we open up new channels to market, or new capabilities to enable us to continue to get the growth. If that makes sense.

It does. It does. So if I do that math, it sounds like 10% is not the longer-term target. That was a -- the three year target. And if you just add up what you just said, it seems like it has to be something higher than that longer-term. And it seems like that the North American business needs more volume, whereas the other businesses, maybe it is just -- some of the investments laps, and some of the integration laps and things like that. Is that correct?

Well, I am not going to say correct to your first part, because I didn't give you that number. You forecasted a number. And as I told you, we will come out with a new set of three-year guidelines, when we get out to the end-of-year. Until then, we don't have that work done, Matt, to be frank. And again, I think you are going to have to take this mix of where these investments are as well.

Okay.

So that is why I am trying to be -- I want to be careful that you don't run away and say, well, geez, we are going to take all of this -- because I was trying be careful to say, yes, there will be an operating level of profitability. But then you are going to have investments you are making to extend the reach of some of those businesses. So there may be some offsets of that, as we are ramping some of them up.

If you look at the growth rates we've got in the ELA business right now, to keep that up, you have got to put infrastructure in place. If you look at S&C where we started to try to open new channels, we are going to have some investment as we go forward around marketing to continue to drive the kind of growth we are getting.

And so, that is my only caution to you is, be careful with just taking that, and saying, hey, well, I am going to add these all up, and they are going to be significantly higher. That is my one caution

Okay. That's fair. Thank you, Brian.

Thank you. And our next question comes Budd Bugatch from Raymond James. Your line is open, please go ahead.

Hello. This is a Bobby filling in for Budd. Thanks for taking my question, and congrats on the quarter.

Thanks, Bobby.

Quickly, can you maybe -- is there any other issues besides the currency that is affecting the international margins, and if maybe is there -- if we were trying to back in to ex-currency what the margin would have looked like? Because it is down from year over year?

Yes, Bobby. This is Greg. Now this is -- this going to be -- have Canada in it too, which is going to play across the North American segment. But the total impact in terms of dollars on gross margin year on year is about $3 million on the gross margin line. So one of the things we have talked about internally is, we were really pleased with 35.7%, given that headwind that we were facing.

So I don't remember off the top of my head, what the difference between Canada and the rest of the business. I think it was in the neighborhood -- Canada was a pretty healthy part of that $3 million.

Okay.

I want to say more than a $1 million, I can't remember off the top of my head, Bobby.

All right. I appreciate that. That is, the color is helpful. And then, maybe just for modeling purposes, a little color on a -- for next quarter some revenue by segment. Last quarter you called out strength again in international revenue. Are you expecting to see that again going forward next quarter?

Bobby, for that question I would look at our orders this quarter, and say, that is -- for modeling purposes that is what I would use.

All right. And can you give us the percentage of federal government as a percentage of sales?

Yes. I didn't do the exact math. It is in the neighborhood of about 4%, Bobby, maybe 3.7%, somewhere between 3.5% and 4%.

All right, perfect. I appreciate it. And then, one last quick one on -- you did give some color on the large [energy] project, but is it possible to get the dollar value that it contributed to the quarter?

I would say, on an order side, organic order growth without that was just under 10%.

All right. I appreciate that. Thank you, and best of luck going forward.

Thanks.

Thank you. Your next question comes from Josh Borstein from Longbow Research. Your line is open. Please go ahead.

All right, thanks. Just a quick follow-up. On the restructuring actions that you took with the Geiger subsidiary, what exactly are those, and are there any estimated savings associated with that? And if so, when should they be realized?

Yes. So it was a combination of things. And at Geiger, there was a shift change, where we combined some two shifts and kind of into -- for the purposes of one shift. That is where the biggest savings will come from. My guess, is you are talking about in the neighborhood of about equal to the amount of the restructure on an annual basis.

Okay. Thanks. And then just lastly, with the improvement in the economy, and the pick up in orders, and the acceleration you are seeing, have you also seen a step-up in the quality of products or price points that customers are purchasing right now?

I don't know that we seen any change in, Josh, in patterns of what folks are purchasing from our perspective. It might, if you look at the industry overall, you might see that. But, of course, we wouldn't have that data. For us, of course, we sell what we have, and we don't really play across that broad of a spectrum in that case. So for us, mix has not changed a great deal.

Okay. Thank you.

Thank you. I am showing no further questions at this time, gentlemen, and I would like to hand the conference back over for any closing remarks.

Well, thank you all for taking time to join us this morning. Before our next reporting window, we hope to see you personally at NeoCon. Meanwhile, we will remain focused on delivering great business performance for our shareholders, and we look forward to sharing those results in June. Thanks, and we will talk to you soon.

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