MillerKnoll Inc (MLKN) 2015 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Herman Miller, Incorporated second-quarter fiscal year 2015 earnings results conference call. This call is being recorded.

This presentation will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These risks and uncertainties include those risk factors discussed in the Company's reports on Form 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. Bylsma, Executive Vice President and Chief Financial Officer; and Mr. Jeff Stutz, Chief Accounting Officer. Mr. Walker will open the call with brief remarks followed by a more detailed presentation of the financials by Mr. Bylsma.

We 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 to participate.

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 are glad to have you with us today. I will open the call with a brief summary of the quarter, including some added details on the overall performance and trends we're seeing in each of our segments.

I will also offer a bit more color on our decision to provide additional guidance for the full fiscal year. Then I will turn the call over to Greg and Jeff for more of the specific financial details.

On a consolidated basis, we posted solid results in the quarter, delivering sales and earnings growth in line with our earlier guidance. This is our 12th consecutive quarter of organic growth in orders and we've boasted one of the highest levels of EBITDA in quite some time.

However, as we noted in the press release, order growth in the quarter was less than we anticipated. The order growth rate was in part impacted by a difficult comparison to a prior year that included an above-trend amount of large project orders in our North American segment.

At the macro level, we continue to believe the overall economic environment is positive for the segments in which we compete and we believe our strategic investments and a growing global presence, our consumer [offering] channel and expanded offering, especially contract businesses, are enabling us to compete and capture a broader part of this continued economic recovery.

We also continue to believe our Living Office strategy provides a framework that enables us to better serve our customers and differentiates us from our competitors.

In recent years, we have invested in growing our global presence, and this quarter, our ELA segment posted impressive growth in orders, sales, and EBITDA. Order growth was particularly strong in EMEA and Asia. Latin America was a soft spot, as many of these economies are impacted by the significant change in oil and political uncertainty. We were pleased with the results of our ELA segment in the face of a complex and volatile geopolitical environment in many corners of the globe.

We also made good progress advancing a number of important strategic initiatives, including facilities projects aimed at improving our operational efficiency and expanding our global reach. This past quarter, we broke ground on a new consolidated UK manufacturing and distribution site, expected to be operational by Q3 of next fiscal year.

We are also nearing completion on construction of a new leased facility in India, where the ramp-up of manufacturing to be completed and fully operational by next June. In brief, the ELA segment is making an important contribution to our current performance and we believe it will continue to be a source of new growth and profitability in the future.

Our consumer segment performed well and we are making solid progress with the combination of Herman Miller and Design Within Reach. To be frank, there's a lot of noise in the results with purchase accounting, and it's difficult to see through the revenue in order results, given our past relationship.

On an organic basis, our consumer segment sales grew approximately 14%. However, perhaps more importantly, on a pro forma basis, the combined Herman Miller, consumer and DWR businesses had revenue growth of 12% compared to the same period of last year.

The growth was driven by the effectiveness of the new large-format studios, increasing square footage, and growth in the Herman Miller e-commerce channel. This past quarter, we opened a new large-format studio in the Boston area while closing two smaller studios in that same market.

In total, the average square footage for all DWR studios has increased from 215,000 square feet a year ago to just under 250,000 square feet today. Over that same time. The number of studios has actually decreased from 41 to 37.

The business remains in the early innings of this studio transformation strategy. It's important to keep in mind that as we pursue this strategy, the business will incur incremental transition costs, such as duplicate rent and moving expenses associated with opening of these new studios.

The impact of these costs was only $200,000 this quarter, but in the future, it will become more significant as we ramp up new studio openings. Of the 37 studios we have today, 10 have been converted to the new format.

You will also note this quarter's results were dampened by $5 million of acquisition-related charges. We believe these charges are now behind us. Meanwhile, our integration plans are moving forward and showing good progress against an identified list of key priorities, with some cost and operational synergies already realized and further opportunities still in front of us.

As we outlined for you in August, while the profitable business segment is good today, the long-term goal of midteens EBITDA margins will be realized as we get an increasing number of the new studios converted to the new model and we increase the mix of proprietary products.

Our specialty segment had mid-single digit growth and improved profitability. The profitability of this segment continues to be muted by integration expenses associated with the Maharam acquisition and will largely be completed at the end of this fiscal year, and capacity investments in both sales and manufacturing we've built to launch the Herman Miller collection and Geiger seating businesses.

We believe this segment represents a critical component of our overall value proposition and is making good progress towards our long-term goals.

Within the specialty segment, there are a number of points worth highlighting. Our Geiger subsidiary turned in another solid quarter, capitalizing on a wave of market momentum following their strong brand and product showing this past June at the NeoCon tradeshow.

The Geiger team is also seeing benefit from a continuing focus on operational improvements and efficiencies that are driving real improvements in both reliability and margins. Our collection business again posted double-digit sales growth and continues to prove to be an effective complement to our contract offer.

Looking ahead, the collection team has a range of new products coming to market over the balance of the year, giving us an expanded portfolio, expanded product offer, and new opportunity in some key categories going forward.

Our North American segment showed mixed results for the quarter. Overall, sales growth was healthy and this team delivered a significant improvement in profitability. On an organic basis, segment sales were up almost 8% compared to last year and adjusted operating earnings increased 170 basis points to 10.2%.

With that said, the pace of new orders throughout the quarter failed to meet our expectations, ending the period down 3% organically versus last year. To be sure, order patterns in our industry are inherently lumpy, given the impact large projects can have quarter to quarter. This is certainly true for us this quarter, as orders last year included two very large accounts that did not see the same level of activity this year.

While the impact of these large orders amplified the order softness we experienced in the quarter, we are also looking at actions we can take to improve our performance. First, I believe the rollout of both our Living Office Solutions framework and our new Insight-led sales training has impacted the time our sales team and dealer network have spent in front of customers. We remain firm that the business will benefit longer term, but that work has taken a toll on our near-term performance.

In answer, we are rightsizing and prioritizing our sales transformation work to ensure our salespeople have more effective selling capacity. Second, and on a related point, we have also had a selling capacity issue from a number of open sales positions in the field. We are addressing this quickly with a reorganization of our sales recruitment and an onboarding process to get our talented North American sales force back to full capacity.

Third, we have been slower to market with some of our newest products. Now to be frank, I bear some of the responsibility for that myself, because I've demanded we maintain discipline in meeting our cost targets.

It's also true that we've had a very aggressive development queue in multiple product categories aimed at growing our North American contract business. This effort has stretched our people and resources. Most of these new products will be fully available as we exit the third quarter.

Regardless, not getting products to market in a timely and effective manner isn't acceptable. In response, we have established a new R&D thread to enable faster cycle times in reaction to identified market needs.

In short, we are taking a variety of actions to assure we can win today while continuing to implement our long-term strategic vision. Looking forward, you will note we have diverted from our normal practice of only providing guidance one quarter out.

To be frank, our visibility beyond one quarter is less than perfect. However, with our expanded consumer business, our quarterly revenue will be more heavily impacted by promotional events and the seasonality of the consumer business.

Specifically, the third quarter will include fewer promotional events than this past quarter and will be impacted by the holiday season, which has historically been a light period for Design Within Reach.

Our fiscal fourth quarter will include three significant promotional events and the normal seasonality of the spring selling season. This will be complemented with a normal seasonal turn in the contract business. We felt this was appropriate and hope that additional guidance proves helpful as you model and evaluate our performance.

With that, I will turn the call over to Greg and Jeff for more on the financials.

Thanks, Brian. Consolidated sales in the second quarter of $565 million were 20% higher than the same quarter last year. Orders in the period of 572 million were 14% above the prior-year level.

The acquisition of DWR in July added approximately $61 million of sales and $64 million of orders to our consolidated results in the second quarter. On an organic basis, excluding the impact of DWR, dealer divestitures, and foreign currency translation, sales increased 9% and orders increased 2.5% from the second quarter of last year.

Our North American segment demonstrated mixed performance between sales and order growth. Net sales of $315 million were up 6% from Q2 of last year on a reported basis and increased 8% organically.

In contrast, segment orders of $319 million decreased 3% on an organic basis. Our results in the second quarter of last year included two specific projects that together accounted for $31 million of orders in the period.

By comparison, order activity on these two accounts was substantially lower in the quarter. Adjusting for these items, organic growth would have been 2.6% higher than the prior-year quarter.

Our ELA segment reported sales of $114 million for the quarter. This represents an 11% increase from Q2 of last year, with the largest contributor of this growth coming from the EMEA region.

New orders in the quarter of $112 million were up 8% from last year. Adjusted for the impact of changes in foreign currency translation, segment sales increased 14%, while orders were up nearly 11% from the prior year.

New sales in the second quarter within our specialty segment totaled $55 million. This represents a 4% increase over sales in the same quarter last year. Orders in the quarter of $53 million increased 3% from a year-ago period.

Our consumer segment reported net sales of $80 million in the second quarter, an increase of $63 million from the same quarter last year. The majority of this year-over-year increase relates to the addition of DWR.

The remaining growth this quarter was driven by organic demand increases from our wholesale and e-commerce customers. New orders in this segment totaled $87 million in the second quarter, an increase of $74 million from the prior-year level.

On an organic basis, segment sales increased 14% while orders increased 79% from the prior year. This is significant percentage increase in orders resulted in part from a year-on-year shift in the timing of the retail stocking orders in advance of the holiday season.

We estimate the translation impact from changes in currency exchange rates reduced our consolidated net sales and orders in the quarter by approximately $5 million relative to the second quarter of last year. This resulted from the general strengthening of the US dollar against other major currencies compared to a year ago.

I will now review expenses and earnings for the quarter. Our consolidated gross margin in the second quarter totaled 36.4% compared to 25.3% in the same quarter last year. Acquisition-related inventory adjustments associated with DWR reduced gross margin by $5 million in the quarter.

Excluding these items, our adjusted gross margin percentage was 37.2%, a 120 basis point improvement over last year's adjusted gross margin of 36%. This year-over-year improvement is primarily attributed to continual favorable product and channel mix, including the addition of DWR, which more than offset an estimated 30 basis point of unfavorable currency impact from the strengthening of the US dollar this quarter.

Operating expenses in the second quarter were $159 million compared to $240 million last year. Excluding legacy pension charges of $111 million, adjusted operating expenses totaled $129 million in the prior-year period. Adjusting for these items, operating expenses increased $30 million, the majority of which relates to the addition of DWR and the variability driven by the net sales growth.

On a GAAP basis, we reported operating earnings of $47 million in the second quarter. Excluding acquisition-related expenses recognized in the current period, adjusted operating earnings this quarter were $52 million or 9.1% of sales.

In the second quarter of last year, adjusted operating earnings were $40 million or 8.5% of sales. Our effective tax rate in the second quarter was 33.8% compared to 37.6% in Q2 of last year.

Finally, net earnings in the second quarter were $28 million or $0.46 per share on a diluted basis. By comparison, we reported a net loss of $81 million or $1.37 per share on a diluted basis in the second quarter of 2014.

Excluding acquisition-related expenses recognized in the current period, adjusted diluted earnings per share in the second quarter were $0.51. This compares to adjusted earnings of $0.42 per share in the second quarter of fiscal 2014.

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

Thanks, Greg. Good morning, everyone. We ended the quarter with total cash and cash equivalents of $65 million, an amount down approximately $2 million from where we ended last quarter.

Cash flows from operations in the quarter totaled $39 million and changes in working capital resulted in a net cash use of $3 million, driven by increases in accounts receivable, offset by changes in trade payables and accrued liabilities. Capital expenditures in the quarter were $18 million and we continue to anticipate full-year capital spending of between $65 million and $70 million.

Cash dividends paid in the second quarter were $8 million compared to $7 million in Q2 of last fiscal year. We remain in compliance with all debt covenants and as of quarter end, our gross debt to EBITDA ratio was approximately 1.52 to 1.

As reminder, we borrowed on our bank credit facility in Q1 in connection with the DWR acquisition. During the second quarter, we repaid $23 million, which reduced the amount owed to $77 million at the end of the quarter. The available capacity on our facility stands at $162 million net of outstanding letters of credit.

We are confident we can meet the financing needs of the business as we move forward, given our current cash position, expected cash flows from ongoing operations, and the available borrowing capacity.

And with that brief update, I'll turn the call back over to Greg to give us guidance on the third quarter and full year.

Thanks, Jeff. We expect sales to range between $510 million and $530 million in the third quarter. This guidance implies total revenue growth between 12% and 16% over Q3 of last fiscal year. On an organic basis, excluding the expected contribution from DWR and the impact of dealer divestitures, the midpoint of this range suggests growth of 4% over last year.

Gross margin is expected to range between 36% and 37% for the third quarter. This gross margin assumes the relative slowdown in factory production that we normally experience around the holiday period and in the month of January.

Operating expenses in the third quarter are expected to range between $152 million and $156 million. And earnings per share in the quarter are expected to be between $0.33 and $0.37.

This guidance assumes an effective tax rate between 33% and 35%. This tax rate guidance does not include any potential benefits related to R&D tax credit legislation currently pending in Washington, nor does it reflect certain tax planning ideas we are contemplating for later this year.

As Brian mentioned, this quarter, we are providing additional guidance on our outlook for the full year, given the added complexity of DWR's seasonality and the relatively choppy demand pattern we experienced in North America over the past quarter. For the full fiscal year of 2015, we expect sales to range between $2.145 billion and $2.185 billion. This guidance implies total revenue growth between 14% and 16% over fiscal 2014.

On an organic basis, excluding the expected contribution from DWR and the impact of dealer divestitures, the midpoint of this range suggests growth of 5% over last year. Adjusted earnings per share are expected to be between $1.80 and $1.88 per share on the full year, which would reflect growth of approximately 10% over fiscal 2014 at the midpoint of this range.

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

(Operator Instructions) Josh Borstein from Longbow Research.

Just the decline in orders in North America -- how much would you say is Herman Miller specific and how much is due to a falloff in industry fundamentals, if any?

I think it's -- I don't know if I can answer the question from a total industry perspective. We don't, obviously, have numbers for the industry for November.

If you take out or exclude the drop that we saw in those large -- in that large-account activity, we've got a base level of around 2.5% to 3%. We've also seen some variation in some particular segments, like our higher education business. It primarily shows up for us as state and local business. That was a little bit choppy as well.

If you look at the base order flow, besides those things -- and I always find it dangerous, because it sounds like an excuse when you start taking stuff out to explain why it probably is better than it looks -- our pattern looked closer to what we saw in the industry for those first couple of months that we have data on. So I would actually say the industry data still looks pretty solid, from what we can see.

It has been, as I think some people have noted in their own information on the industry, the industry has been bouncy and there hasn't been as many large projects out there. So in our case, you got to try to replace those large projects with lots more smaller ones.

And to be frank, we don't see -- we don't want to give you excuses. We want to tell you we are doing things about it and just trying to tell you what we see.

Okay, thanks. And the guidance that you've given for the full year suggests that relative to consensus expectations, most of the shortfall is going to be confined here to 3Q. What gives you the confidence the issues you experienced can be resolved within a quarter?

Well, first of all, I think if you look, the forecast that we've given you guys as you look out in the fourth quarter, the level of activity -- we didn't change it dramatically from what we actually saw this quarter other than normal seasonality. The big driver of the change that looks like it's greater has actually happening on the consumer side, where we have a pretty big step-up based on the fact that we have the semi-annual sale, the Herman Miller sale, and some other brand sales that we do in that period as well. So that's a big chunk of it.

And then really in the core North American business, where we actually saw the softness, we haven't assumed a massive turnaround, because that will take some time to work its way through. I think product side, like I said, most of those -- not even most, all of the products that we are talking about -- will be out at the end of the third quarter. And it takes time for customers to ramp into those.

The sales side, I think, will have all the people in place. They need some time to get up to their full capacity as well. But it's not really based on the fact that we see a major snap back, if you will, in the core business. We looked at order rates and said, hey, what do we think is a reasonable number, given normal seasonality?

Okay. And can you talk about the order trends you saw interquarter? And while I realize it's early, is there any indication that order patterns here in 3Q have picked up at all?

It's too -- we just don't have any real data yet. We've only got a couple of weeks of data, to be honest with you. And I wouldn't say we've seen anything different in that data than we saw coming into it

. So there's nothing in there, but you really got to -- because of the way projects fall in, you got to watch a longer trend line to see what's happening. So I wouldn't tell you we've got any data that tell us one direction or the other.

Okay, and just last from me -- BIFMA took down their 2014 shipment forecast to 4%. Do you find that a reasonable number based on what you are seeing right now entering 2015?

Yes. In fact, if you remember, I think last quarter, they were at -- when we talked, I think they were up around 6%. And I think we were saying at that time that we thought that was a little top-ish, even though we thought the direction was right.

4% is getting, I think, closer to what makes sense. And I actually think, if you look at the more recent data from the industry, looking through the lumpiness, I think people are -- that seems like it's pretty consistent with what you are seeing in the actual data.

The recent BIFMA data, if you average out the last few months, suggests something greater than 4%, doesn't it?

Yes. Well, that's what I say -- I think at least now, you can sort of tie the two together. Right? Again, I think you got the same problem with everybody is that BIFMA data has bounced all over from negatives to big positives. And so, where do you draw the line in that statistically is probably the question.

Okay, great. Thank you for your help. I will jump back in the queue.

Todd Schwartzman from Sidoti and Company.

Could you talk a little bit about the GSA business and also maybe state and local and what improvements or not you saw during the quarter?

GSA in total, which I think we signaled as much as two quarters ago, has been relatively consistent is the way I would describe it. It's actually growing a little bit year over year.

It's a little different depending on whether you look at the office side or healthcare. Healthcare has still been under a bit of pressure on our side, where the office side has been a little bit more robust. That's GSA.

State and local, which has been pretty consistent over the last few years -- that was a little softer this period for us. And when we looked underneath it, it was primarily higher education. So I don't know that that's related to the state and local governments.

But a lot of colleges and universities buy off of state and local contracts. Now that business tends to be, for us, because it's a relatively small segment, the higher ed piece is, it tends to bounce around a little bit, depending on whether you want a project with a particular university or not.

On the healthcare side, are there any signs that folks are looking, maybe sitting on their hands looking towards the 2016 presidential election? Or is it really too early to make that assessment?

I don't know that we see that. I would tell you the healthcare business -- all of the forward-looking data around construction and activity by the architect seems to point that it should get better.

I would tell you, frankly, we haven't seen as much of that and there continues to be, I think, a rotation towards the clinics and ambulatory care facilities. There are some fairly large projects out there on the horizon. But I wouldn't tell you that we've got anything that would at least lead me to believe from my own work on it around the presidential election.

Got it. And on the sales recruiting effort, where are you with that? When do you expect to have at least hired the right number of people?

This is always one that, if we have an area of the business, I think everybody does, your sales force has generally more churn. So it's an ongoing thing. I would tell you, to get us back up to where we feel comfortable, we are probably about a half of way through getting the folks back that we need. My guess is by the end of the time we get out of the end of the quarter, we should be pretty close.

Now then they take a little bit of a ramp-up time to get through their own training and education, get their book of business. It's not unusual for a person to take six months to a year before you are getting full productivity out of them.

But we are all over it. We are looking at it every week, market by market. And that's really where we -- what got us there is we started not looking at the total, but we started digging into MSA by MSA, where were we seeing patterns that didn't feel like they were -- where we would have expected, and started to look for gaps in market potential versus the number of folks we had. That led us to say, hey, we got some spots that need some additional resources to be able to handle what's out there.

And in terms of the sales process, is there anything inherently different about the Living Office products, where those are -- maybe the sales force should best successfully position those products or the approach, the pitch to the customer vis-a-vis the other non-Living Office products?

Yes. I wouldn't say it's necessarily the Living Office product-wise. If -- you know, we have talked in many ways that the Living Office is really about talking to a customer about the total environment, not specific products.

To really be successful with that, you need to be earlier in the buying process before the customer has made up their mind and they are just looking for a product.

Now to be frank, and I often say this to our folks, we are doing both. Right? So those products that we have developed -- they are obviously fine products to sell just as a product. A Mirra 2 chair I can just sell as a chair, if that's all you want to buy is a chair.

So to me, Living Office is two things for us. It's, A, a way to talk to customers to help them through the choice making process. We believe when we are most successful at that, it will enable us to sell them a broader range of products that goes across the whole floor plate.

But it's also the way that we are using to target what our future product development agenda is. So by understanding the needs across the whole floor plate enables us to identify unmet needs that we can solve through R&D. So I see it as kind of a duality, if you will.

When we are most successful with a customer on a Living Office discussion, though, is when we get them either before they've decided that they even need to do something or early on in the buying process, when they are trying to figure out what it is we are going to create rather than trying to decide what it is we are going to buy. Does that make sense?

Yes, it does. So that's a more holistic approach, if you will?

Correct. And that's where some of the training and education has been, that -- and it took some time to get folks out to say, how do you identify those customers, how do you identify who is right for it, how do you get earlier in the buying process. It just takes some education for folks to do.

And coupled with that, we've had a lot of new products that they also needed to be educated on as those were coming out in the marketplace.

And if you are successful in accomplishing your goals, that it will be borne out, I would think, in order size on average?

Yes. I think it's one of those things, you know. I don't think any of the work we've done is wrongheaded, to be frank, in the long run. On the other hand, just like when you make any change, add capacity or something, you have a period of time where your signal strength isn't as good as it could have done.

If I -- I would say I think our learning in this one is we have to make sure we pace how we do that with both our dealers and ourselves. And we could be better at timing when the new products are actually available with some of that training and education so that we are getting full value for what we are doing.

So you know what? We didn't get it all right. That's my problem. I didn't get it right. We are working on it.

Switching to ELA for just a moment, is there anything going on there demand-wise in Q2, large project-wise, concentrated among a small number of customers such that a year from now, we will hear about how the bar was set pretty high in ELA?

To be frank, I don't know of any specific large projects in ELA. Now it's a little different. This gets hard, because large projects to the ELA business versus a large project to Herman Miller versus a large project to DWR are like -- the scales are all over the map. Right? So I'm sure that the team in ELA would say we had some large projects.

The stuff we have been talking about in North America, though -- generally, we are talking about projects that are greater than $5 million on each individual order. That's a pretty big number. I don't know of any that large specifically in the ELA business during this period.

If you look at the ELA numbers, particularly on the order side, it was fairly broad based across Europe and Asia, where the orders were coming from. There are some markets that had more, I'll call it, concentrated, where the growth was a little bigger. But nothing in particular that I would point to from a project perspective.

And in terms of multinationals, how are they factoring in in this trend?

Obviously, serving multinationals is a big part of it. But it's just as much trying to do both US multinationals as well as multinationals or regional players from those local markets.

In this quarter, we had particularly strong activity in places like the Middle East and parts of Europe as well as Australia. So it's pretty varied. It's varied not only by country, but by city.

Right. And lastly, what's your outlook for commodities?

As of right now, we see that we will see some benefit from commodities over time, especially if we continue to see oil down where it is. We've seen some recent drops, I believe, Greg, in steel.

We haven't seen much of the benefit of that yet. We should start to see some of it. The oil one is probably the one that's the biggest wildcard. If it's going to affect us, it will affect probably two areas -- plastics and in transportation, little bit in freight. So those are the two areas we will probably -- if we get a benefit, it will be in those two.

Great. Thanks a lot.

(Operator Instructions) Budd Bugatch from Raymond James.

What is different now, between now and August? What has changed between now and August, when we had, I think, the $2.2 billion of estimate for this year? Is it just the American order weakness? Or is there other things that have changed that have caused you to take the revenue guidance down a touch?

No, Budd, it's almost entirely on the North American side. And I'd say it's a combo of both the office and the healthcare side are both a little bit below what we thought, with the majority of it being on the office side. And a lot of it, obviously, is in next quarter when you look underneath it.

Okay. And what has surprised you or what have you found different than your expectation in the DWR acquisition?

Positively, I would say I am even more impressed today and more confident in the leaders. The connectivity of John Edelman and John McPhee to the broader Herman Miller organization has been outstanding. The inner workings of the two groups have been great.

And I think those guys have had some great observations not only on the DWR side, but looking at how we serve our other wholesale customers as well as on our direct business. Those guys have been very thoughtful at that.

I think, Budd, maybe longer term, some of the side benefits that I don't know that I would have predicted coming in that we still really don't have our arms completely around are their data use and knowledge of data of their customers and what is really happening day by day -- you probably know this, because you've lived in that consumer world -- it's actually just at a level of detail and sophistication I don't think we have generally been at.

So I think longer term, while it's not exactly the same, I think we can learn from that. I think that will be good for us. I think the other thing that certainly has been interesting is that business, you got to be talking -- you almost have to look at it and talk about it by the day and by the hour versus typically, because, again, we are looking at these big projects. You got a lot of -- you are looking at weekly and monthly, maybe annual trends.

That business is much more close in and it has a bigger impact based on what you might call demand creation things you do, whether that's promotional events, whether that's how you are dealing with Google AdWords, and capturing space on the Internet. Those tend to be new things that we are learning about.

I think the things that have been very consistent, where we are getting growth and where we are seeing success, is largely where we expected. The new large-format studios are growing nicely. That has been at our expectations.

If we've had a negative surprise, we've had a little bit bigger falloff in some of the older studios, the ones that are not the new format, that we and they might have anticipated. The good news is some of those are starting to peel off and we will see more of them next year.

So you are in this interesting spot of how much do I invest in them before the leases end? So you got a little bit of crossover period here to pay attention to. But the total looks like it's playing pretty close to where we thought.

Did they make their budget or their expectations for this quarter?

They were very, very close when you looked at the total. That's one of the things we've got to keep talking about is the total, because one level of what's happening is we are also selling more Herman Miller through DWR. You follow what I mean?

So we've got the two pieces. But if you look at the total of the consumer business, they were pretty darn close to the revenue number. Margins were just almost exactly what we expected.

So the one thing that does happen in that business, as you can imagine, is because it's running 47% gross margins, $1 million of revenue makes a pretty big move on the other side. So a little light on the topline, but I would say as forecasting goes, within spitting distance.

And that gets me to the gross profit question. How was the gross profit in the US segment, other than that? How did that compare year over year?

Pretty darn consistent. Right, guys? A little bit of improvement?

Yes. The total -- so you are talking about just in North America, Budd?

Yes, sir, talking about North American office solutions or -- yes, kind of the --

Yes. I want to say off top of my head, Budd, it was up like 100 basis points.

Just to tag onto that, that's despite some pressure from the Canadian dollar, US dollar. We had some margin pressure from translation that we certainly -- and just within the quarter that we didn't have factored into our forecast. So we were facing that headwind.

And is most of the translation impact in for the Canadian dollar? Is that what -- that's one that --

No. In total, it was -- it's actually a fairly close split between the ELA segment and North America.

Okay. All right. Size of average projects -- others have noted that that size has come down. I think you referred to as well. Are you seeing that as well, that the average project size has come down?

I know you've had a huge project going on in the Houston area. What are you seeing for overall incoming orders in terms of average project?

I think certainly, Budd, when you look at it -- and that's obviously one of the things that probably we didn't -- we maybe didn't pay enough attention to coming into the quarter is that I would call it the super large category.

Now to be frank, last year, we were higher than normal of those big projects is the truth, when you look back on it. And it wasn't just one; we had a few that popped into that category.

So as we look out right now, certainly the projects are tending to be more midsized is the way I would describe it than they are the very, very large. There are a few big whales out there that everybody, I'm sure, is chasing.

But certainly -- and that's, I think, one of the things that exacerbated the problem in the quarter at one level is you got mostly -- you got more midsize projects and you are trying to replace two very large ones. And those just -- the math just gets to be difficult.

So does that mean that the average project size has come down for you as well?

Yes.

I'm just trying to make sure.

I think, yes, if you look across the whole thing, that's true.

Okay. You have a big project, that Houston project. And obviously energy costs have been one of the biggest issues that -- or biggest things that's caught on in our country over the last six months or so. Any -- still revenue impact of that for you going on? And what's the outlook for that? Is that just about finished?

That project still has another, what, six months to run. We have another large project we've been working on in that same industry sector. So we haven't seen yet, Budd, that I can tell you, any negative impacts on that sector yet. Of course, you can't help but watch the dislocation we are seeing right now in oil prices and wonder is that going to happen.

So far, we have not seen that. That sector has remained. Now partly, we are still -- and as you know, these things tend to play out. This one has played out over multiple years. We are still playing off of that.

Will we see a drop in that sector next year or year over year? The answer to that is very likely yes, because we won't be able to replace -- I would doubt we would be able to replace that level of volume in that area next year. So we will have to find another area. There's no doubt about it.

So the one project that you are delivering -- there's no deferral in any of that? That continues apace. Is that what I'm reading?

Correct.

And the project that you are working on -- that project, I didn't think, had yet been granted. Am I correct on that or has that been won?

We have one large project that we have won that we have not -- I don't believe it's all even entered in orders yet. And the timing of that in terms of order entry and shipment, I don't think we know exactly. We think some of that will be this year, maybe a little into next. But that's a question mark.

And that's the one that might be at risk if we had delays because of the price of energy and (multiple speakers)?

I don't think so, Budd, because I think they've already got -- the building is already done and coming out of the ground. So I can't imagine they would back up in outfitting, because I think they have to move.

But that's -- I hate to ever sound like that's a -- certainly, CEOs wake up and change their minds. But we have no indication of anybody changing their mind on that.

Okay. I apologize for some more questions. But the sales capacity and product introduction as your new product issues that you referred to both in your release and in the commentary. Can you put a little more flesh on that? How many markets were there sales capacity gaps in and what kind of new products?

Well, you know, Budd, we launched two major new systems platforms in the last bit here. To be frank, both of those were originally scheduled to be ready for orders shortly after NeoCon. It took us longer to get them out, so we are really just in the ramp-up phase. In fact, one of them will be finishing some of it in the third quarter.

There also was a third systems product that we haven't really talked about as much, which was really off of some of the work we did on one of those large customer project that we are now commercializing. I wouldn't say we are necessarily late on that one, although it certainly has been one of the areas that has been -- as we've talked about Living Office, we always saw that as part of it. And as we talked about customers about it, we've talked about it, but it hasn't been available.

In retrospect, we needed that one sooner, to be frank. I think that has hurt us a little bit when we are in the proposal stage, if you follow what I mean.

On the headcount side, we went in and looked at it market by market because that's where it came up, Budd, is we had this question about why are the order patterns different market by market and looked at more potential to a number of places.

I would tell you it was probably five or six markets. I don't remember off the top of my head and I don't have the data in front of me. But it was a good number of folks and a good number of markets that I think could have some real impact.

Now again, you can't really take, as you know -- this isn't a science. I can't give you sales plus products exact. At one level this is, I think, doing what you guys should expect of us, of saying I can give you the reason that we didn't have these large projects last year. That's all really interesting.

But our job is to figure out how to get the order growth no matter what's out there. And we got to ask ourselves how to tack.

And as we dug into it, I looked at two or three things with the team. Curt and I've spent a lot of time traveling around to get our minds around where we thought we could do better and really came to the conclusion it was two or three things we had to dial in, sales capacity being one of them, which we kicked off about 6, 7 weeks ago.

We kicked off a really concentrated effort on going out and getting those folks back in place. We've been working on -- hard on getting the new products to market. Some of that is starting to come to fruition.

So it isn't as if we just woke up and did this as we read the release, of course. But there's also those things you can't turn on a dime.

How many salespeople are there? And what is your total selling force now that reports to Curt?

Curt's total team -- I don't know the number off the top of my head. But I'm going to say it's in excess of 200. And we have way more than that across the Company, of course, because you've got salespeople at Maharam and Geiger and the collection and healthcare.

But Curt's, I think, is somewhere around 200. That's probably excluding the small business folks. He's probably 225 with small business, I would guess, somewhere in that neighborhood.

And we are probably talking 10 to 15 folks, in total, across the business, maybe as many as 20, that we ran out. On the sales side, you are always -- there's always a churn factor going on.

I think our churn factor -- not that we had lost as many people; I just don't think we had been as up on the replacement cycle as we needed to be. And we ended up with a lower effective capacity than what I think we needed.

And some of that is, as the market has picked up and as project sizes are smaller, actually, oddly, you need more people to go after the smaller size, because they've got more places to be to go get those orders.

No, I understand that. And that makes sense. And lastly for me, the strength in ELA -- can you give us some color on whether it's E, L, or A, or how that --

This is interesting. If you look at it on a sales perspective, the big growth this quarter was actually primarily in EMEA. It was both in E and in ME. Both were quite good, actually.

If you look at it on an orders basis, it was both EMEA, both the E and the A, I guess, with the Asian piece being fairly broad based, China probably the softest of the group, although not bad, fairly stable. But good strength in Australia, decent in Japan, pretty good in Southeast Asia.

The area that was soft was actually the L. Latin America was a little soft, in particular. Now that business for us is very bouncy, because sometimes it depends on whether we can actually get a project dealt with in places like Venezuela. As you know, it's not easy to get money in and out of the country, so it takes a little while to get those negotiated. And they tend to be episodic.

But Latin America overall has been a little -- not a little; it has been softer. We think partly because of what's going on in oil, partly because of some of the political instability, instability in places like Brazil, maybe a little bit in Mexico. So that market is probably -- if any of our international markets have been a little tough, it's been Latin America.

Okay. And finally from me, in the E side of that, is it the Continent or UK? Or how would you characterize that?

Actually, both have been pretty good, to be honest. This quarter, if you looked at it from an orders perspective, it was actually stronger growth-wise on the Continent. But we've actually had a pretty good run in the UK. And so it was pretty consistent, but we've had like four quarters in a row that have been pretty consistent in the UK.

Thanks, Brian. Good luck and, again, a great -- have a happy holiday to you and the family and to Greg and to Jeff and to Kevin, too. Everybody there. Thank you.

Josh Borstein from Longbow Research.

Just a quick question to follow on the raw material costs that were asked about. Are there any price increases in the offing for the upcoming year?

Yes, Josh. This is Greg. Yes, there is a price increase February 1. I think the overall increase is about 2%, I believe, is the averaged-in across the entire footprint.

Okay, great. Thank you.

Thank you. I'm not showing any further questions in queue at this time. I would now like to turn the call back to Mr. Brian Walker for any further remarks.

Thank you again for your time this morning. I hope you've heard our deep commitment to improving our performance in the near term while balancing our continued commitment to long-term strategic growth.

On behalf of all the people at Herman Miller, I want to wish you and your families a wonderful holiday season and a healthy, prosperous 2015. Thanks again for joining us and we look forward to talking to you in March.

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