MillerKnoll Inc (MLKN) 2016 Q1 法說會逐字稿

Good morning, everyone. Welcome to this Herman Miller Incorporated first-quarter FY16 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 report 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. Jeff Stutz, CFO; and Mr. Kevin Veltman, VP of Investor Relations and Treasurer.

Mr. Walker will open the call with brief remarks, followed by a more detailed presentation of financials by Mr. Stutz and Mr. Veltman. We will then open the call to your question. 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'd like to begin the presentation by turning the call over to Mr. Walker. Please go ahead.

Good morning, everyone. Thank you for joining us today. In yesterday's earnings release, we announced a quarter of encouraging results, demonstrating the progress we're making against our strategic and operational initiatives. As we noted on our fourth-quarter earnings call, we ended FY15 on a positive note with steady improvement and we're pleased to see that, that momentum continued into the first quarter of FY16. It is particularly true as it relates to our North American segment, where organic order growth of over 7% was double the level we reported last quarter. At the consolidated level, we delivered sales in line with the upper end of our guidance, posted our highest operating margin performance in over six years. These factors contributed to a very strong bottom-line performance, well exceeding our EPS estimate. I'll begin the call this morning with a review of our progress and performance for the quarter for business segment. I will then turn it over to Jeff and Kevin to give you the cover, the first-quarter results in more detail.

Looking at our headline numbers, we reported consolidated net sales in the first quarter of $565 million, which were at the high end of the guidance we provided in June. Earnings per share of $0.56 came in ahead of our expectations, driven by continued strong gross margin performance and well-managed expenses. At a macro level, our gains this quarter were achieved against a back drop of mixed global economic conditions. The US is experiencing a generally positive environment with a growing service sector labor market, positive institutional ABI trends, and improved levels of non-residential construction, all of which bodes well for continued industry growth in North America. Outside of North America, there are areas of economic uncertainty that we're watching closely. These include China, Brazil, and the oil-producing regions of Russia and the Middle East.

Moving on to our segment results, we continue to see steady improvement in our North American contract business. North American orders grew by approximately 7% organically in the first quarter of this fiscal year. This is a marked improvement from our performance in recent periods, which included a year-over-year order decline in the third quarter of last year, followed by growth of only 3.6% in the fourth quarter. This, we believe, confirms that our business in North America is recovering and we believe our progress demonstrates that we have the right team in place and we're taking the right actions to continue driving the business forward. The encouraging results in North America were driven by continued execution against our action plan, just focus on getting Herman Miller closer to our customers and dealers to better align our solutions with their changing needs in the evolving landscape.

As we've previously discussed, we've implemented changes within the structure of our sales organizations, resolved gaps in selling capacity, launched key new products and reset our show rooms to better reflect the solutions we offer. In addition, we put in place a strong leadership team for our North America business to effectively oversee these initiatives. We're pleased with the early market response to our recent product launches illustrating our alignment with industry demands. We've recently completed a product boot camp, a comprehensive product training event for our sales force and dealers. We hosted the event in a newly dedicated workshop environment designed to provide a hands-on experience for both new and existing products from across the business. The feedback we received on this experience has been very positive and we believe it will serve as an effective model and curriculum for preparing our sales team and dealer partners to better serve our customers around the world. It's one of the many ways we're transforming Herman Miller from an office product provider to a solution provider by creatively rethinking space and design and the evolving needs of our customers. We're coming up with solutions to help them realize higher performing and better utilized environments.

Outside of North America, our ELA business segment continues to report solid growth and profitability; however, we continue to face currency headwinds and economic uncertainties around the globe. On a constant currency basis, ELA delivered [quarter] growth in the first quarter of 8%. The business also posted improved profitability with operating margins expanding more than 300 basis points from the same quarter last year. The order growth in this quarter was driven largely by strong productivity in Australia, United Kingdom, Japan, and India. Operating performance benefited from a favorable product mix during the quarter and ongoing operational efficiency improvements in our operations in China.

This performance highlights the underlying strength of our international business and why our focus on leveraging our brand and capabilities to enhance profitable growth around the world remains a key element of our shift strategy. As part of that strategic goal, we've worked aggressively on our global expansion by identifying markets and regions where our business can prosper, establishing a presence there, and partnering appropriately with dealers in those markets. We made steady progress in the United Kingdom where we launched a consolidated manufacturing distribution site, and in India, where we began chair assembly in a new lease facility earlier this quarter.

Our Specialty and Consumer segments are important elements of the shift strategy as we expand the reach of our brands and solutions. Our specialty segment continued to gain momentum in the first quarter, reporting growth in sales, orders, and profitability. The Herman Miller collection led the way, with double-digit sales and order growth during the period, winning with both new product launches and existing offerings. The Herman Miller year-over-year sales order and profitability growth. This industry leading performance textile business is a key contributor to segment profitability and provides a platform for attractive future growth opportunities. Our Geiger craft wood furnishings business showed continued sales momentum in the quarter and further profitability improvement, achieved through operational efficiencies and leverage from additional volume.

The Consumer segment reached a milestone at the end of July, with a one-year anniversary of the Design Within Reach acquisition. Not unexpectedly, we face some clear challenges in this first year of integration, but on balance, we feel good about the progress we've made and the opportunities we see ahead of us. The blend of Design Within Reach with our legacy wholesale and eCommerce businesses is a powerful combination. We remain confident that the value drivers we described for you at the start, transitioning DWR studios to larger, more efficient store formats, and increasing the mix of exclusive products, will prove effective at increasing sales and margins. We plan to open six new large-format studios in FY16. Today, we have five of those studios under development, which will add almost 40,000 incremental square feet when completed. The first two of these studios -- Scottsdale, Arizona and Berkeley, California -- are slated to open next month.

Thus far, the transition to these larger studios is working, resulting in higher revenue per square foot in four-wall profitability than the average drive in investment pay back of less than two years. The integration of our Consumer leadership team, led by John Edelman and John McPhee has been seamless. I continue to be impressed by their deep knowledge of the business and the positive energy they bring to the team. On a combined basis, our Consumer segment posted organic order growth of 2% in the first quarter. This increase was largely driven by strength in our eCommerce platform, and to a lesser, extent continued traction in DWR's small but fast-growing contract furnishings offerings. On a year-over-year comparison for the Consumer segment, this quarter was a bit messy, given a number of moving pieces impacting results.

With this complexity, I want to give you some additional color to help you make better sense of how the business is performing. First, our reported sales quarter data in last year's first quarter included only five weeks of Design Within Reach activity. Second, on our call last quarter, we mentioned a shift from the timing of promotional events at Design Within Reach. The Herman Miller sale was held in May of this year, putting it in the fourth quarter of FY15. By comparison, last summer, this same event fell within the first quarter. This shift in timing unfavorably impacted our Q1 sales by approximately $5 million. Third, we're in the middle of a plan to move the DWR studio model to larger formats. As part of this, we have planned to close underperforming stores in markets when the leases end. As a result, our store count was down year-over-year. We believe in the long run this will result in both top-line growth and increased profitability, but there will be some crossover as we implement this plan.

Looking at the data on a six-month pro-forma basis, which normalizes for this change in timing, sales of DWR are up approximately 3% compared to last year. Within our legacy Herman Miller wholesale and eCommerce business, we did feel some pressure this quarter, resulting from the actions we've taken to rationalize the wholesale distribution channel. Frankly, this isn't a complete surprise as we knew it would take time to recoup the revenue loss from rationalized distributors to the increased online, catalog, and studio sales. We have a number of upcoming brand awareness initiatives and targeted promotions aimed at driving more volume to Design Within Reach, HermanMiller.com, and our wholesale partners who remain an important part of our collective future.

Netting this all together, pro-forma sales at our combined Consumer segment on a trailing six-month basis are approximately flat year-over-year. While this clearly doesn't meet our expectations, we expect growth to accelerate in near term given the new DWR studios coming online and the actions we're taking to recapture volume displaced at the wholesale level. In addition, we're moving forward with a new ERP system in Design Within Reach, a cloud-based solution that will enhance the ability of our sales associates to serve our customers, enable us to optimize a supply chain, and give us greater visibility to what is driving value for us and our customers. The new system is just now coming online and we expect it to be a long-term positive investment for the Company and our customers.

In summary, we believe we're focused on the right actions to drive positive near-term performance. At the same time, we're confident we have the right strategy in place to position the business for success for the long term. Our underlying financial position and operational performance remains robust, allowing us to generate strong cash flows for our strategy and create value for our shareholders. With that, I'll turn the call over to Jeff who will provide more detail on the financials

Well thanks, Brian. Good morning, everyone. Consolidated net sales in the first quarter of $565 million were 11% higher than the same quarter last year. Excluding the impact of Design Within Reach and foreign currency translation, sales increased almost 8% from the prior year. Sequentially, net sales in the first quarter were up 3% from the fourth-quarter level, while orders improved 1%.

Within the North American segment, sales were $338 million in the quarter, representing a 5% increase from the same quarter last year. Adjusting for the impact of foreign currency translation, segment sales were up nearly 7% on a year-over-year basis. New orders in this segment totaled $332 million in the first quarter; this reflects an increase of 6% from last year on a reported basis and an organic increase of over 7%, which as Brian mentioned, marks the second straight quarter of improvement on a year-over-year order trend. Our ELA segment reported sales of $103 million in the first quarter, reflecting an increase of 7% compared to last year. New orders were $108 million, representing a year-over-year decrease of 3%. Excluding the negative impact of currency translation, however, segment sales increased almost 19%, and orders were up 8%, driven by strong project activity in Australia and the United Kingdom, as well as Japan and India.

Sales in the first quarter within the Specialty segment were $58 million, an increase of 6% over the same quarter last year. New orders in the quarter of $58 million increased 2% from the year-ago period. The Geiger and the Herman Miller collection were the major contributors to sales growth in the period. As Brian outlined at the start, Consumer segment had a lot of moving pieces this quarter. In total, the Consumer business reported sales of $67 million in the first quarter, an increase of $28 million from the same quarter last year. New orders from this segment of $65 million were $29 million above last year's level, driven primarily by the addition of DWR for a full 13 weeks. On an organic basis, segment sales declined 3.9% and orders were 2% higher than the first quarter of last year.

At the consolidated level, the impact of a strengthening US dollar has been significant and we estimate this drove a negative year-over-year translation impact on net sales of $16 million in the first quarter. Our consolidated gross margin in Q1 was 38.3%, a 130 basis point improvement over last year's first quarter adjusted gross margin of 37%. Product mix, including the addition of higher margin DWR products, favorable commodity trends, operational improvement, and net price realization all combined to more than offset the pressure from foreign currency translation of approximately 60 basis points. I'll now move on to operating expenses and earnings in the period.

In total, operating expenses in the first quarter were $162 million compared to $142 million in the same quarter a year ago. This represents a year-over-year increase of $19 million, the majority of which relates to the acquisition of DWR. Operating income in the quarter was $55 million, or 9.7% of sales compared to $42 million or 8.3% of sales in the first quarter of last year. After adjusting for certain acquisition-related items, we reported adjusted operating income of $47 million, or 9.3% of sales in the first quarter of FY15. So adjusted operating income increased 17% over the first quarter of last year. The effective tax rate in the first quarter was 33.6%. This compares to an effective rate of 33% reported last year.

Finally, net earnings in the first quarter totaled $34 million, or $0.56 per share on a diluted basis. This compares to adjusted earnings of $0.47 per share in the first quarter of last year. I would also comment that foreign currency translation had an unfavorable impact on EPS of an estimated $0.06 in the quarter relative to last year's Q1. With that, I'll now turn the call over to Kevin to give us an update on our cash flow and balance sheet.

Thank you, Jeff. We ended the quarter with total cash and cash equivalents of $52 million, a decrease of $12 million from where we ended last fiscal year. Cash flows from operations in the period were $33 million, compared to $42 million in the same quarter of last year. Changes in working capital resulted in a net cash use of $18 million this quarter compared to a net cash inflow of $5 million in the prior-year quarter. The largest contributors to the change in working capital were higher accounts receivable and inventory levels offset by the timing of payments for accrued liabilities. Capital expenditures in the quarter were $17 million. We anticipate capital expenditures of $70 million to $80 million for the full fiscal year. We also made further progress this quarter paying down the debt incurred in the acquisition of DWR with the repayment of $22 million in borrowings during the quarter. This brings our remaining outstanding acquisition debt to $18 million.

Cash dividends paid in the quarter were $8 million. As a reminder, last quarter we announced an increase of over 5% in our quarterly dividend rate that will be paid beginning in October. This increase brings our annual cash dividend pay-out to approximately $35 million. We remain in compliance with all debt covenants, and as of quarter-end, our gross debt to EBITDA ratio was approximately 1.1 to 1. The available capacity on our bank credit facility stands at $171 million. Given our current cash balance, ongoing cash flows from operations, and our total borrowing capacity, we are confident we can meet the financing needs of the business moving forward. With that, I'll now turn the call back over to Jeff to cover our sales and earnings guidance for the second quarter of FY16.

Okay, with respect to the forecast, we anticipate sales in the second quarter to range between $570 million and $590 million. We estimate the year-over-year impact of foreign exchange on sales for the quarter to be approximately $13 million, so on an organic basis adjusted for FX, this forecast implies revenue growth of approximately 5% at the mid-point of the range. Consolidated gross margin in the second quarter is expected to range between 37.5% and 38%. Our starting backlog reflects a combination of larger projects and slightly less favorable product mix than we saw this past quarter. Accordingly, we expect gross margin at the mid-point of our revenue range to be slightly lower than what we reported in Q1.

Operating expenses in the second quarter are expected to be between $164 million and $168 million, and we anticipate earnings per share to be between $0.52 and $0.56 for the period. This also assumes an effective tax rate of 32% to 34%. With that summary, I'll now turn the call back over to the operator and we'll take some questions.

(Operator Instructions)

Our first question comes from Kathryn Thompson with Thompson Research. Your line is open.

Hi. Thanks for taking my questions today. The first, on the North America segment and the margin upside that you posted in the quarter. How much of this improvement is driven by your strategic initiatives that you've been flowing through versus overall improvement? And then how sustainable are these margins on a go-forward basis?

Hi, Kathryn, this is Jeff. We listed a number of positive factors on the margin for the quarter. We benefit in a big way from higher production leverage, so it's a little hard to parse out whether this is the strategic initiatives. For sure, we highlighted that we doubled our order growth in the quarter relative to what we posted in Q4, so without a doubt we benefited in a big way from higher production that rolls through in the form of better leverage of fixed cost.

So you'd have to somehow tie that together and attribute that to the strategic moves that we've made. In fairness though, we did benefit, particularly early in the quarter, from a really favorable product mix. And as I mentioned in my overview comments, net price realization, you'll recall, we did a price increase this past February, and so we did see some benefit flow through from that, but toward the latter part of the quarter, we saw larger projects layer into the backlog.

We also saw a bit of a shift in product mix; nothing in the way negative, but just a different product mix that causes us to guide down a bit on the margins. So I'd say on balance, we've always said in this business, if we can keep factories moving and keep volume running through, we can leverage quite well.

We saw that this quarter. That part remains true for the business, if we can keep that top line moving, but we did see a bit of shift in the profile of the backlog and that's going to probably cause a bit of depression on the gross margin in Q2 as we guided.

So really, what you saw in the quarter was a benefit of mix, in addition to better leverage, but you really aren't seeing the full impact of your strategic repositioning. Is that a correct summation?

Kathryn, this is Brian. Good morning, by the way. That depends on how you ask that question. Certainly, the strategic repositioning, if you ask that question for the business in total, not just North America -- that's where your question is a little hard to answer the way you described it. If you asked about the things we've done overall in the shift strategy to get into areas like the Specialty businesses, like the Consumer business, those things clearly drive are driving higher margins.

There's no doubt about that. As well as the things we've done to put operational improvements into some of those Specialty businesses and some of the improvements you've seen in places like Maharam and specific actions we've taken. So yes, the strategic things we're doing are driving higher margins.

If you look at the North American segment in particular, we've done, as you all know, we took several actions last year, beginning in the third quarter, really gaining steam in the fourth quarter. Those actions were driven to be able to help us capture our fair share, if you will, of wherever the industry was going. As we capture those things, certainly that drives volume. That drives margins.

There's also clearly the work that the operational team and Greg Byslma and others have done has been either how do we realize margin, but maybe more importantly, how do we make sure that we can be competitive at a value point, as well as a solution point. That may not drive higher percentages, but in fact, if we can be more competitive on product and capture more volume, that shows up in leverage, if that makes sense to you.

So it's hard to describe those things as unrelated, but much of the margin movement we've seen fairly consistently over the last four or five years has been as we've gotten into some of these newer areas that are higher margin. That clearly is one of the drivers we have been focused on and trying to implement.

Helpful. A follow-up on the new large format stores that you're going to be rolling out this fiscal year. What is the net square footage increase, because I know that you're going to be revamping existing stores, but what's the net overall anticipated increase for FY16? And then, as you roll those out, understanding there are certain costs to rolling out the strategy, how should we think about margins as you're rolling out for the Consumer segment as a whole, as you're rolling out those additional large-format stores? Thank you.

First, best guess we got right now is that the net increase of about 55,000 square feet. Some of those we don't even have the -- we've got one that we don't even have the space identified yet, so that's a bit of a forecast because we have got to find the right space. Also, it's important to keep in mind that some of those will be back-end loaded at the back end of the year.

So as I noted in my prepared comments, two of them will be opening in next month, both of them I believe are replacement stores where we are going to larger stores, so there's a net add in square footage, but you have got to add and subtract. There's some crossover sometimes where you end up with both of them open. Jeff, remind me the numbers we gave for the total cost of opening stores?

Capital tends to run around $1.5 million on average to open. In terms of OpEx impact, per store, and this includes things like if you have some crossover, duplicate rent, and so forth, it's up a couple hundred thousand dollars, $200,000 to $300,000 typically in the quarter.

Okay, great thank you. My final question today is we've just seen so much in our research, both in the early construction part of the cycle and then the latter part of the construction cycle, just the continuing theme of a very tight construction labor market. What product solutions do you have or are you developing to help specifically address this issue? Thank you very much.

Kathryn, in [met], I don't think that most of our folks that are involved in implementing solutions for our customers don't come from the same labor pool as the construction guys. There is some crossover in some states or some markets where you might have union labor that might be carpenters unions and those kind of things but I would say that's a fairly minor impact for us.

If there's a place that we impact it, and it is by trying to make sure that we have the easiest products, most efficient products to install, because obviously the more product they can install for less. One of the ways that we've gone after that over the last number of years is using the Herman Miller Performance System to help our dealers improve the efficiency of their installation, which both takes out labor, takes out time, and in fact improves quality. So in that case, it's less about product as much as it is about process.

That was really more the angle I was going down. Helpful, thank you.

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

Thanks, good morning guys.

Good morning.

Maybe start with the SG&A this quarter, Brian, or maybe it was you, Jeff, that mentioned the product boot camp. I recall there was some training issues, you had some feet off the street earlier -- or last year, but first, can you talk about any incremental cost that was tied to that product boot camp? Sounds like it was a new initiative year-over-year and was there an instance in the quarter where you had some increased levels of feet off the street for a period of time?

Matt, first let me address the feet off the street question. We were very, very deliberate that this was literally is what it sounds like; it was a boot camp. People were in and out and it was a big mix between our folks and the dealers and we got them in and we got them out of here fairly quickly on purpose. One of the other things we did is we did it all at -- one of the reasons we set up the location the way we did is we could bring them in, one location.

They came in one night and in fact, to be frank, we did it over the weekend, so that they weren't always gone from their day-to-day job. Effective selling time lost was very, very minor. In fact, that the report so far is that the training was so effective that most of the sales folks said that it gave them very specific help on very specific projects where they could go back home and implement right now.

Net, that's always hard to say. I don't believe we had any loss of signal strength based on what we did. At least that's the report we're getting back so far from both the dealer and our people are saying it's a net add. Those things are always hard to tell, but I'd say our reviews right now are very, very positive, and in fact, if anything, we're getting asked whether we would run another round of it because we didn't get everybody across the country through because we were very targeted about who we brought in.

So incremental cost, there certainly was cost that we had in the quarter to do things like we reset one of our facilities. There were some costs around product. Some of that probably got capitalized (multiple speakers). Certainly some designs -- in some ways, what we did, Matt, around this was we largely, if you can imagine, we reprioritized what people were working on, what we were spending versus trying to spend incrementally.

So we put it from something else so that we could get that work done as quickly as possible. Most of it was internal labor, and in fact, the dealers actually paid for their own travel to get here to West Michigan to come in and do the training. So there wasn't a huge amount of incremental dollars as much as there was incremental effort.

Okay, got it. The next question, again, on SG&A, it looks like you delevered to that line Q1 on a year-over-year basis. Looks like the guidance implies no incremental leverage on a year-over-year basis and no incremental leverage on a sequential basis, even though the top line looks a little bit better. Can you talk about what's driving that, how long it's going to last, do we see leverage return in the back half?

Yes, Matt this is Jeff. First, let me take you back. We talked last quarter on our call that we expect operating expenses -- this is as we move through FY16 -- to reflect some incremental investments related to show rooms, some of the new studio work that Brian alluded to, much of which we haven't actually addressed yet in the first quarter, and the impact of other things, like currency and higher incentive bonus expenses.

We thought that those factors largely would drive toward back half of the fiscal year. If you consider what we've guided -- let me maybe take this angle to answer your question -- if you consider our guidance for Q2, say at the mid-point, you'd say looks it like we're expecting to average total operating expense of about $164 million per quarter through the first half.

Of course, we've got seasonality, so we all know that this -- it doesn't tend to be flat, but just on an average per quarter, $164 million. We think it's reasonable, given those factors that we outlined last quarter, that you could see $2 million to $4 million of incremental operating expense spent per quarter, above what we've averaged through the first half in the second half of the year.

So if we average $164 million through the first half, we could see that be as much as $2 million to $4 million higher in the back half per quarter. On a contribution margin perspective, we think that we can leverage somewhere between 10% and 15%, moving through the back half of the year and then increasing toward a more historical 20% to 25% as we get past those items, but that would be post-FY16. Does that help?

It's very helpful, Jeff. Thank you. So the contribution margin you just mentioned, 10% to 15% is inclusive of the higher SG&A spend of the $166 million to $168 million? And is that year-over-year contribution margin?

Correct.

Okay. All right. I have to do some more math. All right. The last question, Brian, maybe for you. Jeff talked about some of the project wins and the mix impact on your margins or expected margins. Can you talk about some of those project wins? Can you talk about the health of the cycle? Any of those project wins from new customers that are resulting from some of the moves? Just how are you feeling about the cyclical health and how much of the project success was maybe new customers?

Matt, first of all, the cyclical health is pretty good, particularly in North America. It's a little harder, as I'm sure you guys are reading the same stuff I am. Globally, it's a little more of a mixed picture, particularly as you look at markets where you're more of an importer versus local. The good news is over time we moved a lot of our production to be regional. That's helps a bit with that, but certainly global markets are a little tougher.

The North American market, though, right now, from everything I can see and any data we can read that the industry collects, the cycle looks pretty robust still and looks like it's got legs. So that part we feel pretty good about. Of course, we don't know what everybody is producing [their results]. We're just reading the macro data, but it looks pretty good to me overall.

From a private win standpoint, rather not go into names, of course. I'd say, yes, we have some competitive wins. You're always out there competing for existing customers and some new ones. We had a couple of good wins that were competitive that add some new customers to our rolls and our dealers.

Matt, the thing that is most encouraging, the team has done a really good job of getting some new solutions out to help us, changing some processes of how we're interfacing with the dealers and with our sales teams. The sales team is really energized right now. One of the things that happened in the product boot camp, when we brought people in, is it's often one of the things that -- making sure that they are keeping up with the expansion in the offer.

It is hard work and no matter what we put into the show rooms, it's difficult to show the entire breadth of what we have in the offer today. One of the real benefits of bringing them back was that they could see not only the Herman Miller product, but we highlighted everything across the entire family, from Herman Miller to Geiger to Nemschoff, to even DWR, Maharam, the Herman Miller Collection.

People saw everything in one place. That's really sparked both the dealers and our sales people. And that's helped us in some of those competitive situations when people have said, wow, the offer is broader than maybe even what I've been thinking about and that's what's been helping us a bit in some of that competitive setting.

Perfect. Thank you, Brian.

Our final question comes from Budd Bugatch with Raymond James. Your line is open.

Good morning, Brian, Jeff, and Kevin. This is Bobby actually filling in for Budd. Congrats on a good quarter and congrats on the nice improvement in North American office.

Thanks, Bobby.

Couple questions on DWR from me. Can you update us on what the current break-out is between the large formats and the small formats inside the 32 net stores at the end of the quarter?

Yes, Bobby, this is Kevin. The DWR, it's roughly on the large format, we're about one-third of the way through the total stores on that front.

I was just trying to get to -- out of the 32 stores that ended the period, how many of those currently right now are large formats? One third, is that what you're telling me?

Yes, it's pretty close to 10, Bobby. I don't know if that includes (multiple speakers) next month or not. That does not include it, correct? We're 10, 12 probably by the end of the next quarter.

Okay, that's perfect. That's exactly what I was looking for. And then on the plan for closures, how many of the small formats do you plan to close, the remainder? You closed one this quarter?

That's a great question, Bobby. I don't know if I have that in front of me. Those come up as leases expire. What you often get is -- Scottsdale, Arizona is a great example. There's a current store that is a smaller formats so when the new one opens next quarter, the older one will close shortly thereafter, so there's a little bit of an overlap. That's an example.

The other location that opens next quarter is exactly the same thing. We have got a current existing store that will close within a few months of each other. The other one next quarter is just an expansion of an existing format, so you're going to take -- what we did is we've got a location where we're able to get the space next door so we're just expanding. Do you follow what I mean?

Yes, yes, I follow you. A relocation or just an expansion of the existing format. I was just trying to get around to the net number of stores to try to model this year to end the year with -- so mix the new openings with the closures and the relocations?

Right now, we're probably at the low watermark for the year, is my gut, if I remember right from the data guide. We end this year back up around 34 or 35, maybe 36. Remember, we actually said we would drop from the beginning of 38, we would come down and then we would eventually get back up to even.

I think it's as we get into next year, we get back -- middle part of next year, Bobby, we get back up to 38, if I remember right from the -- to be frank, we've been -- one of the reasons it isn't a simple answer is, A, we're out scouting for locations so some of that depends on when we find the right location with the right demographics. You're constantly in that battle of prospecting on where you think the best next location is going to be.

Okay, I appreciate that. Then, Brian, maybe for you. I understand the year-over-year shift in the timing of the Herman Miller sale and how that hurts the comparison this year versus list year, but can you maybe talk a little bit about how DWR business has trended lately over the last two months? We've seen pretty good data out of competitors with the top line from Restoration Hardware and some pretty good Census Bureau data for the retail sales so I'm just trying to match all of the endpoints up together?

We gave that we think its been running -- DWR alone -- this is always a little funny, Bobby, because we've got stuff moving -- to be frank, like we're closing stores, we're also closed some wholesale customers, so if you look at our Consumer business in total, you won't necessarily see this. It looks flat right now, which obviously isn't where we want to be.

DWR, if you take the total of DWR, it looks like it's more in that 3% range. That's looking through the fog of all of the noise that's going on. Part of that is going to be impacted by having fewer doors open, because while we're getting more square footage, which we think is positive longer term, when you close a location, you don't necessarily move those customers over from one spot to another automatically, so we've got some things to wash our way out of that.

We feel really good about the way that the large format stores look. They are running heavier than the 3% so that's looking a the sum total. Other thing, if there's a positive [at] DWR, it's been on the contract side. We're in the early innings of really getting our contract dealers connected to the offer at DWR. The boot camp was a start towards that.

So we still have some positive underneath trends that are not just even in the macro data but at our control. It is just going to take us some time to get through the, what I call internally, a crossover between location, size of store, and the movement between wholesale business to our own dot com and at DWR.

To be honest, if there's anything that we would all say didn't go as well as we would have liked, we didn't pick up as much business from that wholesale side back to us as we would have liked, over not only the last three months but the last six months. We saw it in the fourth quarter, but it was masked by this movement in the sale and now this quarter you really saw it. So as we get through Q2, we'll have a better read on how well we're doing at executing those plans.

Okay, and I appreciate that color. That's very helpful. Then lastly for me just on office, Canvas stock was one of the big products you guys mentioned getting out there to have a big impact. Was that part of the driver of the nice improvement this quarter?

We certainly we had some wins with Canvas stock. Canvas stock is also one of those things that it has the effect on cargoing other things along. It's probably right now stirring up more on the order side more than it's shown up in shipments, because order entry started, if I remember right, in late April, so you're out there winning projects with it, but we probably haven't seen much in terms of revenue yet. That would start to hit more in Q2, I would guess.

Yes, Bobby, this is Jeff. I would just tag on to that, that one of the factors when I alluded to the mix of backlog, that's one of the factors, is we've seen a ramp-up in activity on Canvas stock, which is great, but it's changed the mix of the backlog coming into Q2 versus what we saw coming into the first quarter.

All right. That makes sense. I appreciate the color. Thank you for answering my questions and best of luck through the remainder of the fiscal year.

Thanks.

That does conclude the Q&A session. I will now turn the call back over to Mr. Brian Walker for closing remarks.

Thanks everyone for joining us. We appreciate you being with us today and your continued interest in Herman Miller. We look forward to reporting further advances in December and the opportunity to talk to you again. Have a great day.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and everyone have a great day.