Miller Herman, Inc. F2Q09 (Quarter End 11/29f/08) Earnings Call Transcript

Dec.18.08 | About: Herman Miller, (MLHR)

Miller Herman, Inc. (NASDAQ:MLHR)

F2Q09 Earnings Call

December 18, 2008 9:30 am ET

Executives

Brian C. Walker – President, Chief Executive Officer & Director

Curtis S. Pullen – Chief Financial Officer & Executive Vice President

Joseph M. Nowicki – Treasurer & Vice President Investor Relations

Analysts

Chris Agnew – Goldman Sachs

Budd Bugatch – Raymond James & Associates

Todd Schwartman – Sidoti & Company

Matthew McCall – BB&T Capital Markets

Leah Villalobos – Longbow Research

Operator

Welcome to the Herman Miller Incorporated second quarter fiscal 2009 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 10K and 10Q and other reports filed with the Securities & Exchange Commission. Today’s presentation will be hosted by Mr. Brian Walker, President and Chief Executive Officer and Mr. Curt Pullen, Executive Vice President and Chief Financial Officer. Mr. Walker and Mr. Pullen are joined by Mr. Joe Nowicki, Treasurer and Vice President of Investor Relations.

Mr. Walker and Mr. Pullen will open the call with a brief presentation which will be followed by 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 turn the call over to Mr. Walker.

Brian C. Walker

Our results and activities from this past quarter reflected two distinct themes. First, based on the strength of our opening backlog the organization did a great job of executing and delivered very solid results. Second, as the news and turmoil of the economic crisis took hold, we began to experience significant lower levels of order entry as our customers deferred capital expenditures and began to adjust their businesses for what most feared would be a deep and longer than normal recession.

I’d like to open our presentation with a few remarks on each of these topics and then I’ll turn the call over to Curt and Joe for a more detailed review of our results. As you will recall, we entered this quarter with a strong backlog in most of our businesses but we were tepid about the strength of demand in the core North American office furniture business and we faced a strong headwind from rapidly rising raw materials.

In general, the quarter played out as we expected but we did not anticipate two very big factors. First, the rapid acceleration and spread of the credit crisis had a significant impact on order entry level as companies pulled back on the reins and began to defer projects and hold on to cash in anticipation of a deep and long recession. Second, the very swift appreciate of the US dollar against many currencies resulted in a significant reduction in reported orders and a revaluation of our backlog.

This drop in order entry levels was experience across most areas of the business with a notable exception being healthcare. This business tends to have longer sales cycles and previously funded construction has remained strong. Our business model is characterized by having a good deal of variable cost, a light asset footprint and high turns of working capital. Therefore, within a reasonable range of demand, our business will adjust naturally.

This is clearly demonstrated this past quarter. We were able to adjust our expenditures levels and still deliver respectable bottom line results and generated a good deal of cash. While the price of raw materials and commodities began to rapidly retreat, this change will take some time to work its way through the supply chain. Therefore, this positive development had very little, if any, impact on this past quarter.

As order entry trends became more convincing and the general economic climate continued to decline, we decided that it would be necessary to adjust our expenditure levels beyond what our business model would drive naturally. As a result, we moved deliberately to reduce employment and expenditure levels. These changes announced earlier in the quarter were in most areas of the business and across the globe.

The employment reductions were in both salaried and hourly positions and were implemented in four steps: voluntary separation; involuntary separation; elimination of temporary labor; and layoffs. We’ve offered an enhanced severance package to enable folks who are near the end of their career with Herman Miller to volunteer for separation. Ultimately we received more volunteers than we had anticipated.

While this increased the cost of our actions, we believe that this action has enabled us to retain the people and skill sets that we will need now and in the future. The first two steps of this plan were implemented in early December. We will complete the remaining two steps in early January. In total, we have reduced our total employment by over 1,000 people. Keep in mind this is a moving target as we will flex production employment level with demand.

In addition to employment levels, we have prioritized and reduced our program and capital expenditure plans. Of course, we’ve also developed tax goal actions to ensure we can win our fair share of what will be a very competitive environment. These actions are not a change in strategic direction for Herman Miller. We continue to believe our strategy of performance innovation and revenue diversification was, and is working. And, we believe the long term trends we have been anticipating and building towards are still in play.

At the same time while none of us like to live through down cycles, we have always used these times to sharpen our game, improve our efficiencies and anticipated new sources of customer value. That is what we are determined to do this time. We have an experienced leadership team at the helm who have steered through difficult periods in the past. We know that we must manage the short term performance while maintaining our most important forward investments that will be critical to our long term future and growth.

We are building cash reserves to ensure we have the financial flexibility and security to invest in our future and take advantage of opportunities that present themselves. I am sure you all noted that we did not provide guidance in the press release. We have been discussing the topic of quarterly guidance for some time and have come to the conclusion that it is often cross purposes with maintaining a longer term view of what we are trying to accomplish.

However, as we had anticipated this to be a more difficult year in terms of the business cycle, we have continued to provide guidance to keep you informed of what we were anticipating. Our decision to not provide guidance at this time was based on two factors. First, the third quarter of each fiscal year is by far the most difficult to predict. The holiday season contains several short weeks and many of our customers reset their annual capital plans during this period of time.

Second, the fluid and rather cloudy economic environment will exacerbate the normally difficult seasonal pattern. So, we’ve decided to suspend guidance but to rather discuss with you some of the factors we are evaluating to manage and adjust the business. We hope this will give you the insight in to the driver and enable you to make informed analysis about where we are headed.

Let me close by saying thank you to the people at Herman Miller. This past quarter they delivered solid results while dealing with a very significant cost and employment reduction effort. And, as we look back on the first half of this year, we accomplished a great deal. In June we lost a new line of storage products including the award winning Teneo line. We announced a strategic alliance in China and Asia with POSH that is in the early stages of ramping up.

Our healthcare business has grown rapidly and the combination with Brandrud has exceeded our expectations. We significantly expanded our retail distribution footprint with the addition of Costco and this past quarter we introduced several new products at the German Furniture Fair Orgatec. The headliner of that introduction was the Embody chair. We believe and the design community appears to agree, Embody represents a step function improvement in the art and science of ergonomic seating.

So yes, this will be a difficult period but we have and will continue to put in place the building blocks that will ensure a prosperous future for Herman Miller. To give you a better understanding of our results and financial strength, I will now turn the call over to Curt.

Curtis S. Pullen

As you’ve read in the press release, we delivered sales and earnings levels within the range of our updated guidance. Our revenues were down 6% from last year and about .5% from the first quarter. Our ability to partially offset the volume decline by lowering our operating expenses enabled us to once again produce a double digit operating income percentage as well as continue building strength in to our already healthy balance sheet.

Our earnings per share performance was strong for the quarter and for the first half of the fiscal year equaled the same period last year. All of this notwithstanding, the business climate today is much different than at the beginning of the quarter. Our orders declined as the quarter progressed which we’ll talk about in a minute.

Let’s look at sales for the quarter; consolidated first quarter sales of $477 million are lower than last year by $29 million or about 6%. North American sales of $389 million marked a decrease of approximately 5% from the prior year. The decline was experienced across the whole of the US contract market, Canada and Mexico. Last quarter revenue had continued to grow in Canada and Mexico but we are now seeing the effect of the economic downturn spill over in to these regions as well.

Also, the decline of both of those local currencies also detracted from our sales results. Consistent with what we experienced last quarter and what is occurring on a macro level, our non North American business also felt the impact of the global recession. Sales declined 13% from last year’s very strong second quarter. We mentioned last quarter that several large projects in the UK were pushed out in to the second quarter and these projects were completed.

However, many of the other global markets had revenue declines as business activity levels in these markets began to soften. On a positive note, our healthcare business continued to see strong revenue expansion both in organic product sales and from the Brandrud acquisition. Our retail business was up slightly from last year partially due to our expanded distribution activities.

During the quarter the US dollar strengthened significantly relative to most other currencies which reduced our revenue by $7 million. Moving in to order rates during the quarter, consolidated orders totaled $426 million compared to $573 million last year, a decrease of 26%. Consistent with our comments last quarter, I’ll point out that the pricing increase implemented in August pulled roughly $35 million of orders from our second quarter up in to the first quarter.

If we back out this effect, our orders in Q2 declined about 19% from the same period last year and 8% sequentially from Q1. Similar to our sales numbers, orders were also negatively impacted by $13 million due to changes in foreign exchange rates. Our pacing through the quarter was consistent in September and October at approximately $34 million per week and slowed in November to roughly $30 million per week.

Looking more closely at the geographic order patterns, orders in North America decreased about 23% versus the prior year. Some of that decrease was due to the pull ahead effect of the price increase. However, our order levels have fallen across most regions of North America. Also, order rates for our retail business declined during the quarter. We did however, continue to see growth in orders for the healthcare business.

Orders for the non North America component of the business decreased 30% for the quarter. This is a significant swing in our business compared to our recent performance and is a consequence of the slowing overall economic environment. Gross margin is next; our gross margin performance for the quarter ended at 32.6% of sales, a decrease from the prior year’s margin of 35.6%.

Gross margin was negatively impacted by continued higher commodity costs and the loss of overhead leverage as a result of lower sales volume. This was partially offset by the continued efficiency gains by our operation teams as well as very good spending control. Raw material price increases pushed costs higher by $12 million compared to last year’s levels reducing our gross margin by 240 basis points on this alone.

Sequentially, rising material prices increased costs by $4 million. We have worked through the majority of our agreements with suppliers and given the recent decline in commodities we do expect to see some improvements in these costs beginning in our third quarter. Lower production and sales volumes also had a negative impact in absorbing overhead costs. However, our teams have done an extremely good job of adjusting labor and manufacturing related spending to alleviate some of this impact.

Our cost reduction actions recently taken will continue to provide relief. Moving on to our operating expenses and income; operating expense total $100 million, a decline of $14 million from last year’s second quarter bringing our operating expenses as a percentage of sales to 21.1%. Once again our variable model and cost reduction actions have allowed us to move costs lower as our sales volume has declined.

Operating income was again very strong at $55 million or 11.5% of sales. Going forward, if sales volume continues to decline, this double digit level of operating income performance will be difficult to maintain. The effective tax rate for the quarter was 33.5% down from the first quarter rate of 35%. Congress extended the R&D tax credit which enabled us to recognize a tax benefit thereby lowering our tax rate for the quarter.

Our full year rate should approximate 34% but is dependent upon income levels going forward. Consolidated net income was $33 million or 7% of revenue for the quarter. Earnings per share were $0.60 for the quarter which compares to $0.67 for the same quarter last year. On a year-to-date basis, we have produced EPS of $1.20 equaling our results at this point last year.

Let me turn the call over to Joe, he’ll take us through the balance sheet.

Joseph M. Nowicki

Regarding the current quarter balance sheet metrics, we grew our cash balance by over $18 million to end the quarter with $166 million. Of this amount, approximately $49 million located internationally. Cash flow from operations for the quarter totaled $42 million compared to $56 million for the same period last year. Capital expenditures of roughly $8 million are down from the $10 million spent during the second quarter last year.

Our plan is to continue our conservative capital expenditure spend levels for the remaining of the fiscal year. We’re targeting $30 million in expenditures with $16 million already spent in the first half. Adding to our cash reserves, we have $237 million available on our five year $250 million revolving credit line. Considering our available revolver and our cash reserves, we are confident in our ability to continue funding our strategy and we feel well prepared for the uncertain times ahead.

We completed the accelerated share repurchase program in September with the final settlement of 2.1 million shares. In total our share count is down 12% from the year ago levels. This did not have a cash flow impact as the payments occurred in prior periods. Our current plan is to conserve cash, hold off from purchasing stock until the business climate becomes more stable.

We are in compliance with all of our debt covenants. We’re currently running with a leverage ratio of approximately 1.3 times debt to EBITDA which is towards the low end of our targeted range of 1 to 2 times debt to EBITDA but given the current market conditions is appropriate relative to our capital structure and business strategy. Our debt position remains fairly conservative. We do not have any principal amounts coming due in the near future. In fact, our earliest debt layer to renew or repay is $175 million due in March of 2011.

That’s it for now on the balance sheet for the quarter. I’ll hand it back to Curt.

Curtis S. Pullen

We have not provide guidance as Brian mentioned in the press release. We believe the uncertain picture caused by the current economic climate does not provide us with sufficient visibility to confidently publish a sales or earnings range. The traditional drivers of demand in our industry, corporate profits, service sector employment and non-residential construction have seen or are expected to see declines, at least for the near term.

In addition, this time of year always poses a challenge as we enter the holiday season which is typically slow for our industry. Adding this to the current economic uncertainty leaves us simply without a very good picture of our near term expectations. However, our best two internal indicators of future volumes are order rates and backlog. Our order rates for the second quarter declined to a level of about 26% below the same time last year, 19% lower if you consider the effect of the price increase.

Our beginning backlog is also down approximately 19% from the prior year. We believe these two indicators begin to frame up how to think about our revenue projects for the next quarter. From a gross margin perspective, we expect to see some good news starting in the third quarter as a result of lower commodity costs. This should drive a benefit of $3 to $5 million when compared to second quarter results.

As expected, this will be offset by lower production volume and our seasonal shut down over the holidays. However, our cost reduction efforts in the overhead areas will also begin to mitigate the effects of lower volume. From an operating expenses perspective, as we discussed, our cost reduction actions have been implemented and we will see the benefit of these actions beginning in January. We expect the actions taken to further reduce our expenses compared to our second quarter rate which when combined with our actions taken in the overhead areas place us on track with our previously described $60 million annual savings targets.

In addition, we will also realize reductions in variable expenses such as warranties, royalties and sales distribution costs, if in fact our volumes are lower. It is also important to remember that approximately $21 million in restructuring charges will also be included in our third quarter results.

We have great confidence in our ability to continue serving our customers well and at the same time in adjusting our costs and maintaining our financial flexibility to meet current and future business conditions. Let’s turn the call back to the operator and we’ll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Chris Agnew – Goldman Sachs.

Chris Agnew – Goldman Sachs

First question on your annual savings of $60 million, will you be achieving the sort of $15 million quarterly run rate by fourth quarter assuming third quarter will still be too early?

Brian C. Walker

It will feather its way in throughout the rest of this fiscal year. We’ll see as Curt said, some of it starting in January although that will probably be a little bit lighter because there are some folks that while they are leaving us there is an extended period for them. It will gain speed in the fourth quarter and I would think by the time we get to the first quarter of next year we’ll be fully implemented. Partly that’s just the transition of folks if you will from one spot to another.

Chris Agnew – Goldman Sachs

Second question, have you seen any weakness in state or local government spending given the fiscal problems that they’re experiencing?

Curtis S. Pullen

No, actually not. The government continues to be fairly strong and in fact, the state and local governments were actually running stronger than they have been over the past couple of quarters. I think we commented on that before as well.

Chris Agnew – Goldman Sachs

Then the final question, is there any – from your experience in 2001, 2003 is there any change in product mix you typically see as volumes are declining that impacts gross margin in any way?

Curtis S. Pullen

I’d say a couple of things first, the international business has grown quite rapidly through increased distribution of seating products and as you know, those seating products carry higher margins for us. So, as John Portlock in the international business has started to sense a slowdown in some of those regions, if those regions are more dependent mix wise towards seating that could affect his business.

However, he’s seeing growth in certain areas around his patch. But, for the most part I don’t think we’ve seen significant change in mix in the North American business.

Brian C. Walker

Not yet. I think last time Chris if you went back to it we did see a bit of a movement last time towards seating and storage, more drop in products. I think part of that is you’re seeing less of the major projects stuff but you’re still seeing the drop in work. Now, whether that will repeat itself or not I don’t know but I think last time if you went back and looked by product category, the bigger drop off was actually in the systems category which is, as you know, we tend to have higher margins in the seating area. But of course, you know you sort of lose that in the absorption picture when you look at it overall.

Operator

Our next question comes from Budd Bugatch – Raymond James & Associates.

Budd Bugatch – Raymond James & Associates

Let’s start off talking a little about customer visits if you would. We talk about backlog and I know that usually works for the first half of the quarter or so but I know that you monitor your customer visits and how that looks out longer term. Have you seen a drop off on that and is that a significant – Brian, I know you look way out in the horizon too with talking to the sales force. Could you give us an indication of what the appetite looks like out there? Even outside this period?

Curtis S. Pullen

Joe probably has the tracking numbers on his finger tips there but we’ve been very busy. I think we’ve all see a lot of activity with folks coming in. But, I don’t know if Joe you have anything?

Joseph M. Nowicki

The metrics specifically on customer visits Budd, they were actually up from where we were at the first quarter. So first quarter to second quarter we saw a slight uptick in customer visits. Year-over-year, down slightly but nothing dramatically shifting in that area.

Brian C. Walker

I think one of the things you find Budd, this happens faster I think, the down draft if you will, when we went through that period when everyday in the news people were watching what was going to happen in the financial sector. That drop was pretty swift so I think when you look at customer activity, companies had yet to filter that down throughout their organization so we still had lots of folks who had plans and process coming forward.

I think even as I’ve listened to the sales force talk about this, we’ve had lots of cases of customers saying, “Yes, we still plan to do this. It’s a matter of when not if.” So, I think we’re in that period where folks are holding on to cash and I think all businesses are doing that and in fact, all their bankers are telling them to do that. So, we’re in that period of time where people are holding on to cash.

I think the visits have kept up because people are still trying to plan for themselves as to where they are going to be when things get back to normal, if there is such a thing.

Budd Bugatch – Raymond James & Associates

Have you seen many of those organizations within companies start to get trimmed and downsized like many companies are doing? I mean, in terms of reducing employment?

Brian C. Walker

You mean employment in terms of the facilities folks?

Budd Bugatch – Raymond James & Associates

Yes, obviously if they cut back those folks then that appetite goes away.

Brian C. Walker

I don’t know if I can comment on any specific trends around that. I don’t know, I think part of the thing we’re all dealing with and maybe you’ve got better information than I do but, these employment reduction announcements have been sort of fast and furious. I don’t know that many have been implemented yet. So, unlike us who we not only announce, we implement it so I can tell you exactly who’s here and who’s not here, I think most of those announcements have been almost forecasted reductions more than you’ve actually seen the folks leaving and I think that makes it a little harder to pick right now what’s going to happen on the other side.

But certainly, I would say we have not seen major reductions on the facility side. If there’s an area we’ve seen employment reductions in that are sort of along those lines I guess it would be in – and I know you watch this, I see it in some of your writing, in the architectural design firms there certainly have been some employment reductions throughout that group which are specifiers.

Now, one of the things that you’ve heard is that much of that pull back has come as a result of some of the sort of ancillary areas that have been pulled back pretty hard to like hospitality, it’s my understanding has pulled back pretty far, things like stadiums those kind of deals have been pulled back pretty hard. So exactly how much of that relates to folks that would be interfacing with us or not I think is still a debatable question.

Budd Bugatch – Raymond James & Associates

You normally keep a figure of project business versus what I call regular or over the [inaudible], do you have that for what went on in the second quarter?

Joseph M. Nowicki

Yes, that was another one that was pretty stable. Projects were around 41% and this is again, in the North American business where we track that which is pretty consistent with the prior quarter and what we saw last year as well too.

Budd Bugatch – Raymond James & Associates

Curt, when you look at the savings of $60 million annually, can you parse that out for us maybe with what is payroll and what are other kinds of components of that savings?

Joseph M. Nowicki

The $60 million is split 50/50, half of it or $30 million is compensation related and $30 million is non-compensation programs and other activities.

Curtis S. Pullen

Part of the $60 Budd is in overhead as well.

Joseph M. Nowicki

That’s true.

Curtis S. Pullen

You know, you’ve got part of this showing up in op ex, part of it in cost of goods sold.

Joseph M. Nowicki

Yes, it’s about $10 million in the overhead numbers and $50 million are in SG&A.

Budd Bugatch – Raymond James & Associates

Do you have the dollar numbers for the North American orders and non North American orders and how much of the pull through for the pricing affected the non North American? I thought that was only in North America?

Curtis S. Pullen

They were on a different time schedule Budd, so the $35 million we talked about is all the North America piece.

Budd Bugatch – Raymond James & Associates

Will that be in the Q? The orders for North America and non North America?

Brian C. Walker

Yes, it will.

Budd Bugatch – Raymond James & Associates

Do you have those numbers or can you disclose them now? Or, do we wait for the Q?

Curtis S. Pullen

They’re working over the holidays to get me a draft. I haven’t seen it yet.

Brian C. Walker

I don’t have those at my fingertips right now.

Operator

Your next question comes from Todd Schwartman – Sidoti & Company.

Todd Schwartman – Sidoti & Company

What are you seeing and have you seen in the cancellation of any large projects? And, where are the concentrated in terms of geography?

Brian C. Walker

We’ve certainly seen deferrals more than we’ve seen cancelations so that’s always an interesting question about does a deferral become a cancellation. I don’t know that there’s been any particular concentration. As Curt mentioned, we had seen some deferrals in the UK when we were in the first quarter. Some of those got completed, many of them got completed in the second quarter.

Certainly I would say the places that have seen the majority of that sort of activity have been in the financial services groups in particular where they’ve deferred things out as they have been having to obviously scramble to hold on to cash. Now, some of those you have to keep in mind are not necessarily orders we had in hand, those were prospects so it’s not as if we had an order and then it was cancelled as much as it was a prospect that then got deferred out in terms of when we thought we would see the order.

I know of one that we had in the southeast that was a deferral that we hope is going to come back on line here as we get in to the spring. But, I don’t think there was a specific pattern to it that I know of.

Curtis S. Pullen

The comment I would add to Brian’s on this Todd is that the total number of projects that we’re tracking both in numbers and dollar volume continues to increase. Now, that’s not to say that some of those projects haven’t been put on hold, and not all of those were necessarily short term business. So, we have a pretty big funnel, we look at a lot of stuff. Some of the things in that funnel have been deferred or started to slowdown but the total number and the total dollar volume of what we’re tracking is actually up over the past several months.

Todd Schwartman – Sidoti & Company

When you say tracking are you simply working harder to find out what’s upcoming and what’s out there?

Curtis S. Pullen

Well, I mean these are sort of universe of potential to consume sort of situations so I mean we and other competitors are probably looking at these things. They are probably on their tracking radar too. But, from an overall macro perspective, our project activity, the things that we’re looking at and the things we are pursuing has not declined.

So, back to the question I think Brian was alluding to a minute ago, there may be some capacity to consume constraints but the fundamental demand feels like it’s still there, it’s just a matter of when some of this stuff is going to occur that we’re having a difficult time predicting right now.

Todd Schwartman – Sidoti & Company

Now, with the corporate office market, the traditional customer activity declining, what percentage of the Q2 sales were to government, healthcare, education combined on a worldwide basis?

Brian C. Walker

To be honest Todd, we don’t have that level of granularity today in front of us. I don’t know if we’ve seen a big shift of that yet. It’s likely that we’ll see a shift towards government tends to run a higher percentage when we get through these periods of time barring the question we had earlier around state and local government which has held in so far. But, to be frank, I just don’t think we have that level of detail right now.

Todd Schwartman – Sidoti & Company

Also, just shifting to the cost reducing activities, thus far the ones you’ve talked to are centered on North America, what are the opportunities for savings outside of North America? When might we hear more of a formal announcement if you will, on that front?

Brian C. Walker

Todd, they were not centered on North America, actually all the changes we made were global in virtually across all areas of the business with one exception, we did not make many changes, although there were some, in the healthcare business because it was growing so rapidly. In fact, there were two areas that didn’t see a lot of change: healthcare; and retail. Retail, because it is fairly small in terms of infrastructure. But generally, it was across the globe where we made the changes.

Now, I say that, that doesn’t mean it was even everywhere and in fact, if you looked at the international business, more the changes were in the UK than they were anywhere else. Asia because it was continuing to grow and South America we made fewer changes in some of those areas. So, it was more disproportionate and it wasn’t equal across even functions if you will. But, I would say all areas of the business did some level of change as a result.

Todd Schwartman – Sidoti & Company

But on the whole in the aggregate is the absolute dollar amount consistent with your sales mix geographically?

Brian C. Walker

Well, you’ve got to be a little careful with that. I would say not necessarily but remember it’s because we leverage a lot of the infrastructure in the US for all of the other businesses. Remember, our business model for the most part is we have four sort of market facing units and then we have four kind of key centers of excellence. Most of those centers of excellence are centered in the US quite frankly so we leverage much more of that infrastructural cost so it’s never going to look even if you try and look at where the costs are geographically versus where the revenue is.

Todd Schwartman – Sidoti & Company

Finally, were you able to realize as much price as you had hoped to?

Brian C. Walker

I think the answer is we’re still pretty early days after the price increase so I don’t think we actually have enough data to even draw a conclusion. Remember, we just got the price increase really this quarter. Most of what we saw coming in of course, we’ve always said that there’s a bit of a lag because we have long term contracts with folks that have price holds or periods of time. It was a little less than maybe we thought at this point but I would say way too early to conclude anything.

Operator

Your next question comes from Matthew McCall – BB&T Capital Markets.

Matthew McCall – BB&T Capital Markets

I’ll follow up on that last question, Curt I think you said maybe a $3.5 million sequentially from maybe easier inflation, does that include any benefit from price?

Curtis S. Pullen

No, Matt it is $3 to $5 million is what we talked about relative and that was commodities related. That’s not factoring in any expected benefit on that number relative to price realization.

Matthew McCall – BB&T Capital Markets

I know it’s tough but is there still an expectation that there will be some price benefit showing up next quarter?

Curtis S. Pullen

A little, I mean I don’t know that we’re forecasting that for the way we’re rigging the business but for sure we’d look for those opportunities where they present themselves.

Matthew McCall – BB&T Capital Markets

Then you guys commented on some of the puts and the takes that will impact some of your margins, volumes down, shutdowns are going to impact you, cost savings will help, cost declines will help, things like prices, is there another variable? Maybe help us understand that a little bit more looking at the fixed and variable costs in your model right now both on the cost of goods and SG&A line? I don’t know how much detail you can give but in general what does that look like now? What do the incremental margins look like going forward? And then, how does that compare to the ’01 versus ’03 time frame?

Joseph M. Nowicki

I can give you a little on the fixed and variable pieces which might help fill in the blanks a bit. On the cost of goods sold side, so on our cost structure, as you know on the cost side our overhead costs run 12%ish of sales. I think last quarter that was around $60 million in overhead costs. Those numbers on the down side, so as volumes come down tend to be around 90% fixed so you can use that as a rule of thumb to guide you.

On the SG&A side, our SG&A expenses tend to be again, on the down side, tend to be about 80% fixed so around 20% variable. That includes the bonus in there. They tend to be somewhere around 90% fixed even on the SG&A side, even on the down cycle and then the bonus is the other part of it which moves, as you know, with our EBTIDA results and gets tacked differently.

Brian C. Walker

I think what you’ve got to keep in mind Matt is I think when everybody talks about cost being variable and we do believe we’ve got a pretty good variable model, that’s sort of a step function question. So, if you’re moving around on that kind of 10% up, 10% down it adjusts pretty naturally. When you get outside of that, a lot of costs that once looked variable all of a sudden get fixed unless you take specific actions to make them variable.

Hence, the decisions we made this quarter to say, “We’re going to have to do something once we start seeing order entry rates that are running, as Curt said, 19% down.” We have to do something to be able to continue to see the costs be variable at all. The real question is the first increment of 10 points down or so is relatively natural because as Joe said the bonus and other things we set variable with volume levels or profitability levels and of course, those go hand-in-hand, that moves naturally.

Once we get beyond that, then the tough stuff starts to come in to play that says to get it to be variable other than the ones that are obviously variable like materials, you’ve got to start to take actions to get them to move in a variable nature.

Matthew McCall – BB&T Capital Markets

So it sounds like because there’s been this sudden step function down, you’re not going to be able to recognize the full cost savings, you’re not going to see the full benefit of cost declines or price that Q3 could be maybe an exacerbated move to the down side on margins before you start to push through some of these variable cost changes? Am I hearing you correctly?

Joseph M. Nowicki

I think Brian did comment about the timing of when we would see some of the cost savings initiatives that we just went through, right. Those cost reductions just kind of getting implemented now so we won’t see the full effect of those in the third quarter so to your point of the volume is going to be down in the third quarter, we’re not going to have all of those cost savings initiatives in place that would be correct.

Brian C. Walker

The other point I was trying to make Matt is as you look forward and you start thinking about models, sometimes I think people get carried away with how variable things really are because it depends on how fast they move and over what time frame. The move but they move largely in some ways depending on how many actions you can take to make them move.

Matthew McCall – BB&T Capital Markets

Then just curious, you spoke with us last on November 10th and you gave us a guidance range, the reported number on the top line came in at the low end of that range. Obviously, things got weaker, I understand that but just curious was it the project activity, was it the day-to-day activity, was it everything that kind of deteriorated and kind of surprised you to make the top line come in at the low end of your revised range?

Curtis S. Pullen

It’s not anything in particular Matt, it’s certainly in some situations we invoice directly on certain large projects and if those don’t get completed on the schedule, that gets wrapped up in our delayed invoicing which is part of the reason you see inventory up slightly. It’s not an inventory issue relative to our production, it’s more the work in process moving towards a project that we may have taken directly and we’ve got the exchange rate effect of some of that in there as well which we were trying to anticipate the effect of and that’s fairly significant for the quarter.

Brian C. Walker

Matt, besides the factors of fx that Curt mentioned, I think that’s more not a result of any specific thing as much as the nature of the beast right now with how fast people are moving and making decisions. Coming in to this quarter if you would have told us we were going to see the number of layoffs that we saw in the general economy, I don’t think anybody would have predicted that.

I think that’s what’s happening, things are moving fast enough and as companies are reviewing what they can do they’re trying to pull on any lever that they’ve got in there hands. So, I think it’s more that side of things that it’s fairly chopping out there.

Operator

We’ll take our final question from Leah Villalobos – Longbow Research.

Leah Villalobos – Longbow Research

I am just wondering a little bit more about your customers and how much business you’re getting from new customers at this point versus existing customers and how that’s changing?

Curtis S. Pullen

I don’t know if I have that detail with me. Joe gave us a project versus [inaudible] numbers which we typically talk about. I don’t know if I have anything right here on that basis.

Joseph M. Nowicki

I don’t know if that’s a number that we specifically do a lot of detail tracking on new customers versus existing customers. We track it by kind of project size.

Curtis S. Pullen

We track it I just don’t know if we’ve physically talked about it in the call and I don’t know if I have it with me.

Operator

There are no further questions. I’ll turn the conference back over for any additional or closing remarks.

Brian C. Walker

Thank you all for joining us today and for your continued interest in Herman Miller. I also want to express again my appreciate to all Herman Miller employees for their outstanding work and commitment to our shared success. The recent uncertainty in the global markets and difficult view of the next several months challenge all of our stakeholders.

We have solid plans and outstanding committed teams in place to keep our business moving and gaining strategic strength. We are committed and confident that we’ll have the right long term vision for Herman Miller, a strong network of business partners to make it a reality and the financial resources to keep it moving forward.

On behalf of myself, Joe Nowicki and Curt Pullen, we wish you all happy holidays and a great New Year and we look forward to talking to you all in March. Thanks.

Operator

Once again ladies and gentlemen that will conclude today’s conference. We thank you for your participation and you may disconnect at this time.

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