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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

Budd Bugatch – Raymond James & Associates

Chris Agnew – Goldman Sachs

Todd Schwartzman – Sidoti & Company

Herman Miller, Inc. (MLHR) F3Q08 Earnings Call March 20, 2008 9:30 AM ET

Operator

Good morning everyone and welcome to the Herman Miller, Inc. third quarter fiscal 2008 earnings results conference call. Today’s call is being record. This presentation will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These risks and uncertainties include those risk factors discussed in the company’s reports on Form 10-K and 10-Q and other reports filed with the Securities and Exchange Commission. Today’s presentation will be hosted by Mr. Brian Walker, President and Chief Executive Officer; Mr. 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 begin the presentation by turning the call over to Mr. Walker.

Brian C. Walker

Good morning everyone. As always, I’ll open our presentation with a few introductory remarks and then turn the call over to Curt and Joe for more detailed review of our results. As you know we announced a lot of changes leading into and during our first third quarter. We announced how we were going to improve underlying business performance so that we could accelerate our investment in strategic growth initiatives. This quarter was about following through and implementing those changes. First we completed changes to our capital structure to utilize our balance sheet more effectively and also increase our financial flexibility. As a result during the quarter we retired 5 million shares of our stock completing a 10% year-over-year reduction on weighted average share count. Next we closed the announced Brandrud acquisition. The team worked through the due diligence in record time and we are extremely pleased with the ongoing integration effort. It’s going to be a great strategic fit that will expand our healthcare product offer and add management talent and depth to our efforts. Brandrud is a quality manufacturer of healthcare furnishings with an emphasis on seating products for patient rooms, patient treatment areas and public spaces such as lobbies and waiting areas. We have shared a successful marketing alliance with Brandrud since 2005 and look forward to further gains going forward now that they are officially a part of the Herman Miller family.

We are also continuing to implement changes to our business model as we previously outlined to get to our targeted 13% operating income. This quarter we began seeing the impact of all of those changes. With only modest top line sales growth we realized strong operating leverage and produced operating income of 12.5% and a 30% growth in earnings per share. Looking forward we remain appropriately cautious in the current economic environment. Unsettled credit markets and declining consumer sentiment coupled with softening non-residential construction and employment data suggest the next four to six quarters in the US will be challenging. This is consistent with our recent industry BIFMA forecast for US manufacturing shipments of a 1% decline in calendar 2008 and a 3% decline in calendar 2009. In addition as Curt will talk about in more detail the raw material markets will likely have a negative impact on our gross margins in the coming year. Fortunately we have proactively changed our business model, capital structure and also the overall mix of our business.

Today we are less dependent on the US office furniture market and we will continue to diversify both our offerings and our geographic reach. While not immune to the market around us this will help to insulate us from some of the impact. We are very excited about our potential. This includes continuing our launch of a [inaudible] queue of new products for the core business, international and healthcare many of which will be introduced over the next 18 months. We also continue to expand our international business which continues to grow at a good pace. And we will continue to ramp up our Cambia business which creates both a strong and differentiated opportunity for our core offering as well as creating an entirely new market with unique technology and customer proposition. Each of these initiatives hold great individual promise and we believe collectively points to a stronger and more diverse revenue stream for Herman Miller than we have ever had in the past.

Finally I’ll close my introduction by highlighting recent recognition that Herman Miller has received. Fortune Magazine named us as the Most Admired in our industry for the 20th time in the past 22 years and among the top 10 of all companies for our quality of products, our people management, our commitment to social responsibility and our innovation practices. In a separate ranking Fortune and A Great Place to Institute also named us among the 100 best companies to work for in America and cited us having one of the five best strategic diversity programs in the country. Additionally Fast Company Magazine named us number 26 in their Fast 50 List of the World’s Most Innovative Companies, truly an honor. I share these not because we like to see our name in print but because they validate our ambitions to achieve and sustain our spirit towards performance innovation. These awards are further evidence that our strategy is working and that we are achieving our goals a credit to my team and the great people we have at Herman Miller.

Now I’ll let Curt and Joe take you through the details of our Q3 financial results.

Curtis S. Pullen

Good morning everyone. There’s a lot to talk about again this quarter so let me briefly hit the highlights. As you saw in the press release we experienced modest revenue growth, gross margin improved by 130 basis points above the third quarter of last year as a result of continued cost improvement efforts, stable commodity prices and improved pricing realization. Reductions in operating expenses driven primarily from the cost structure of changes implemented last quarter drove an additional 100 basis point improvement from the third quarter of last year. Combined these items resulted in a 12.5% operating income for the quarter and earnings per share are a record for our third quarter at $0.65 up 30% from last year.

Let’s look at sales and orders. Third quarter sales was $495 million representing our 17th quarter in a row of year-over-year revenue growth. Although our growth was modest at just over 2% we are pleased that it was near the top of the range that we had provided in our guidance of $475 to $500 million. North American sales experienced an increase of 4% and our non-North American sales increased 6% from the prior year third quarter. These gains were partially offset by a slight decline in our retail business and also the effect of our having exited an OEM business last year which in the prior year third quarter had revenue of $6 million. We should also note that we experienced a foreign exchange benefit from our international sales this quarter of approximately $8 million due to the weakening US dollar. About half of that was in our non-North American business, Europe primarily. The other half was in Canada. The weak dollar also increased the operating income of our international business by about $2 million for the quarter when compared to last year.

On a sequential basis our sales declined approximately 2% compared to our second quarter reflecting the traditional seasonal industry slowdown and our own shutdown over the holiday season. Looking at orders last quarter we described a cautious outlook for our order forecast for the third quarter. In total orders in Q3 were $454 million compared to $458 million last year a decrease of a little under 1%. As expected the holiday period gave us a relatively slow start to the quarter in terms of weekly order pacing. However we did realize an improvement in weekly order rates as we progressed through the quarter which has continued to strengthen thus far into the fourth quarter. In addition it’s important to recall the implementation of our February, 2007 price increase. We’re talking a year ago which had the effect at that time of drawing forward an acceleration of orders into the third quarter of last year which we estimate to be in the range of $20 to $25 million. Thus, removing the effect of this change we would have experienced moderate growth in orders for the quarter. On a sequential basis third quarter order rates were down 21% from our second quarter total of $573 million partially a result of the traditional holiday season slowdown mentioned before and our seasonal shutdown. However our second quarter order performance was one of our strongest ever and includes several large project wins that did not recur at the same level in the current quarter.

Let’s look a little more closely at some of the order information. Orders in North America decreased about 1% versus the prior year and most of this is explained by the impact of last year’s February price increase as I just mentioned. Now we’re seeing this factor we continue to experience growth in our healthcare business as well as in Canada and Mexico. Orders in the non-North American component of the business increased over 13% for the quarter with the strongest gains in Asia and the Middle East. Similar to the foreign exchange impact on sales we also experienced a benefit to our international orders this quarter of approximately $7 million due to the impact of the weakening US dollar. Orders in our retail business were down slightly versus the prior year and last year’s third quarter contained $6 million order number relative to the OEM products that we are no longer producing. Thus our comparative is lower by this amount as well.

We finished the quarter with a healthy ending backlog of $307 million which is a 3.5% improvement from year ago levels and provides us with a good base from which to move into the fourth quarter. Gross margin is next. We’re once again very pleased with our gross margin performance for the quarter which ended at 34.3% and represents an improvement of 130 basis points over the prior year of 33%. This strong performance was primarily the result of our continued efforts around cost improvement, favorable material pricing as well as our ability to capture price improvements relative to last year. Perhaps favorable pricing around materials sounds unusual in today’s environment. So I’ll explain that a little bit. Because of our way of securing long term purchase agreements for certain materials and components as well as our focus on continuous improvement we did experience year-over-year declines in our steel, plastics and wood costs. These were a good benefit for us in the quarter and we are pleased with this performance and will continue our determination to manage our costs. However commodity prices are increasing and eventually these cost increases will begin to affect us. Soon certain of our contracts including those related to steel will renew and we expect to begin to see some negative impact of this as we move into Q4. We will talk about more of this when we get to our forecast.

On a sequential basis gross margin decline from the 35.6% recorded in the second quarter as we discussed in our second quarter call high sales volume for the second quarter enabled our plants to run at very high production volumes which improved our margin performance and we also had a favorable mix of product sales in that quarter. Those conditions did not repeat to the same extent in Q3. We had lower production volumes caused by the holiday shutdown, slightly higher discounting and some mix shift in products sold that all contributed to a slight decline in our gross margin for the quarter. But overall margin was in line with our expectations and is a solid improvement over last year. Operating expenses for the quarter totaled $108 million or 21.9% of sales compared to $111 million or 22.9% of sales last year. This represents a year-over-year decrease of $3 million even though sales are higher and is an improvement of 100 basis points. The decrease in spending was primarily driven by the cost reduction actions announced during the second quarter and were partially offset by increased accruals for bad debts as well as annual wage and benefit increases compared to the prior year. Overall we are very pleased with the team’s efforts to carefully manage our operating expenses and yet continue to drive our strategic initiatives forward.

Gains in gross margin and reduced operating expenses drove operating income as a percentage of sales up to 12.5% for the quarter a 26% increase over the prior year and one of our highest operating income results ever recorded and certainly consistent with our goal of 13% which we discussed last quarter. Our effective cash rate for the quarter was 33% which was at the midpoint of the range of 32 to 34% that we were forecasting. Our tax rate again benefited in the quarter from the increased manufacturing deduction under the American Jobs Creation Act and an increase in foreign tax credits related to cash repatriation from our foreign subsidiaries during the quarter which Joe will talk about shortly. You’ll also perhaps remember that at this time last year our third quarter effective tax rate was 30.3% a full 3 points lower than our current level due to our ability to benefit last year from newly enacted R&D tax rules. That benefit during last year’s third quarter positively boosted our EPS for that quarter by $0.02 which makes our current year growth in EPS even more impressive.

Consolidated net income for the quarter was $38 million approaching 8% of sales and is a 19% increase over the prior year. Earnings per share for the quarter totaled $0.65 a record for a third quarter and a 30% increase over the $0.50 per share reported at this time last year. Our strong operating results combined with the reduction in the number of shares outstanding due to implementation of the capital structure changes we previously announced produced this strong result. We’re proud of these results which we feel are a reflection of the hard work and dedication of everyone at Herman Miller.

I’ll now turn the call over to Joe Nowicki, our Treasurer and VP of Investor Relations. Joe will take us through how the balance sheet is doing and give us an update on the implementation of the capital structure changes we announced last quarter.

Joseph M. Nowicki

Before I jump into the current quarter balance sheet metrics I want to start with providing an update on our capital structure. We announced our plans last quarter to more effectively utilize our balance sheet by borrowing $200 million in private placement notes and using the proceeds to execute an accelerated share purchase program. The private placement notes were issued on January 3rd, the proceeds were used immediately to enter the ASR on January 4th. Upon execution of the ASR agreement we retired 4.4 million shares of our stock. Subsequently in accordance with the agreement we retired another 600,000 shares on February 1st for a total retirement of 5 million shares so far. The actual price per share and final number of shares to be retired under this ASR will be determined at its completion in September and we estimate that at that time we’ll retire an additional 1.5 to 2 million shares. In summary during the current quarter the ASR lowered our share count and favorably impacted EPS by approximately $0.03. This was partially offset by the increased interest expense on the additional debt of about $0.02 for a net positive impact to EPS of $0.01 for the quarter. This amount will increase as we go through the year and the remainder of the shares are retired.

Regarding the current quarter balance sheet metrics cash flow from operations was $35.5 million in Q3 compared to $67.2 million in the prior year. Higher working capital requirements for the use of funds of $13.2 million in the current year as compared to $26.7 million source of funds during the prior year. Higher quarter end accounts receivable due to the timing of sales combined with cash payments related to the previously announced restructuring drove the majority of the change in working capital year to year. Depreciation and amortization amounted to $10.7 million for the quarter as compared to $10.2 million in the prior year. Capital expenditures of $9.2 million for the quarter are slightly lower than the $9.7 million spending during the prior year and well within our plan levels. Investing activities also reflected a net outflow of $11.7 million related to the previously announced acquisition of Brandrud. In addition to the $200 million returned to shareholders under the ASR we also returned to shareholders $5.4 million in dividends this quarter. After the completion of the ASR we’ll still have about 171 million remaining on our Board share repurchase authorization.

We ended the quarter with a cash balance of $81.4 million. Of this amount approximately $54 million is currently located in our international entities. However during the quarter we repatriated about $24 million in cash from our foreign subsidiaries. We will be able to more effectively utilize those funds in the US and given our overall foreign tax credit situation we were able to complete that action without increasing our effective tax rate.

I think that’s enough on the balance sheet for this quarter. Now I’ll hand it back to Curt.

Curtis S. Pullen

Let’s look at the outlook. Again this quarter we’re starting with a strong backlog. In fact it’s about $10 million higher than in the prior year so that should help us as we begin our fourth quarter and our recent order levels have been strong. But as Brian mentioned earlier we are cautious about the current overall economic environment and are anticipating order rates to remain relatively consistent with what we saw at this time last year. As a result we’re expecting fourth quarter sales to be in the range of $475 to $500 million which represents a flat quarter relative to last year’s Q4 sales of $485 million. As I mentioned earlier gross margins this quarter are expected to face headwinds from higher commodity prices and while we expect a realized continued benefit from ongoing product cost improvement initiatives in place these efforts are not likely to offset all the likely upward commodity pricing pressure. As a result our gross margins are likely to decline from where they have been in the past couple of quarters and be more in the line of 33.5 to 34.5%. In addition our operating expenses are expected to be slightly higher this quarter as we ramp up for several new product launches as well as prepare for the June NeoCon event.

The effective tax rate for the fourth quarter should be again in the range of 32 to 34%. As Joe discussed our share count will continue to decrease during the quarter as a result of the continued execution of the Accelerated Share Repurchase program and our weighted average number of shares outstanding should be approximately 57 million for the fourth quarter. In terms of earnings guidance even with basically flat revenues, higher anticipated commodity costs and our expectation of slightly higher operating expenses we expect earnings per share to be in the range of $0.55 to $0.62 for the fourth quarter which would represent an increase of 10 to 24% over the prior year. Again a reflection of the benefits from the changes we have made this year in the operating costs and in the capital structure.

Now I’d like to talk about next year for a moment. I’ll start by saying that next year our fiscal year 2009 will likely be a challenging year given the general state of the economy led by the slowdown in the US. Fortunately we have already taken measures to adjust our operating costs and our capital structure. We have also benefited from our efforts to carefully and profitably grow our international businesses which are less dependent upon the US office furniture market. Our non-US sales in the third quarter were nearly 24% of our total as we have grown our businesses beyond North America and we are continuing to carefully pursue these markets. Also within North America our efforts in the area of healthcare and higher education also continue to diversify our overall business and we are excited about the newly launched Cambia business and the opportunities that this award winning capability will bring. So as we look forward to our fiscal year 2009 given the overall uncertainty in the economy we believe our revenues in total will be in a range of flat to low single digit growth. In fact if the latest BIFMA forecast is correct it could be quite difficult showing any real growth in the core domestic office furniture business over this next fiscal year thereby mirroring the BIFMA experience.

At the same time we expect further growth in our international markets, healthcare business and higher education markets plus we will see the benefits of our Brandrud acquisition and incremental sales from our Cambia business. These positive growth areas will be partially offset by a planned dealer divestiture that we expect to complete at the start of the new fiscal year. On the operating income side we feel that our manufacturing operations are solidly under control and that operating expenses will continue to show great discipline. The biggest variable for us could be commodity prices. Right now we are anticipating that these costs could be up anywhere from $25 to $35 million from the current year, factors which are likely to affect everyone in our industry some of whom have recently announced price increases. Even though we have historically been able to overcome increases in our input costs without necessarily increasing prices and we continue our efforts to offset these increases with cost and productivity improvements we are nonetheless also developing our plans for a price increase. The timing of such an increase if implemented coupled with the speed with which certain of these costs are beginning to move could negatively affect our margins and profitability in the new fiscal year particularly in our first quarter since the effect of any price increase will take some time to realize. As a result we anticipate operating income to be in the range of 11 to 12% of sales for the entire full year.

To summarize we see top line growth of flat to low single digit and operating income of 11 to 12% and we see three big variables as we look into next year. Number one, the BIFMA forecast and what that actually turns out to be. Number two, the economies outside the US and whether or not these will continue to grow as they have been. And third and perhaps most significant to us right now is what’s going on with commodities and what really happens here as to speed and intensity and our ability to easily manage through these.

I’ll turn the call back to the Operator and we’ll take some of your questions for a minute.

Question-And-Answer Session

Operator

(Operator Instructions) We’ll hear first from Budd Bugatch from Raymond James.

Budd Bugatch – Raymond James & Associates

Just to make sure I understand, Curt, if I did our numbers right I think the operating margin implied by the range for the fourth quarter is like 11.2 to 11.8% and you had said gross margins between 33.5 to 34.5% for the fourth quarter?

Curtis S. Pullen

Yeah around 34 is our kind of guess on gross margin and we’ve got operating income of around 11 and change in the fourth.

Budd Bugatch – Raymond James & Associates

Just to make sure we also understand your plans on price increases, you have as you said correctly a couple of competitors have already done that in a weakening environment with costs going up it’s obviously hard to do that. What is your thought about timing and what more can you say? Any more color on that?

Brian C. Walker

First of all I think if you look historically at price increases when we’ve seen that it’s a major commodity change those have been able to stick pretty well regardless of the demand picture. Certainly it’s harder, right? So we’re not counting on all of it sticking but we do believe that if steel keeps going at the degree it is that most if not all the competitors will be forced at one level or another to raise prices in the industry. I think that’s going to be true not only in our industry by the way, I think that’ll be broader. We’re seeing significant increases in steel that are just not possible for anybody to absorb them. So I think we’ll be able to capture some. We are working through the details of the price increase right now. We will probably make an announcement shortly of the exact timing. Given where we’re at though our belief is we won’t see much benefit of that, we won’t see really any benefit of that in the first quarter. It will probably start in the second quarter and beyond. So the issue on the raw material costs for us right now is going to be while we think between all the work we’re doing around efficiencies, other cost reduction efforts and the price increase we can offset a fair amount of the commodity increase and some of that depends on what’s the magnitude of those increases in the long run. The issue is we’re going to have a timing issue that for sure in the first quarter we are not going to be able to offset all of that commodity increase and in fact we’ll get hit with a little bit of it in the fourth quarter as Curt mentioned but it’ll be heavier actually in the first quarter. But we really won’t get any relief from a pricing perspective at all.

Budd Bugatch – Raymond James & Associates

And regarding next year, Curt or Brian, you gave us some clue as to you’re thinking about that. Did I hear you say that overall sales will be up flat to low single digit or was that just North American in office?

Brian C. Walker

That’s overall. We think overall, Budd, zero to low single digits and as Curt said as you guys can appreciate watching what’s going on around us today when investment banks fail from one day to the next and you didn’t expect it, I think the question for us right now is it’s really difficult to predict. We’ve got really good visibility on the fourth quarter because we actually as Curt said come out with a decent backlog, we know what the orders have been the last few weeks. That’s pretty predictable. When you get beyond that it’s a little hard to predict right now and I think the three big things that are out there in front of us that are variables and by the way all these have both positive and negative sides to them at one level or another. The first one is the US industry and what kind of demand picture are we going to see there. Right now we would say we think the BIFMA number looks reasonable from what we can see. We are still seeing as you saw this past quarter good growth in international and healthcare. The question is will some of the difficulties in the US particularly in the big money center cities which is a point for us to play in not necessarily by the way because we serve the financial services industry but those big money center cities could be affected. The third one that’s out there this whole question of commodity prices I keep believing and we saw some signs of this this morning that if it’s a little lighter we would half expect that commodity prices would start to back up and that maybe that will give us some relief over what we’re currently expecting. But to this point we have not seen that, that even with lots of negative news on the economy commodities continue to run forward. So again it’s not all bad news because we’re seeing growth in the places that we’ve tried to plant new seeds and that’s good news and the US businesses hung in there so far reasonably well. So it’s just a pretty cloudy picture if we get beyond that fourth quarter.

Budd Bugatch – Raymond James & Associates

You must feel like a manic depressive this year because going from the first quarter to the second quarter to this quarter in terms of the outlook it kind of feels like – I remember the first quarter was pretty dour and the second quarter much better and the performance has been fine. It’s just been the outlook has changed, your mood has got to be changing almost daily our hourly.

Brian C. Walker

You know, Budd, it’s interesting. I would say maybe not as much internally. I think we’ve been pretty even about what we thought was what we saw and that’s why we made some of the moves that we did in the fall is we said hey look it we think this thing is difficult to predict. We think we’ve got some great strategic investment that we need to make sure we’ve got the headroom to fund no matter what. We think we’re in the right place longer term but let’s get ahead of the curve so that if it is a little more challenging we’ve got the headroom to operate and I think BIFMA has continually sort of knocked the number down step by step. So I think maybe the one that has been the biggest change in mood for us most recently is this whole commodity thing which again I guess the other side of our prediction earlier was that we would see relief on the commodity side and that certainly hasn’t proven to be the case so far.

Budd Bugatch – Raymond James & Associates

Finally for me, you talk about strong order pacing now. Can you kind of give us a feel of where the weekly order pacing is right at the moment?

Curtis S. Pullen

Budd, we ran if you remember 37.2 weekly average in all of Q1, that jumped up to a $44 million weekly average in Q2 and we ran Q3 at 35 which isn’t bad given that in traditional holiday slowdown and the fact that we close our operations as you know for a full week. But the last couple of weeks we’ve been up over 40 which has been a really nice up tick and that’s held up for the last three, four weeks as we’ve started to get into the quarter which we find encouraging. And there’s a lot of activity. I mean there’s stuff going on and the sales team are working very hard on every opportunity they see out there so there’s a lot of good activity still going on and that effect of the pull forward of orders last year that $20 to $25 million wouldn’t surprise us to see growth rates above last year but just in terms of the nominal dollar numbers we’re pleased with the order of dollars being in the above $40 million weeks.

Operator

Our next question will come from Goldman Sachs and to Chris Agnew.

Chris Agnew – Goldman Sachs

First question on transferred costs and can you remind is that included in your gross margin or is that operating expenses and are you able to pass on for example like fuel surcharges?

Joseph M. Nowicki

Transportation costs as in freight out and fuel costs, Chris?

Chris Agnew – Goldman Sachs

Yes.

Joseph M. Nowicki

Yes, those are included within our gross margin so they’re in our cost of goods sold. And that number has been running somewhere around 5 to 6% of sales. Last quarter specifically freight and distribution ran around 5.7% of sales.

Brian C. Walker

We did some stuff happening this past quarter, Chris, because of where we were shipping to as much as it was fuel. We were in some heavier cost shipping lanes just because of where projects were going. The question of can we pass stuff along in fuel surcharge, my opinion is surcharges have never been very lucrative or manageable in our industry because of the pricing methods we use. As you know we start with a list price and we’re really project sensitive. Quite frankly last time we tried a little bit of that, some other folks tried it. Our opinion is you’re much better off going to customers straight up and talking to them about price increase and what that looks like rather than surcharges. So I wouldn’t anticipate we’ll do anything in the form of a surcharge. It’s just to complicated for the sales people and they spend their time explaining that versus what we think are a great set of products.

Chris Agnew – Goldman Sachs

And then question on capital structure, did the accelerated share buy back – interest rates have fallen and your industry generates a lot of cash flow, good times and bad. Would you be prepared, would you think about taking on more leverage to maybe repeat or do you need to now just use your annual cash flow to generate share buy backs?

Brian C. Walker

First of all interest rate while the base rates have fallen, as you know spreads have increased to the point that actually as you look at it the all in rates aren’t really all that much different. [Will Baroth] is fond of saying recently it doesn’t matter what rate it is, you can’t get money and I think because of that with the markets being so tight really there hasn’t been that big a change in the net-net rate that you’re borrowing at. Having said all of that we made the move in the capital structure to a spot that we were comfortable with in terms of not only the mixture of the capital structure but also in terms of making sure we had the flexibility to do the stuff we want to do strategically and I would still say our first thing is if we could find great capabilities out there that we need that would move us forward whether that was in Asia or healthcare or in fact in Cambia or in the core business those are the things we would like to do first versus just continuing to change the mixture of the capital structure. Having said that if we have excess cash that we don’t see a need to deploy in the mid-term you can count on the fact we’ll treat it the way we always have and tell ourselves that keeping excess cash in the balance sheet is not something we need to do. For right now we’re going to field a little bit of cash probably because of where the ASR sits and we’ve got a few months for that to play its way out. But longer term our policy and strategy will stay exactly as it has been, it will be great returning the cash flow to shareholders, we are about it deeply and at the same time we’re looking for strategic investments as our first priority.

Curtis S. Pullen

The other thing I’d mention on that, Chris, is in late December when we closed the private placement deal Joe did a great job of bringing forward all of the interested parties in that and you know this that we were oversubscribed by 2X or twice that which we were asking. We did a $200 million private placement. At $400 million of inquiry we said thanks we’re good, we’ve retained our investment grade rating and we got great rates and we’ve had some comment back from us with folks being pretty impressed with that overall package and the financing that we were able to accomplish given the strength of the company’s results and capabilities. So that leads us to believe that we still have opportunities to keep looking at that if we ever need to for strategic purposes.

Chris Agnew – Goldman Sachs

One more housekeeping, you talked about a dealer that you’re de-consolidating in 1Q. I was wondering if you could quantify that or at least I guess you’ve Brandrud that will be added on a year-over-year basis. Would those offset [inaudible] in 1Q?

Curtis S. Pullen

Pretty much offset, Chris. You know that over the past several years we own a few dealers in the US and in Mexico and Canada and when we find the right leadership team that has the right long term sustainable commitment to the organization and we have confidence in them we’re happy to help move that back to an independent ownership state. So that is a dealer that’s coming out of a planned path that way and it’s not that significant to the overall consolidated results and they just about offset each other in terms of the Brandrud.

Operator

(Operator Instructions) We’ll hear from Todd Schwartzman with Sidoti.

Todd Schwartzman – Sidoti & Company

Could you provide some color on the unfavorable shift in product mix in the third quarter and whether you see this continuing?

Curtis S. Pullen

Todd, that just ebbs and flows with the project nature and the balance of that against business. So there are differences in gross margins among product lines and certainly within product lines depending on what that mix specification is and you know how complicated our business really is and also if you lay into that where the growth comes from if it’s growth in one of our emerging markets that has a particular mix towards something versus growth in more of a based business account where we have different products. So it’s not dramatic but we watch it pretty carefully and it was just worth commenting to you guys to say that’s a factor relative to that change in margin percentage. When you look at our second quarter which just happened to have a lot of things line up very positively, high production volume, great impact on commodities, continuous improvement worth, positive mix and if all of those things tend to lean a little bit differently the next quarter that’s part of what you see.

Brian C. Walker

Todd, I think you’re fully earned statistics there is no trend of a change in mix shift. This is just simply the quarter to quarter variances that happen. We haven’t seen any consistent move one way or the other, other than the fact that as we grow in some of the markets like international in particular we have a heavier mix of seating which tends to be a little bit better from a margin perspective for us. The other thing is when you look at it right now with home being bound it offsets a bit of the side of the international move. But no specific trend that we can point to, this is just a normal move by project.

Todd Schwartzman – Sidoti & Company

And what about discounting? Was it most prevalent versus prior quarters in terms of geography or customer industries? Any light that you could shed on that?

Brian C. Walker

Again, just like the mix thing, Todd, I don’t think we have anything that would tell us right now that there is a systemic change in the discounting picture in the numbers. Certainly at times get a little bit more, lighter on the demand side. People tend to get more aggressive on new projects, but that tends to bounce around to market to market, even city to city from time to time. But I don’t think we’ve seen anything yet that would tell us we see a sustained pattern of that happening.

Todd Schwartzman – Sidoti & Company

With respect to the contracts expiring for raw materials, can you give us an overview, maybe a timeline of sorts in the next one to two years of what expires when?

Joseph M. Nowicki

The ones that are longer tend to be annual contracts so we tend to roll them every 12 months for some piece of the purchases, not necessarily all of them either.

Brian C. Walker

It’s not all the contracts, Todd. A lot of our raw material contracts are for a particular quarter so they can vary from a quarter to a year and they’re constantly coming off each quarter.

Joseph M. Nowicki

We just happened to have, Todd, to tie it back to our comments steel and you know from our production process a lot of things we bring in at the component level so we’re not actually buying the raw stock, if you will, we’re buying components. In those cases we don’t tend to have as long of forward buying contracts at least at the raw material side. In the case of steel, particularly flat steel that we bring in for things like files and those kinds of things, we tend to buy that on a 12 month sort of locked in contract for at least a percentage of it. Those contracts, most of them, roll as we get to the end of this quarter.

Todd Schwartzman – Sidoti & Company

Also earlier in the call you’d mentioned that the recent order rates were strong or remain strong, I’m assuming that you’re referring to subsequent to the end of Q3, that things had picked up a little bit maybe or were you speaking more towards non-North American growth rates when orders were actually down slightly in Q3?

Curtis S. Pullen

Yeah, Todd, we were talking really about the last several weeks of the quarter itself and the first couple of weeks into the fourth quarter. So as I mentioned earlier we ran really $35 million a week on average if you take that roughly $454 million divided across the 13 weeks of the quarter that gives you $35 million a week. But we really ran $41 million a week towards the last six weeks of the quarter and we’ve stayed above $40 million into the first couple of weeks of the fourth quarter. That was the way we had described it.

Todd Schwartzman – Sidoti & Company

And in those first couple of weeks of the fourth quarter with respect to North America have orders turned positive?

Curtis S. Pullen

Oh, yeah.

Todd Schwartzman – Sidoti & Company

I know you mentioned the shipments look like they’re picking up a bit but the orders, you’re seeing growth?

Curtis S. Pullen

Right.

Todd Schwartzman – Sidoti & Company

With respect to the share count do you have an actual number of shares outstanding either as of March 1 or some later date?

Curtis S. Pullen

Yeah, 56.5 was the share count at the end of the quarter, but the weighted average effect is a little higher because that came later in the quarter and I think as we mentioned on the earlier remarks we think the weighted average will be about 57 for all of Q4.

Curtis S. Pullen

We’re actually at 56.5 right now at the end of the quarter.

Joseph M. Nowicki

And that’s a fully diluted estimated number at the end of the quarter. That includes common stock equivalents as well too. It gives you that 56.5.

Todd Schwartzman – Sidoti & Company

And what was the cost basis, the average purchase price of the 5 million under the accelerated?

Joseph M. Nowicki

The way that the ASR works we won’t know the actual price we pay until the end of the agreement in total in September. Our partner with us, Morgan Stanley, is out there acquiring those shares right now so the price we pay will really be based on the average market share between when it began in January through when it ends in September.

Todd Schwartzman – Sidoti & Company

So you guys are kept literally out of the loop as it were until such time as the program has concluded?

Joseph M. Nowicki

I don’t know what you mean by out of the loop. We get daily reports from the Morgan Stanley folks on the amount that they’re buying each share which is pretty much an even amount over the course of the contract period.

Curtis S. Pullen

If we want to get more into the technicals we can with you but they’ve delivered to us 5 million shares so we’ve recorded that and retired those shares. The way the remaining 200 million is spent essentially is it just trues up at the end and that’s where Joe gave the range of we think we’ve got another 1.5 to 2.5 million shares that will come out of the system by the time this ends up. So that’s how we really, at the end that’s why Joe is saying we won’t really know until the end of this thing.

Todd Schwartzman – Sidoti & Company

The 5 million that you know have been retired, were you apprised of the total or average cost of those shares?

Joseph M. Nowicki

No, they’re currently still in the market buying those back. While they did retire those shares for us, as you know they would have acquired them through either borrowing on the market or other ways to get them to retire them.

Todd Schwartzman – Sidoti & Company

It’s semantics. It’s a distinction between retiring and actual purchases.

Joseph M. Nowicki

You’re correct.

Todd Schwartzman – Sidoti & Company

Finally looking at your guidance does that assume, I’m assuming it does not assume, any additional layoffs above and beyond the 150 previously announced back last quarter?

Brian C. Walker

Nothing of any significance. The one thing that’s always out there is we do move production folks up and down. Now that doesn’t necessarily mean a layoff, it could just mean short weeks and those kinds of things where we need, we backed off on some temps so the direct labor number moves around a little bit more. But if we run at the kind of levels we’re talking about right now we’ve already made the changes, we got after that stuff early as you know and so even from a production standpoint we’re in pretty good shape right now.

Operator

(Operator Instructions) That concludes the question-and-answer session. Thank you for your questions. Mr. Walker, I’ll turn the call back over to you for any additional or closing remarks.

Brian C. Walker

Thank you all for joining us today. In closing I want to thank you for your continued interest in Herman Miller. I also want to express again my appreciation to all Herman Miller employees for their outstanding contributions. Working through the changes to our business has been a challenge for all of us, but we’re proving we are capable of achieving still greater results. As we look to the new year we are a stronger company and well positioned to further improve our underlying business performance, accelerate our growth and utilize our strong balance sheet more effectively. That’s all for now. We look forward to talking again next quarter.

Operator

Once again thank you all very much for joining us today. That does conclude the presentation. Have a great afternoon.

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Source: Herman Miller F3Q08 (Qtr End 03/01/08) Earnings Call Transcript
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