Herman Miller's (MLHR) CEO Brian Walker on Q4 2014 Results - Earnings Call Transcript

Jun.26.14 | About: Herman Miller, (MLHR)

Herman Miller, Inc. (NASDAQ:MLHR)

Q4 2014 Earnings Conference Call

June 26, 2014 9:30 AM ET

Executives

Brian Walker - President and CEO

Greg Bylsma - EVP and CFO

Jeff Stutz - CAO and Treasurer

Analysts

Josh Borstein - Longbow Research

Todd Schwartzman - Sidoti & Company

Matt McCall - BB&T Capital Markets

Bobby Griffin - Raymond James & Associates

Operator

Good morning, everyone. And welcome to this Herman Miller Incorporated Fourth Quarter and Fiscal Year End 2014 Earnings Results Conference Call. This call is being recorded. This presentation will include forward-looking statements that involve risks and uncertainties that could cause the actual results to differ materially from those in the forward-looking statements. These risks and uncertainties include those risk factors discussed in the Company's reports on Form 10-K and 10-Q, and other reports filed with the Securities and Exchange Commission.

Today's presentation will be hosted by Mr. Brian Walker, President and Chief Executive Officer; Mr. Greg Bylsma, Executive Vice President and Chief Financial Officer, and by Mr. Jeff Stutz, Treasurer and Chief Accounting Officer. Mr. Walker will open the call with brief remarks, followed by a more detailed presentation of financials by Mr. Bylsma and Mr. Stutz. We will then open the call to your questions. We will limit today’s call to 60 minutes and ask the callers to limit their questions to allow time for all participants.

At this time, I would like to begin the presentation by turning the call over to Mr. Walker. Please go ahead, sir.

Brian Walker

Good morning, everyone. Thank you for joining us. I’ll briefly share some of my thoughts on the quarter’s results and the strategic progress we have made this past year before turning the call over to Greg and Jeff for their presentations of more detailed financials. We feel good about the results we have posted yesterday afternoon. Despite softer than anticipated sales and order pacing earlier in the period, our overall operating performance on an adjusted basis came in at or above the levels we committed to in March. We are also encouraged by the continued progress being made across the organization to advance the momentum of our long-term strategic agenda.

I’m sure you noted our reported results included pre-tax restructuring and impairment expenses totaling $21 million. These charges are weighed to the impairment of intangible asset value associated with our Nemschoff and POSH trade names. Accounting for intangibles assets that was off from business combinations is complex. When you add a continued consideration element, such as an, earn out provision, it gets even more difficult to follow. So I think it’s important we give this task a bit of time today.

Let me start by assuring you we continue to believe both businesses and brands are important parts of our long-term offer. This past year, Nemschoff was again recognized as the number one healthcare furnishings brand in the United States. POSH continued to be a leading brand in China and is helping us to build a growing presence in India and other markets in Asia. Both businesses posted growth and profitability this past year. However, the current and forecasted results are not at the level we forecasted at the time of the acquisitions, and we have work to do to realize our ultimate goals. As a result, this partial write-down of asset carrying values was required under GAAP accounting rules.

The current quarter charges were offset by a $2.6 million gain from the reduction of a contingent consideration liability recorded at the time of the POSH acquisition. In essence, the original purchase accounting assumed we would have an additional payment based on achieving a sales target in the years after the acquisition. This contingent liability gave rise in part to the trade name asset impaired this past quarter. In the case of Nemschoff, contingent consideration came in two forms, a cash earn out provision based on targeted sales growth and a contingent value right or CVR liability, which changed in value based on the movement in the price of our common stock.

In fiscal years 2010 and 2011, the contingent liabilities related to the Nemschoff were reduced, and we recognized gains totaling $24 million based on the underlying performance metrics. In short, while the accounting impairments are disappointing, they’ve been largely offset by cumulative life to-date reductions in the amount owed under the contingent consideration liabilities. In a perfect world, the liabilities and assets would have been reduced at the same time, but GAAP rules require us to evaluate the two separately and this will often result in timing differences.

With that detail covered, let me go up a level and talk about the market and what we’ve done to move our agenda forward. Overall, the domestic and international business environment, though still mixed by region is generally pointing in a positive direction. At a macro level, recent Fed commentary supported by positive employment numbers and ISM reports suggest a moderate GDP rebound from the disappointing prior quarter. Our industry’s key indicators including corporate profits and the ABI are also pointing up. Those factors along with improving non-residential construction backdrop are helping fuel the optimism, I’m sure you have seen BIFMA’s latest forecast for 2015.

Internationally, the picture also appears to be improving with more encouraging signals from the UK and Europe, and greater stability in parts of Asia. There are obviously wildcards out there, especially unfolding geo-political events in the Ukraine and most recently the Middle East, but overall we appear to be in a period of improving industry dynamics. To be frank, it has been frustrating to see expected growth repeatedly pushed in the later quarters as the domestic and global economy has been trying to find traction. Having said that, we continue to see signs of momentum building in our business.

This past quarter serves as a good example. Despite a sluggish start for order entry in their early weeks of the quarter, our order pacing accelerated late in the period driving us to a strong finish and a backlog of almost 12% compared to a year ago. We have also noted that a greater percentage of our new orders are dating out beyond the normal delivery method.

With this as context, I will turn to some of our segment highlights. On an organic basis, our North American reporting segment recorded flat sales for the quarter, while orders were up 7%. We were encouraged again this quarter to see further signs of stability in the U.S. Federal Government sector, where sales and orders were up over last year driven by strong demand from Government Healthcare Agencies.

Our Living Office initiative continues to build momentum. During the quarter, we began taking orders on two of our major new product platforms with a third scheduled pro forma market launch in early calendar 2015. In NeoCon, we displayed all three to great effect, integrated with our broader product offering using our own Chicago staff and showroom at the case study, we were able to demonstrate a Living Office landscape uniquely designed for the people, work, character, and culture in that space. This also enabled us to share more of Herman Miller’s new research based tools for assessing client need and supporting design-driven space planning. We believe Living Office is well timed with clients and the designer seeking to understand and adopt a new landscape of work, and our NeoCon showroom was a powerful proof concept for both our unique insights and new product designs. In fact, for the second consecutive year, we received International Interior Design Association’s award for the best large showroom in NeoCon, another significant validation of our Living Office design concepts.

Another key development in our work business this past year is the progress we have made in rolling out new inside led sales training and CRM tools for our field and dealer network. That work has energized our sales force and dealer partners with a Living Office providing a great catalyst for their enthusiastic participation. We’ve held a number of readiness rallies across North America and are now taking those programs and events to other international regions. The Herman Miller sales team and dealer network have always been among the very best in our industry. But we’re really excited to see the impact of these new skills and tools they’re having.

Our specialty consumer segment closed the year with another great quarter with organic sales and orders up 8% and 7% respectively versus the prior year. We were particularly encouraged to see that this growth was broad-based across the segment. The integration of Maharam widely recognized as industries top textile brands has gone very well. That team continues to make a positive contribution to our overall financial performance and their product and operational capabilities are a great complement to the other elements of our business.

The Herman Miller collection also continues to grow in both product offer and brand value, demonstrated by the fantastic market reaction to our presentation at the New York Design Week in May. Dozens of new SKUs have been added to the collection from this past year in both new and archival designs, growing both our consumer business in a range of solutions we offer for commercial and hospitality phases. This year has shown we are successfully reaching the expanded marketplace that offers new growth and richer margins. In short, we’ve made great progress expanding our specialty consumer portfolio and capabilities, all of which builds on our conviction that our rich brand legacy gives us the unique advantage to improve our reach into the consumer market.

Turning to our ELA reporting segment, that business delivered a good quarter with organic sales of more than 9%. This was led by strong performance in Europe, particularly the UK. Additionally despite the recent news headlines highlighting strains on economies in Asia, we benefitted this quarter from strengthening sales on that region including our business in China. Organic orders for ELA were essentially flat, but we’re generally encouraged by the improving fundamentals in Europe, in parts of Asia, and the opportunities we are seeing in Mexico and Greater Latin America.

We’re also expanding our global capabilities to capture more of these international market opportunities. In the near-term, we are scheduled to begin the construction of a new manufacturing and fulfillment center in the UK that will serve the EMEA region. We’re also very excited about our lease manufacturing distribution facility scheduled to be operational in Bangalore, India later this year. In short, Herman Miller’s international business continues to expand profitably and we see much more potential as we grow our brand and our operational capability in these markets.

Looking at the total buy of work over this past year, we’re pleased with how far we’ve come, but we all recognize there’s still much more work to be done to achieve the long-term objectives of our strategy. Most of you are well aware that we have for sometime referred to this as the shift strategy in recognition that the key social and economic changes around the world offer us exciting new opportunities for profitable growth, but also require a shift and our focus and capabilities in some fundamental areas. These fundamental shifts have informed each of the areas of progress I have described for you this morning. And we’re confident that it will continue to lead us toward the objective we’ve established for the business.

In June of 2012 we outlined for you a set of 3 year goals for sales and operating income growth. We’re now two years into that period and we’ve committed to refreshing these goals, reflecting the changes we’ve made in the business and our strategic growth plan going forward. We feel strongly that for these goals to be meaningful they should be shared within the broader context of the strategy. Accordingly, we won’t be providing this information on today’s call instead we will outline this information during a separate Analyst Day and Investor Conference Call later this summer, following our Board Meet in July. We’re intending to be planning this event for July 28th in Chicago and more details will be coming soon.

With that brief introduction let me turn the call over the Greg and Jeff for more details on the quarter.

Greg Bylsma

Thanks Brian. As Brian covered the main highlights of our business segments I will focus my comments on the consolidated results for the quarter. Consolidated sales in the fourth quarter of 488 million were 6% higher than the same quarter last year. Excluding the impact of the Maharam acquisition, dealer divestitures and foreign currency translations, sales increased 3% in the prior year. Orders in the period totaled 480 million, an amount that was 4% higher than the prior year level.

As a reminder at the beginning of February we increased our general list prices on average of 2.5% and as a result we estimate orders totaling approximately $22 million, were pulled ahead into the third quarter that otherwise would have been entered into the fourth quarter. Excluding the full head impact of the price increase as well as the Maharam acquisition, the order divestitures and foreign currency translations, orders increased 6% in the prior year. Sequentially net sales in the fourth quarter increased 7% from the third quarter level while orders improved 3%. When factoring in the impact of this year’s price increase, sequential order growth in the fourth quarter was nearly 14%. This increase is directionally in line with seasonal trends we’ve experienced in the business over the past several years.

The translation impact from changes in currency exchange rates had a negligible impact on consolidated net sales and orders in the quarter. Our consolidated gross margin in the fourth quarter totaled 36.7%, 130 basis point improvement over last year’s fourth quarter gross margin of 35.4%. The addition of higher margin Maharam products as well as the net benefit from the recent price increase net of discounting drove the majority of this year-over-year increase.

I’ll now move on to operating expenses and earnings in the period. In total operating expense in the fourth quarter of 131.5 million, compared to 127 million in the same quarter a year ago, this represents a year-over-year increase of $5 million. Our expenses this quarter were reduced by $2.6 million related to a reduction in the remaining earn out liabilities for POSH which Brian described earlier. When you adjust for this contingent consideration adjustment our operating expenses came in at the low-end of the guidance that we provided at the end of the third quarter. Further last year’s fourth quarter included $2 million of legacy pension charges associated with the defined benefit plans that have since been terminated. Excluding these items our operating expenses increased approximately $9 million from the fourth quarter of last fiscal year, a majority of which relates to the acquisition of Maharam.

On a GAAP basis operating income this quarter was $26 million or 5.4% of sales and this represents a 240 basis point decrease from our consolidated operating income in Q4 of last fiscal year. Excluding restructuring and impairment expenses as well as the reduction in the POSH contingent consideration adjusted operating income was $45 million or 9.2% of sales. By comparison we reported adjusted operating income of 39 million or 8.6% of sales in the fourth quarter of fiscal 2013. The effective tax rate in the fourth quarter was 25.7% in an adjusted basis excluding asset impairment expenses and reduction in contingent consideration liabilities the effective rate was approximately 28%. This adjusted rate was below our previous forecast of 32% to 33% due to favorable true ups to reconcile both tax provisions to complete tax returns. The effective tax rate in the fourth quarter of last fiscal year was 24.4%.

Finally net earnings in the fourth quarter totaled $17 million or $0.28 per share on a diluted basis, adjusted diluted earnings per share in the quarter were $0.50. This amount included approximately $0.03 related to lower than expected tax rate in the quarter and with that I would turn the call over to Jeff to give you an update on our cash flow and balance sheet.

Jeff Stutz

Thanks Greg. We ended the quarter with total cash and cash equivalents of $102 million, an increase of nearly $25 million from where we ended last quarter. Cash flow from operations in the period were 40 million, changes in working capital resulted in a net use of cash totaling $4 million with the largest factor being an increase in trade receivables. For the full fiscal year cash flows from operations were $90 million. As a reminder this full year amount is net of a $49 million cash outflow made earlier in the fiscal year related to the final termination of our domestic defined benefit pension plans.

Capital expenditures in the quarter were $9 million, bringing the year-to-date total to $41 million. Cash dividends paid in the period and full year were $8 million and $30 million respectively. As a reminder, the dividend increase we announced last December was reflected in our April payment, putting our annualized payout level today to approximately $33 million. We remain in compliance with all debt covenants and as of the end of the quarter our gross debt-to-EBITDA ratio was approximately 1.2 to 1. The available capacity on our bank credit facility remains at $145 million with the only usage being from outstanding letters of credit. Given our current cash balance ongoing cash flows from operations and our total borrowing capacity we’re confident we can meet the financing needs of the business as we move forward.

And with that brief overview I’ll turn the call back over to Greg to cover our sales and earnings guidance for the first quarter of fiscal 2015.

Greg Bylsma

Okay, based on the order trends we’ve seen in the recent weeks and the level of composition of our starting backlog we’d anticipate sales in the first quarter will range between $480 million and $500 million. This implies total revenue growth between 2.5% and 7% over Q1 of last fiscal year. Earnings in the quarter are expected to be between $0.44 and $0.48 a share this assumes an effective tax rate of between 33% and 35%. We expect our consolidated gross margin in the first quarter to range between 36.5% and 37% and finally operating expenses in the first quarter are expected to be between 132 million and 135 million.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Josh Borstein from Longbow Research. Your line is open, please go ahead sir.

Josh Borstein - Longbow Research

Hi. Yes, thanks for taking my questions here, just on last quarter you had talked about firing on all cylinders and I realized revenue came in within your guidance range, but just wondering if any of the segments either under or outperformed relative to your internal expectations this quarter?

Brian Walker

Hey Josh, this is Brian. Actually, it just a great call because -- a great question, because in some ways that was a, we came out of the third quarter feeling really good that we have seen order growth really across the business. What we saw early on in the quarter as we mentioned, it was a little more sluggish particularly I would tell you in North America. As you saw, we had really great activity across ELA. And in fact, the specialty and consumer business ran pretty well across the whole quarter, so the lightness early in the quarter was in North America. The other thing that was a little surprising to us was the dating of when we started to get orders that a fair amount of that was outside of the quarter and in fact even as we look into the first quarter, the lead time from when we are getting orders and when people want it is also pushing out in the first quarter, that’s why even with the good size growth in backlog that we had in the fourth quarter we are seeing some of that move out even into the second quarter of this next fiscal year.

Josh Borstein - Longbow Research

Okay. And I know you had mentioned that earlier in the call about orders getting pushed out or just that the lead times getting longer, how unusual is that relative to historical norms, is there any particular reason behind that or any kind of metrics you can put behind it?

Brian Walker

No, I don’t know that it’s -- I think you go through this from time-to-time. It sort of depends on the scale of some of the projects. The good news is we have seen some bigger projects and those have tended to be a little bit longer, so I don’t think there is a -- we don’t see anything in there that yet makes us believe it’s kind of a change in the business or trend. It was just interesting that we saw both, as we got towards the end of the fourth quarter and as we look to the first quarter, and we looked at the dating of the backlog we saw in both spots. So, just a little greater percentage of what we have seen in the past. I wouldn’t call it monumental but when you are down to $4 million to $5 million worth of shipments making the difference of being at the topper end of the range or the bottom-end of the range, I mean it makes a difference.

Josh Borstein - Longbow Research

Okay, thanks for that. And then just in the most recent BIFMA forecast, there was a shift that seems like it pulled some of the demand from 2015 into the back half of 2014, so it still looks like the second half of ’14 is stronger than before. Is that a trend that you are seeing in your business as well?

Brian Walker

I don’t know, I think we have looked at the forecast over our total fiscal year and said hey, the direction looked right. I don’t know that we have ever said hey, look we can count on the exact number. I think still when we look at patterns and strength of U.S., you hear good things on the architectural and design community as they are quite busy. NeoCon, there was pretty good floor traffic from people who were in the mode of making decisions, not that you see orders there but it certainly looked like there was good traffic by companies that were in the mode of deciding what they were going to do. So, all of that seems to point to directionally where BIFMA is looking at for continued momentum makes sense. As I said in my opening comments, Josh, the only trepidation I have about that is that forecast has continued to kind of move out a little bit throughout the last 12 months. We would have thought we have seen more of that in the spring, and in fact it wasn’t quite as strong in the spring as we would have thought.

Josh Borstein - Longbow Research

Okay. And then just one last one from me, with the Living Office, you spent that considerable amount of effort here to retrain sales and dealers on a solution-based selling approach. At this point, is this how sales and dealers are going to market and are there any other metrics you can share there just to gauge how successful that selling approach has been?

Brian Walker

I don’t have any particular metrics, I would say, to you that it’s how they go into market there. I think we are in -- I would call it we are certainly in the middle innings of the development and training of everybody. I mean it’s a pretty big effort to get out and get everyone on-board. We have done initial training with folks to get them fired up. NeoCon was another chance to go back and do some of that training again, but this is going to be a multi-year activity. It’s not going to happen in 12 months, and we have really been at it super strong in the last 12 months, but we are probably talking a multi-year effort to be frank before we got every person on the Herman Miller side plus all the dealers up to speed, and then in sync. I would say we just did a Living Office event this week in the UK, and Andy Lock who runs our international business called me the day after and said, hey, there was another kick at the can. This time we brought in all the dealers. The materials are getting easier for the dealers to absorb, they walked out fired up, so I think what you got to hope is you get sort of the alchemy of the market improving at the same time that you got folks out there with new tools to help people discover the new ways that they can create their offices.

Josh Borstein - Longbow Research

I appreciate the color. Good luck in the rest of the year.

Operator

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

Todd Schwartzman - Sidoti & Company

Good morning, gentlemen. Earlier this morning, a competitor have cited warranty, freight, and distribution costs higher year-over-year in their May quarter. Can you speak to those as it pertains to Miller?

Brian Walker

Todd, we have throughout our year this year, we have actually seen warranty cost come down, which is I think our second year in a row we have seen warranty come down. So, we haven’t seen anything significant around warranty at all. It wasn’t a big mover this year, but it was a nice move for us which to be frank is really very much directly related to some hard work by Mr. Bylsma and some additional training and systems we have put together around manufacturing, but often in this industry and I obviously can’t speak to their particular issue, those things tend to come because you’ve got either a large project or something that’s caused your problems or maybe a new product introduction. But we haven’t had anything at our end that has been out of line with what we’ve seen in the recent past. And distribution cost wise, I’d say the same thing there, slightly up, but not significant enough for us to talk about.

Todd Schwartzman - Sidoti & Company

Okay. And when does product developments spending ease a little bit maybe relative to last couple of years?

Brian Walker

I don’t really expect it to ease in terms of dollars, I think the question is going to be as can we grow the top-line faster versus the dollars increase in R&D. To be frank if you were adding the economy walk through, I think the whole industry is going through a fairly transformative period where everyone is looking for new ways to solve the problems of the modern office. I also think everyone is trying to find new places to get revenue, whether that’s new product segments, new customer segments and to do that you’re going to need a very robust set of new products. I think our primary challenge for us internally is, how do we build a faster clock speed? Because when you look at our R&D it’s rarely related to capital as much as it is to our own folks. And so our focus is, how do we apply the learning we’ve had from lean to our R&D processes which is not a one year journey. It took us many years to get lean, implemented across manufacturing, I am sure that will be the case and case with R&D. So I don’t expect us to see reductions in R&D dollar spent overtime, hopefully we can grow the top-line faster than we’re growing the investment and that’s where you’ll see the offset to that.

Todd Schwartzman - Sidoti & Company

Got, it. And what color can you provide on the integration of both POSH and Maharam anything new there? Any surprises good or bad?

Brian Walker

On the POSH front we acquired the manufacturing side in October. We knew that would take some additional effort, we had to sort of unwind, some things we did it in interim step when we acquired just the front-end of the business. So I would say the team isn’t completely finished with that work, it’s gone pretty well overall, we feel really good about the stability of the workforce. I think our next challenge in POSH to be frank is around spreading the use of those products to our broader geography of Asia. We’ve done some of that in India, and we think there are opportunities for other plateaus we can use the POSH brand to give us a secondary brand, especially in markets that are maybe a little more cost conscious. So overall the POSH integration has gone well on that front.

Maharam was a -- I would call it there was light integration of Maharam from the beginning generally it’s gone very well with the family. If we had any surprises at Maharam this year revenue wise it was dead on where we thought it would be margins were quite good as you can see that in our overall results. The one place that we spent additional money on Maharam this year to introduce a greater number of new textile designs, as well as an entire new rug offering and so the profitability was a little bit lower, mostly related to forward spending in R&D and marketing cost which we think is going to be really helpful. That’s not only expanding in the Herman Miller -- in the Maharam brand our new rugs with the Danskina brand which we’re quite excited about that we launched at NeoCon as well as additional textile offerings in other parts of our business. So overall the Maharam integration has gone well.

Todd Schwartzman - Sidoti & Company

And those new products are being rolled out over a couple of quarters?

Brian Walker

Yes, you’ll see -- you’ll start to see, I mean those guys do in the textile business different than in our world where we may think of a product line that’s introduced and then it’s out there for five, 10 years or longer. That business is much more like a fashion industry. So you’ll see two, three, four, five introduction periods in a year. So you’re constantly updating SKUs and bringing out new things and thing are pulling in and out of the line depending on their receptivity. One thing you can do that as its primarily development cost and sales and marketing more than it is, you’re not building, tooling and those kind of things and the majority of those products are of course made in the supply base. So you see a lot faster churn on their products and what we might be used to. In this case a big chunk of the cost of launching more new SKUs as you have a higher sampling cost, which in some ways run through as marketing dollars, because you have to go out and create samples for Andy from sales people, dealers and the such to be able to market the products.

Todd Schwartzman - Sidoti & Company

And just looking at the ELA segment, I know you have called out the UK as particularly strong. Are there any other markets on a normalized or organic basis that were up at least mid single-digits top-line for the quarter?

Jeff Stutz

Yes, so Todd, this is Jeff. Actually and we have tried to make this point, Brian said in his prepared remarks despite some of the skittishness that you’re seeing in the headlines about the PRC, our business in the PRC was actually quite strong this quarter. So obviously we’re always careful to we’re not a bellwether for the Chinese economy obviously, but that was an area of our business where we were actually quite strong. We have talked in recent quarters here about how the Chinese economy and again that skittishness, has had a negative impulse on the Australian economy of course we own our distribution in Australia and that’s had a drag on us from most of the fiscal year. We actually had a really good order traction in Australia this quarter less so on the top-line we’ve still kind of seen some of the hangover in the quarter for sales, but order entry was quite strong and the team is doing more and more bullish there. We are hoping to see that continue obviously, but those will be two that I think are notable.

Todd Schwartzman - Sidoti & Company

Okay, thanks a lot and last question with the GSA, are you prepared to call a bottom?

Jeff Stutz

Well, yes, it’s probably early to say it’s a bottom time, but certainly if you look at the last -- I think we’ve seen this progression over the last year or so that, that quarter-by-quarter it’s at least evened out and the declines are certainly -- and this quarter was the first time I think we’ve seen positive year-over-year numbers. And by the way that was a little different when you look at the healthcare facilities or non-healthcare. We had growth in healthcare and the non-healthcare side it was actually still down a little bit. So some of that’s going to depend on where the mix is, so right now I wouldn’t say we procure the bottom we sure aren’t feeling like we’re getting close still.

Todd Schwartzman - Sidoti & Company

Sounds good, thanks guys.

Operator

Thank you. And our next question comes from Matt McCall from BB&T Capital Markets. Your line is open, please go ahead.

Matt McCall - BB&T Capital Markets

Thanks, good morning everybody.

Brian Walker

Hi, Matt.

Greg Bylsma

Hi, Matt.

Jeff Stutz

Hi, Matt.

Matt McCall - BB&T Capital Markets

So, I guess, Brian, the comment you made about the spring and the cycle and expectations and the trends not necessarily meeting expectation as you kind of ponder the cycle and what’s going on and I know you have a lot of conversations with the folks out in the field, what’s your best guess as to what is making this cycle so different?

Brian Walker

Yes I would tie, that I guess you have to say it is the same thing nobody can talk on the overall economy right. It seems like every day we hear one person say, hey we’re in this great period of expansion and the GDP numbers are going to get better and the next person says, well no so fast and of course the overall GDP numbers in the quarters weren’t very good. The thing to think that maybe was a little surprising to us is if you remember in our third quarter call, we did not talk about weather at all. Everybody else was talking about weather. And we didn’t see any impact at least on the order front from weather and said, okay, well this didn’t impact us. I don’t know if that’s partly what we started to feel and the beginning of the quarter was sort of maybe the hangover and we tend to have the delayed effect of that stuff. I am hesitated to call that Matt because I don’t have any data to point to.

On the other hand, it was just, it was odd we went in to, we felt like we went into a little bit of all, a little bit of a law now some of that can be project related and then it really picked up at the end of the quarter. So when you go out and talk to the sales team and you talk to dealers and you talk to the A&D folks they remain quite buoyant about what they’re seeing. I don’t think it’s a rocket shift but I think that’s true with the overall economy. So my gut is more what we’re seeing Matt right now is it’s a reflection of the overall economy feeling like it’s, it’s growing, it feels way better than it did in the bottom of the crisis. On the other hand, I don’t think anybody, anything has seen as bit of a big of a rebound as you might have expected given the change in the tone.

Matt McCall - BB&T Capital Markets

Okay, alright. So maybe hitting a different angle, just in the past you have talked about the mix of project activity versus the day-to-day activity, if you have that data that’s great maybe throw it at us but, what is that, what is the trend project versus day-to-day tell you about the health -- I know we have talked in the past that day-to-day has actually not been keeping up I have heard that from time-to-time with expectations, so what is the mix of business tell you about the cyclical health?

Jeff Stutz

So, yes, Matt, so I think this is always an interesting one because as the underlying economies of the business start to improve, you see, you tend to see a rising tide that hits both the project and the day-to-day side. What we’re seeing and Brian alluded to this is a bit of a tilt toward high to larger size project. The commentary around the non-res construction data and I know we talk a lot about that. I know you talk a lot of that in your notes. Certainly, we’re seeing construction related project. We have won some. We see construction related project opportunities clearly on the rise, so I think that the overall mix to direct your question is not changed a great deal, but we’re seeing a bit of a tilt toward larger size project and I think it has being impart driven by the improving construction environment.

Matt McCall - BB&T Capital Markets

Okay, so any -- have you seen any trends and improving trends in that day-to-day business as well?

Brian Walker

Well, if you think about it Matt, it’s the mix that doesn’t change which is what Jeff said. If the mix doesn’t change and we’re seeing this kind of six to seven top-line growth, the answer is, it’s growing, but it’s growing sort of a long but normal the same trend line.

Matt McCall - BB&T Capital Markets

Okay, okay, got it. And then finally, so it looks like on Analyst Day and we were to get more detail about your new outlook then. But can you give us kind of a sneak-peak anything we should think about on the margin front -- unfortunately I have to publish them all before July 28th, and I want to make sure that they it reflects as most of the reality as I can. So anything which we should think about when we’re looking at margins for this year?

Brian Walker

I mean, Matt, I would say that we’ve had, I think on the last call we said, hey if you look at the growth, we wouldn’t expect -- obviously in the guidance we gave, we are saying, hey look, margins are about the same and the same revenue, right? But as that revenue numbers starts to pick up we would have imagined that our leverage number that we were talking was kicking around at that kind of 18% leverage number, had we got a little bit better than that in Q4 based on the year-over-your performance. But it’s going to be in that kind of range as we look out. Unless you get -- if you do get a surge in revenue, like if the 10% becomes real in the second half of the year, we have always said that when you get that in quick burst that that number then gets -- the leverage number gets higher than that.

Matt McCall - BB&T Capital Markets

Okay, thank you all.

Operator

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

Bobby Griffin - Raymond James & Associates

Hi guys, this is Bobby Griffin filling in for Budd. I appreciate you guys taking my questions.

Brian Walker

Hi Bobby.

Jeff Stutz

Hi Bobby.

Bobby Griffin - Raymond James & Associates

I apologize if you answered this earlier. I jumped on the call a little bit late. But besides ex-currencies, is there anything structurally in the ELA segment that’s hurting margins a little bit? It looks like it’s the second quarter in a row that it’s profit or margin is down year-over-year?

Brian Walker

For the year, if you look at it, I don’t know about the quarter not so much. For the year, actually we did. We have lost a fair amount of dollars on the margin line from currency change year-over-year, if you have looked at it year-to-date. But not so much on the quarter, because I think by the time we got to this quarter last year, it sort of anniversaried its was in by the looks of it, but certainly in the early parts of the year, that would sit in the margin line. I think more of what you are looking at, if you look year-over-year, my guess is we’re seeing more of a mix shift. Because if you notice a lot more of the business was in Europe where margins tend to be a little bit tighter because the mix of our product portfolio in Europe is more balanced rather than being as heavily skewed towards things like seeding they tend to have a little bit higher margin. So I would say its mix of product line and it is mix of what region depending on the makeup of our business is more than likely. The other thing for sure, if you look year-over-year, we are spending more money this year on the integration efforts at POSH and bringing that manufacturing side in. The margins have been a little bit lower than we would have last year in total as we are working our way through that.

Bobby Griffin - Raymond James & Associates

I appreciate that, that’s helpful. On the mix, is that something -- I know it’s very hard to look out and see where that mix is going, but is that something that you think could continue to play out going forward in more of a shift in mix towards Europe and we should probably adjust our models a little bit. Because of that or, how do you see that playing out going forward?

Brian Walker

I think as we -- I have to step back and look at the plans in detail, but I think right now our plans are for the mix that we have seen in the balance of the year to be about the same next year. I don’t expect it to move radically around one place or the other. And those are really hard to predict, of hey where the buying is exactly going to be in and what is the mix by product line. It will overtime, we will work to get the margins back up and in the total of ELA, but I think you do have to remember that business gets bigger it becomes more of playing across all the different product categories and by its nature you are going to have a little bit of an offset to play lower dollars and hopefully a lower percentages and hopefully higher dollars.

Bobby Griffin - Raymond James & Associates

Okay, that makes sense. And then another question on -- in the shift of the revenue out, people pushing back the projects are you seeing any type of change with that in terms of the dollar value that they are spending? Or is it just kind of the same project level but just getting pushed back out because construction or what not is delayed?

Brian Walker

I don’t know even any of these are delays, as much as people are just taking more time through their planning process. Because that none of these are things that I think are due to delays, nor delays by us. If you take as an example, even though this isn’t one of them, I will just use it as an example, the large project we have been working out for the last couple of years in Texas. We had a very long lead time and orders started to flow to when we were shipping things, because they are being very deliberate about the building planning. So I don’t know that I see anything in there that would tell us it’s about size or it is delays as much as it is. People being very deliberate about their planning and making sure all the components are lined down.

Bobby Griffin - Raymond James & Associates

Alright, perfect, I appreciate that. And then lastly, on full year CapEx, can you give us a little estimate on where you expect that to end up for the year?

Greg Bylsma

Bobby, this is Greg. So CapEx, if you look at our spend this year, we probably had more purchase orders than actually cash outflows, so if you look at the commitments made, it’s quite a bit -- not quite a bit, it’s a bit higher than the 42 million that we spent. The number is going to be between right now it is 70 million to 80 million bucks, remember a big chunk of that is the -- is how far along in the UK building we get and that will be the big variable in that number.

Bobby Griffin - Raymond James & Associates

Yes I appreciate it.

Greg Bylsma

Go ahead.

Bobby Griffin - Raymond James & Associates

I was just saying, it’s helpful, I appreciate that. Best of luck going forward, I appreciate you guys taking my questions.

Brian Walker

Thanks, Bobby

Greg Bylsma

Thank, Bobby.

Operator

Thank you. And I am showing no further questions at this time gentlemen.

Brian Walker

Thanks again for spending your time with us this morning and for your continued interest in ownership in Herman Miller. Be assured that the people at Herman Miller are working hard to award your confidence by continuing the successfully execution of our strategy this new fiscal year. We look forward to sharing more of our plans and goals when we talk you again in late July at our Analyst Briefing and until then we hope you have a good day and a great summer.

Operator

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

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