MillerKnoll Inc (MLKN) 2016 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Herman Miller Incorporated second-quarter fiscal year 2016 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 -- from the forward-looking statements. These risks and uncertainties include risk factors discussed on 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 Brian Walker, President and Chief Executive Officer; Mr. Jeff Stotts, Executive Vice President and CFO; and Mr. Kevin Veltman, Vice President Investor Relations and Treasurer. Mr. Walker will open the call with brief remarks, followed by a more detailed presentation of the financials by Mr. Stutz and Mr. Veltman. 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.

Good morning, everyone, and thank you for joining us. Yesterday, we announced our financial results for the second quarter of fiscal 2016. We continue to execute on our key strategic initiatives and made great progress across our business, hitting on almost all cylinders, including delivering another strong quarter in our North American segment.

Consolidated sales for the quarter were $580 million, which reflected the midpoint of our guidance. Our earnings per share $0.57 came in above the high end of our range, thanks to strong gross margin performance. Jeff and Kevin will provide a more detailed breakdown of our financial results later on the call. But, as I normally do, I will begin by sharing some of my thoughts on our performance and the overall direction of the business.

Let me start with some perspectives on the macroeconomic background. In North America, the contract market is buoyed by positive factors including strong employment, courage in construction, good activity in design firms and low commodity costs.

On the other hand, there are industry segments and geographic areas that are being hit very hard by the dislocations happening in the energy complex. This environment requires us to be very flexible, define opportunities and put our best resources toward winning them.

Considering all of these factors, we remain cautiously optimistic that we will continue to see reasonable growth in our North American contract furniture segment. As you know, information on the North America consumer is somewhat mixed. As with the contract market, some geographic areas are being impacted by the dislocation in the energy complex, and the exceptionally strong dollar has reduced some of the appetite for vacation home buyers from some parts of the globe. While these factors are concerning, we believe strong employment, expanding wages and low interest rates should auger well for investments in housing and furnishings.

The picture internationally (inaudible) mixed. The strong dollar has been a real headwind to our REIT, to our reported results, and makes export markets challenging. Additionally, regions with a focus on commodities and oil will likely have slower growth in 2016.

That said, industrialized Western economies are stable and growing, and the breadth and diversity of our business outside of North America mitigates a risk from any one market. Therefore, despite these challenges, we continue to see long-term opportunities for global growth as we leverage our manufacturing distribution and R&D capabilities around the world.

Let me turn to our performance by business segment. In the North America segment, we delivered another strong quarter in both our core work and healthcare businesses, which combined to drive a year-over-year increase in sales and orders of approximately 10%. This demonstrates continued traction from our initiatives to get closer to our customers and dealers and ensure that we have the right product and solutions to succeed in the market. Taken together, the feedback received from dealers and customers along with these positive financial results validate that our efforts over the past year or two proved solid capacity, launch innovative products and refreshed showrooms are having a clear impact.

In my update to you last quarter, I told you about a new dedicated space within our West Michigan facility to be used for delivering a comprehensive product training curriculum for our salespeople, dealers and design specifiers. Participant feedback on this capability has been overwhelmingly positive, and we plan to leverage this in the months ahead to ensure our sales organization is fully versed in our entire offer of products, brands and solutions.

Going forward, we will continue to invest in this segment by designing and launching innovative new products that provide solutions for our customers by further operational improvements and leverage the scale benefits from additional manufacturing volumes.

The results within our specialty segment were also very encouraging this quarter, highlighted by double-digit order growth and improved earnings. Net sales in this segment increased a relatively modest 4% compared to robust and broad-based order basing, which, in total, increased 15% from a year ago. Our specialty businesses not only serve as a powerful -- as powerful brand ambassadors for all of Herman Miller, but, in recent years, that have grown into a key part of our economic engine. This transformation reflects a deliberate focus and commitment toward delivering solutions to the design trade through a reinvigorated Geiger brand and curated Herman Miller collection, and Maharam, the benchmark name in performance textiles.

Our focus in this area has helped us create widely respected brands; notably, Herman Miller and our subsidiary brands ranked number one in a range of categories in Contract magazine's recent industry surveys. These include Herman Miller for ergonomic seating, Nemschoff for healthcare furniture, and Maharam for fabrics and textiles. Perhaps most notable is the number one ranking for Herman Miller in the category of brands that inspire, an honor we have achieved in each of the past few years. We are widely considered the industry benchmark for design and innovation, and we are confident that our new product development initiatives, directed by living office insights, will further support our brand reputations and deliver continued growth into the future.

The results of the ELA segment this quarter reflected inherently bumpy -- lumpy project nature of our international business. As expected, currency translation headwinds persisted throughout the quarter, adding pressure to our year-over-year growth rates. On an organic basis, which excludes this negative translation impact, segment sales were down approximately 4% from the same quarter last year. With that said, new order pacing was much more encouraging, resulting in organic order growth of approximately 8%.

As I mentioned earlier, we have a diversified business outside of North America. And we have invested considerable resources in building our brand and capabilities to create a powerful growth platform worldwide. Expanding our markets internationally is a key element of our strategy as we aim to build a truly global organization. We continue to be excited about the opportunity in emerging markets, particularly in regions such as China and India, with demographics that align with increasing demand for the types of products and solutions we offer. As we look toward the second half of this fiscal year, our ELA team is gearing up to launching a number of exciting new products across a range of categories under both our Herman Miller and Posh brands.

The one notable area weakness in our results this quarter came from the consumer business, which posted declines in sales and orders relative to last year. This resulted from three primary factors. First, the actions we took earlier in the calendar year to rationalize the distribution channel within our legacy Herman Miller wholesale business continues to be a headwind.

Having said that, we remain confident that the sales volume lost during this crossover will mitigate over time to our online catalog and BWR Studio channels. However, the process has been slower than anticipated. As a result, we are taking aggressive action, putting in place brand awareness and specific new channel initiatives aimed at customer acquisition in the second half of this fiscal year. Candidly, this will include increased investment in advertising, direct mail and search engine optimization beginning in the third quarter, which Jeff will outline further in a few minutes.

Second -- the second factor impacting the consumer results this quarter emanated from an ERP conversion in Design Within Reach. The new system went live at the beginning of September. And despite the team's planning and testing efforts, it resulted in substantial customer and sales team disruption. Frankly, this was a negative surprise that lasted throughout the majority of the quarter, proving to be a source of cost and distraction across all areas of the organization. The good news today is that the team feels confident that major issues have been resolved, and we are beginning the third quarter on a much more stable condition from an IT perspective. Additionally, despite the near-term problems conversion caused, this new cloud-based system significantly enhances the ability of our sales associates to serve customers and improves our visibility to the factors driving value for the business going forward.

Third, as we undergo the transformation of our retail studios to larger, more efficient formats, we have closed a number of smaller legacy studios. As a result, we had 5 fewer studios this year when compared with the second quarter of last year. Several of these studios were in underperforming locations, making closure the right long-term decision for the business. With that said, this bid to have a negative near-term impact on year-over-year sales and order comparisons.

Stepping back, the value drivers for the consumer business remain intact to drive future growth, including the addition of new higher-performing studio locations and increasing the mix of exclusive products. This past quarter, we opened a new studio in Scottsdale, Arizona, and expanded our Berkeley, California, location, bringing us to 13 large-format locations out of a total of 32 studios. There are 2 additional studios under development for the fourth quarter that will add an estimated 20,000 incremental square feet. Going forward, we plan to add or convert 6 studios per year on average. Importantly, we believe the fundamentals of our consumer business are strong, and we have the right strategy, people and tactics for this important driver of future sales and profit growth.

Let me close by saying that, despite some acute challenges, our performance this quarter caps a solid first half for the fiscal year and demonstrates the progress we are making against our strategic and operational initiatives. The keys to our strategy and growth are having the leading global multi-channel distribution system, a family of industry-leading brands, and a design and innovation capability that keeps our offerings inspiring, relevant and enduring. In short, we are beginning the second half of fiscal 2016 with a running start and a strong sense of direction.

With that, I will turn the call over to Jeff to provide some more details on the financials.

Thanks, Brian, and good morning, everyone. Consolidated sales in the second quarter of $580 million were 3% higher than the same quarter a year ago. Orders in the period of $601 million were 5% above the prior-year level. On an organic basis, excluding the impact of foreign currency translation, sales and orders increased approximately 5% and 7%, respectively, from the prior year.

On a sequential basis, net sales in the second quarter increased 3% from the first-quarter level while orders improved 7%.

Within our North American segment, sales were $348 million in the second quarter, representing a 10% increase from the same quarter last year. Adjusting for foreign currency translation, segment sales were up 12% on a year-over-year basis. New orders in the segment totaled $350 million in the quarter, and this reflects an increase of nearly 10% from last year on a reported basis and on an organic increase of almost 11%, marking the fourth straight quarter of meaningful improvement in year-on-year order trends.

From a geographic perspective, order growth was led by strength in the West region of the United States. We were also encouraged to see particular strong order growth in our healthcare business this quarter. And beyond this, the growth by industry sector was relatively broad-based, with the main exception being energy, which continues to reflect that sector's challenging economic backdrop.

Our ELA segment reported sales of $101 million in the second quarter, reflecting a decrease of 12% compared to last year. New orders totaled $113 million, an amount roughly flat with the same quarter last year. Excluding the negative impact of currency translation, however, segment sales decreased 4.5%, while orders were up almost 8%, led by strong demand in the Middle East. As well, China and Mexico also contributed to order growth, while pockets of weakness persist in certain regions, notably Brazil.

Sales in the second quarter within our specialty segment were $58 million, an increase of over 4% from the same quarter last year. New orders in the quarter of $61 million increased 15% from the year-ago period, reflecting order growth across all three of our specialty businesses, led by notable percentage gains at Geiger and the Herman Miller collection.

As Brian outlined at the start, our consumer segment had a difficult quarter from a sales and order perspective. In total, the consumer business reported sales of $74 million in the second quarter, a decrease of 8% from last year. New orders in the segment of $78 million were 10% lower than last year's level.

I would note that as the ERP implementation stabilized toward the end of the quarter, we began to see positive year-on-year order comparisons beginning in the final week of November and extending thus far to the early part of December. While this is an admittedly small data sample, it is an encouraging sign of improvements supporting our view that the issues we face in Q2 are transitory.

The impact of a strengthening US dollar has continued to be a significant headwind to our consolidated growth, and we estimate this drove a negative year-over-year translation effect on sales of $14 million in the quarter.

Our consolidated gross margin in the second quarter was 38.7%, a 150-basis-point improvement over adjusted gross margin of 37.2% in the second quarter of last year. Favorable commodity trends, production volume leverage and operational improvement all combined to more than offset the pressure from foreign-exchange translation of approximately 60 basis points.

I will now cover operating expenses and earnings in the period. In total, operating expenses in the second quarter were $169 million, compared to $159 million in the same quarter last year. This represents a year-over-year increase of 6%, the majority of which relates to spending on new product launch and marketing initiatives, higher incentive bonus accruals and variability from sales growth. Operating income in the quarter was $55 million, or 9.6% of sales, compared to $47 million, or 8.3% of sales, in the prior-year period.

On a pro forma basis, excluding certain (technical difficulty) related items, adjusted operating income in Q2 of last year totaled $52 million, or 9.1% of revenue. Against this pro forma comparison, we delivered operating income growth of approximately 7%. Further, excluding the impact of currency translation, our operating income growth would have been closer to 19%.

The effective tax rate in the second quarter was 33%, and that compares to an effective rate of 33.8% in the same quarter a year ago.

And, finally, net earnings in the second quarter were $35 million, or $0.57 per share on a diluted basis. This compares to adjusted earnings of $0.51 per share in the second quarter of last year. I would also comment that foreign currency translation had an unfavorable impact on EPS of around $0.06 in the quarter relative to last year.

So with that overview, I will turn the call over to Kevin to give us an update on our cash flow and balance sheet.

Thanks, Jeff. We ended the quarter with total cash and cash equivalents of $55 million, an increase of $3 million from where we ended last quarter. Cash flows from operations in the period were $40 million. Changes in working capital resulted in the net cash use of $14 million this quarter. The primary contributor to the change in working capital for the current quarter was higher accounts receivable levels.

Capital expenditures in the quarter were $19 million, and $35 million year to date. We continue to anticipate capital expenditures of $70 million to $80 million for the full fiscal year. We made further progress paying down the debt incurred in the acquisition of DWR with a repayment of $11 million in borrowings during the quarter. This brings our remaining outstanding acquisition debt to $7 million. Cash dividends paid in the quarter were just under $9 million. We also resumed a modest share repurchase program during the back half of the second quarter at a level aimed at offsetting dilution from share-based compensation programs. In total, we made repurchases of $1 million during the quarter.

We remain in compliance with all debt covenants, and, as of quarter end, our gross debt to EBITDA ratio was approximately one to one. The available capacity on our bank credit facility stands at $184 million. Given our current cash balance, ongoing cash flows from operations and our total borrowing capacity, we are well-positioned to meet the financing needs of the business moving forward.

With that, I will now turn the call over to Jeff to cover our sales and earnings guidance for the third quarter of fiscal 2016.

Okay. Thanks, Kevin. So looking at Q3, we anticipate sales in the quarter to range between $535 million to $555 million. We expect the year-over-year impact of foreign exchange on sales for the quarter to be approximately $7 million. So on an organic basis, adjusted for this impact, this forecast implies revenue growth of approximately 7% at the midpoint of the range.

Consolidated gross margin in the third quarter expected to range between 38% and 38.5%. This assumes the relative seasonal slowdown in factory production that we normally experience around the holiday period and in the month of January.

Operating expenses in the quarter are expected to range between $167 million and $171 million. This guidance, as already mentioned, includes an estimated $2 million ramp-up in marketing expense for the consumer business, aimed specifically at more effectively offsetting the impact of actions we implemented earlier in the calendar year to rationalize our legacy retail distribution channel.

We anticipate earnings per share of between $0.37 and $0.41 for the period, and it is also assumed an effective tax rate of 32% to 34%. This tax guidance does not include any potential benefits related to the R&D tax credit legislation currently pending in Washington.

With that brief summary, we will now turn the call back to the operator, and we will take your questions.

(Operator Instructions) Matt McCall, BB&T Capital Markets.

Maybe, Brian, start with your comments about the North American market. You talked a lot about the macro, but can you maybe reference what your internal leading indicators that you guys sometimes cite are telling you? What are your expectations? I know you are on a different fiscal. But as we talk about calendar 2016, what are your expectations for industry growth. Not exactly sure what regional growth means in West Michigan. So maybe put some more color behind that.

Well, first of all, from everything we can read from dealers, salespeople and those kinds of things, I am looking at project activity, we feel pretty good about where that is. Activity levels have remained strong, and we think we are in a pretty good spot competitively. I would say if there is anything that you hear out there, certainly, the size of projects continues to be on the mid- to smaller size. There is not as many very, very large things out there, at least that we can see. On the other hand, the number of projects seems to be a little bit greater. So there is kind of an offset between those two. More modest size, but more of them seems to be the current trend line, if you will.

I think BIFMA's number right now for calendar 2016 is around 4%, give or take. My gut is that number is in the right direction. It is always hard to say is it exactly 4%. We have been sort of 2% to 4% has been our long-run number, depending on, of course, where the economy is. I think if there is -- if you look at the backdrop of the economy overall, it feels pretty good. I think for our industry, while corporate profits haven't been growing as much as people would like, they remain pretty darn good.

And certainly, as there continues to be pressure on companies to hire the best talent to live -- to get through the sort of generational shift, there seems to be a fair amount of pent-up activity with companies saying, I got to create and provide the kind of places that are attractive to those folks. And I think that is a little bit of why we see a number of fairly good, robust project activity is, you feel folks trying to stay in front of that curve. While they may not be building new headquarters, at the same time they are constantly looking for how am I going to update and improve.

Okay. All right. Thank you for that. The ERP impact, Jeff, can you quantify the sales impact? Can you quantify the profit impacts? It sounds like you had some expense pressure there as well. Can you just quantify a little bit more?

Matt, it's Brian. Maybe I will take the sales side, and Jeff can talk more about the cost angle. It is almost impossible, as you can imagine, to specifically parse out the revenue number based on the impact because it wasn't as if we were not shifting and taking orders throughout the period.

But what you did have is, we know that we have had a lot of sales associates, unfortunately, that were spending their time making sure that they could find the right data to service their customers. The biggest transition we had with moving orders from old system to new system and being able to make sure that we didn't miss delivery dates, that just took a lot of selling capacity to go work on those kinds of issues.

First is, doing what you want folks doing, which is serving the next customer who is up. And so we know we saw a lot of disruption from -- we heard it from the sales team that it was taking a big chunk of their time. It certainly took a big chunk of the management team's time to be out with customers making sure.

Now, at one level, ERP conversions are always difficult, is the best way to describe it. It is one of the reasons we talked about it on the first-quarter call of saying, hey, we're going to go through this. Like always, you believe you have done everything that you can to prepare. I'll say, as these things go, it was actually a pretty good one, but it still had more disruptive impact, particularly at the sales level of what was going on to the sales team. And, certainly, as a result, at times we were more difficult to do business with than we would like to be for our customers.

So I don't know that I can give you exact percentage. I do think the top line has been affected by those kinds of three factors that we keep talking about. First, the conversion of the wholesale customers. I think, to be frank, in retrospect, we haven't been -- we haven't spent enough on customer acquisition, hence the ramp-up we're going to do in Q3.

As we try to move people -- particular, by the way, capture customers to our continuing wholesale-retail customers who we think are a part of the future. We need to spend a little bit more money driving volume to them and to our other channel constructs. And I think we are a little behind. We have talked about doing it earlier in this quarter. But, to be frank, given what was going on with ERP conversion, we decided now wasn't the time to do it; that we should get things stable and make sure that we can serve well before we did it.

And then, as we noted, we are still bound in the number of studios. A lot of the studios, including Scottsdale, actually, is a relocation and a growth to a bigger-format studio. I would say if you had the team from the consumer business here, if there is anything that we didn't plan as well as we would have liked to have, as when a studio was going out, if we have a new one in the queue to open, to be frank, it has been a little harder to get approval on all of the right locations. I say approval; some types of planning, commissions and local municipalities and those kind of things that we had thought.

The good news is the team has built a really, really solid backlog and program for new studios that we are really confident about over the next, sort of, 15 to 18 months. So we have got them queued up now, and we have a lot of them that the leases have been signed, and we are now just going through either landlords building the places or going through the final touches and then get to the implementation phase.

So we feel better as we look forward. I would like to tell say if we could do it over again, we should have had a bigger queue coming in to the year so that if some got pushed back, we had some in our back pocket for other locations.

And, Matt, this is Jeff. Just to your question on the cost side, it is definitely one of the drivers that costs are -- our operating expenses in the period becoming ahead of the level we had anticipated at the start -- at the front end. We did incur costs related to some incremental consulting fees. We had some -- we brought in some temporary labor. We had a lot of travel, as you might imagine, because our teams from West Michigan rallied to kind of support from an IT finance customer service perspective. I would tell you, rolling it all together -- I don't have the exact numbers, but rolling it all together, you are talking probably $500,000 in that ZIP Code impact on the quarter.

Okay. Thank you. That's perfect. And then that leads me to my final question. The gross margin outlook looks really good; good performance this quarter. But it looks like -- I just plugged in the numbers -- you're going to see a further deleveraging of the SG&A. Is it all related to the marketing spend that you referenced? Is that just a change? Can we look at that as a change in the promotional calendar, and maybe you will see some relief from that as we move forward? How do we model beyond Q3 on the SG&A line?

I will let Jeff talk to you about how to model it, Matt. Here is what I would say to you. Is, first of all, typically, this quarter always bumps up a little bit as a percentage because you have a little bit -- you have lower top line, but often you have got some level of fixed cost. What is a little unusual is the dollar is looking a little more flat Q2 to Q3 with lower revenues. That is a direct result of two or three things.

First of all, the additional money that we are spending on, I'll call it, consumer demand marketing, which I outlined two or three different areas that we will do that in the second quarter. That is a little bit of a catch-up. I will tell you, overall, we know we have got to bring that up, but it is a little more spiky this quarter than I think you will see as we move forward. So there is a little bit of a spike here on purpose.

The second thing that is in there is we told you guys in the past we are building this new showroom space, flagship location in New York City. We will add some additional cost in the quarter that will -- again, will kind of elevate in dollar terms in this quarter compared to what you might typically see in a year.

So I think this quarter -- the third quarter is going to be a bit unusual. And I think, as Jeff has talked throughout here, we have been doing a pretty darn good job on margin and top line. That is driving a little bit higher incentive comp throughout the year. And those look a little bit more fixed when you look quarter to quarter. So those drive up percentages of sales, if you will. I will let Jeff talk about going forward.

Yes. So, of course, I guess, just perhaps it is obvious, but while we anticipate continuing at that higher incentive compensation level, as you know, that is going to lever up and down based on performance. That is a natural part of the program. But right now, that is our anticipated -- it is included in our guidance.

I would tell you, Matt, from Brian's point, we are going to seasonally lower top line in the third quarter. And on a percent of revenue basis, that having our guidance implies about a 31% operating expense run rate, I would tell you, as we move toward the back half of the year, we expect that to come back more in line with what we ran in Q2, which I think is in the (inaudible) 29%.

Bud Bugatch, Raymond James.

This is Bobby, actually, filling in for Bud. Thank you for taking my questions, and happy holidays to everyone. Just on ERP systems, so the system went live in September, largely completed by the end of the quarter. Are all the new orders now on the new system, and that is kind of up and running from that aspect?

Yes, Bobby, completely up and running. Partly, what we are trying to do is do something that is both at the store level -- so when we say ERP system, we are talking all the way down to what is in the associate's hand when you walk into the store. And most of that is through a Salesforce product that is on their iPad so that they can service you right there. And that ties back to the ERP system. All of that stuff is now completely installed. So we are up and running and in pretty good shape. And the last three or four weeks have been much, much better, and we got the rail back where we need it to be and, I think, people out of being distracted.

Okay. And the same for shipment and delivery times? Those are on a normalized cadence now, I guess?

Correct. And, in fact, we didn't really so much move out delivery times. We just had a lot of hiccups with placing orders back to the supply base and those kind of things. But that is all in good shape as we speak.

All right. Thank you. And then Brian, can you maybe update us on where you guys are with the refreshed showrooms in North America? I know it has been a big focus over the last couple of quarters as you try to kind of re-energize the North America contract segment. So how much is left to be done, or where do you feel you are in that process, I guess?

Well, first of all, we have essentially refreshed virtually -- between last year and February and now, we have touched every showroom. Not only in North America, but globally. Of course, there is always that question of showroom churn, ones that are ending with their lease.

The big investments this year is we have got the reset of New York where we are moving from what I think is about 3 or 4 locations in New York City down to one, with one combined showroom with all the brands and a retail shop as well. We also have a movement in Washington, DC. We are in a temporary space in DC right now, and the new space opens up, I think, in the fourth quarter, if I am not mistaken. (multiple speakers) perhaps in Q1, but yes.

So those are the big ones in North America. We have got some -- we will -- next fiscal year, we will actually move our Chinese showroom -- our Hong Kong showroom, that is going to move locations. The lease is ending.

So there is always some level of those, but I would say the push to get them all reset and up to a similar level, we did that. Now we are into what I would call the more sort of, if you will, normalized cadence, Bobby.

All right. Thank you. That's helpful. And then lastly for me, just on the real estate plans for DWR, is the goal still about a net add of about 55,000 square feet this year?

It has come down a little bit, Bobby. This is Kevin. As Brian mentioned earlier, some of the getting to the necessary approvals and things, it is closer to 20,000, 25,000 net square feet. And --

Okay.

Yes, we had some stuff move into next year, Bobby, so you will see more of that as we look into next year. And even next year, a fair amount of the stores next year are what I would -- we would call realignments. I think out of the 6 or 7 we have got planned for next year, a couple of them are absolutely new locations, and some of them are realignments.

Often, though, remember, when we are doing a realignment, we are not just moving locations, we are going to a bigger footprint. And that is where you get additional square footage even when you are not adding in that studio. That is certainly a driver. But we also know longer term that we want to grow the number of studios from today's 31 or 32 to more in the mid-40s. But that will take us some time to get through the -- with a kind of a mix always of realignment and brand-new.

Okay. I appreciate that color. Best of luck to you in the remaining fiscal year, and, once again, happy holidays to everyone.

Katherine Thompson, Thompson Research.

First, on North America, how much of the North American upside margin was driven by strategic repositioning versus just an overall market improvement? Really, what we are trying to drive at is how sustainable, conceptually, are these, and how much is it specifically Herman Miller versus just the continuation of an improving market? Thank you.

Hey, Katherine. This is Jeff. Let me give you a little bit of color on some of the moving parts within the margin line for the North American business. And Brian could maybe speak a little bit to the strategic realignment piece. I would tell you that, clearly, we have benefited from commodity. We mentioned this in the prepared remarks. Commodity pricing has been a big benefit for us. I mean, that is not unique to Herman Miller, of course, but that has been very helpful. As you know, as we have talked in the past, steel and steel component parts are a big driver in our overall cost of goods sold. And those levels are at levels that we haven't seen since the early 2000s. So that has been a big help.

Now, intertwined in that a bit is the currency drag that we have been feeling. And, of course, we feel that in the North American segment in our Canadian business. So those two are not necessarily exact offsets, but they are -- they have kind of been moving in opposite directions and somewhat offsetting. I would say, by and large, in North America, we benefited more from commodities than the currency has hurt us. And I would say the opposite for our ELA segment. So those are two important competing parts.

And, I would also say, too, that within our margin, we mentioned a set of bonus expenses. Those are running higher than they were a year ago. So if your comparisons are year-over-year, keep in mind we have got a bit heavier expense load in the margin line from bonuses. And from a -- Brian, I don't know if you have anything to add on the strategic side.

Well, what I would say to you, Katherine, is certainly the teams in operations continue to focus on lean manufacturing. And we certainly have seen cost benefits on the manufacturing side. And I think yesterday when we talked, as a management team, it is about a half a point of margin that we can see from cost improvements that are beyond commodity and those kind of things. Really, the team is being better at operating. But, I think you have to remember, we still are in a very, very, very competitive market where every day we have to win every single project.

And so while we are focused on improving margins, we are mostly focused on saying, we have got to win. And if we win, we can figure out margins.

What I think this team has done an incredible job on this year -- and I give Greg Bylsma, Lisa Bryant and the folks back in West Michigan all the credit for it. Those guys have done a great job of making sure that we can respond to our dealers and our customers and our salespeople needs to be more competitive. And we have been able to do that by providing them more cost-effective solutions.

So, in many ways, what you are seeing going on a margin line is a little bit of mix because we have been able to play better at price points, but without having to simply give up discount, but as much be able to provide solutions that drive better value for the dealers on less of them being competitive and win. Which, of course, is the ultimate goal. While, at the same time, they are continuing to focus on driving cost improvement.

So I think the combination of those two things are the key. And they will continue to be the key going forward is that we are not only being competitive on the price side, but we are doing a great job at tuning the offers specifically to where the market is moving. And I think that is -- if there is an overriding thing that has happened this year better than we would have expected coming into the year, it has been how good the team has been at doing that.

Great. Thank you. And the second question, just on ELA, what drove the better organic growth in orders for that segment? Obviously, you had a little bit softer in sales, but you certainly showed some improvement in orders as the quarter came to a close. What was the driver for this? Is it new product? Better end market demand? What are some of the factors that we should think about?

Well, first of all, Katherine, as I mentioned in my prepared comments, that is a historically -- and this is true of a lot of the smaller businesses. They tend to be a little bit more lumpy or bumpy, depending on how you want to talk about it. And then you still win projects. And projects come through, and that is a big part of it.

And that business in particular, because it has a wide spread geographically and we are often not planned for market share as much as we are planned with specific customers, you see a lot of bouncing around. I would say the team in international continues to do an amazing job of uncovering opportunities and winning significant projects. But the timing of those make them move around quarter to quarter in terms of revenue. In this quarter, they had some significantly good-sized wins right towards the end of the quarter. It came in orders in the Middle East that were very impressive. Good wins both on the worksite as well as in healthcare. And those guys have done a really nice job of that.

Having said that, I would also give Andy Lock and our team in international a lot of credit for the work they have done around the product offer. They have got a great pipeline of new products, some of which have already gotten to the market. That certainly has helped the competitive position of Posh in China and, actually, in India and other places where we use that brand pretty extensively.

So I think it is a combination of being really good and uncovering opportunities, serving our global customers in a nice way, and then mixing in some new products to make sure that the brands are relevant and fresh.

Hey, Katherine. This is Jeff. Just one tag on comments to that, and this gets more to the margin performance. You asked about North America, but I just would emphasize, too, internationally, particularly in Asia, the team at Posh has done a really nice job improving operating performance relative to where we were just a year ago. The margin improvements there have been significant, and it is really moved the needle and made a big difference for the business. So I think that, in combination with everything Brian just described on new products and so forth, has been a big driver.

And I am not showing any further questions at this time. I would like to turn the call back over to our host.

Thanks, everyone. We appreciate you joining us today and your continued interest in Herman Miller. On behalf of all the people at Herman Miller, I want to wish you and your family the wonderful holiday season. We look forward to the opportunity to talk to you again in March. Have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.