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Executives

Brian Walker – President & CEO

Curtis Pullen – Executive VP & CFO

Joseph Nowicki – VP IR

Analysts

Todd Schwartzman – Sidoti & Company

Chris Agnew – Goldman Sachs

Budd Bugatch – Raymond James & Associates

Matthew McCall – BB&T Capital Markets

Herman Miller, Inc. (MLHR) Q4 2008 Earnings Call June 26, 2008 9:30 AM ET

Operator

Good morning everyone and welcome to the Herman Miller, Inc. fourth quarter fiscal 2008 earnings results conference call. Today’s conference 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 and Mr. Curtis Pullen, Executive Vice President and Chief Financial Officer. Mr. Walker and Mr. Pullen are joined by Mr. Joseph 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.

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. As always I’ll open our presentation with a few introductory remarks and then turn the call over to Curtis and Joseph for a more detailed review of our results.

We have completed one of the best years in Herman Miller history, both in terms of our financial achievement as well as an execution of our strategic priorities. I’m going to spend some time this morning reviewing those accomplishments and then share a sense of what we see ahead for us in the new fiscal year. I’ll start with the financial results; the focus of this call.

We finished the year with sales up 5% over the prior year crossing the $2 billion mark for the first time since 2001. Leverage from the additional volume combined with our continued implementation of the Herman Miller production system drove gross margin improvements of 100 basis points to 34.7%. A heightened cost management focus helped operating expense improve by 80 basis points to 22.5% of sales.

As a result our operating income rose 200 basis points to 12.3% of sales. In November we committed to increase our operating margins and you can see consistent and significant progress in each of the past two quarters. We also put our balance sheet to work this year and took a little more leverage in order to facilitate repurchasing over $266 million of our stock. This drove an over 8% reduction in our weighted average share count for the year.

All of that combined to drive a record earnings per share of $2.56 for the year; an increase of over 29% and we also saw our cash flow from operations increase by 55% to over $213 million for the year. As a result we ended the year with a cash balance of over $155 million. Great results like these don’t just happen. It took a lot of hard work from the over 6,000 employee owners of Herman Miller to get there. Our folks executed at a level of excellence that is truly remarkable. This type of performance also requires leadership. We are fortunate to have a committed and experienced group of leaders who are willing to make the tough calls and know how to inspire the people of Herman Miller to overcome any challenge.

While I am pleased with our financial performance I am even more excited by the accomplishments we made toward our long-term strategic vision. We believe there is a great opportunity to grow and diversify our business, moving us from being a primarily US office furniture manufacturer to becoming a global habitat company with a formula centered around performance innovation.

This past year we made significant progress toward making that vision a reality. Here are just a few examples of our accomplishments. We introduced innovated new products in every segment of our business this year. In our retail business we introduced a new collection of home office products that won Best of Show at the International Contemporary Furniture Fair. Our international business introduced a new table-based office system that is remarkable in its simplicity and ease of installation.

Our healthcare business introduced two new award winning chairs for patient rooms. This is a significant milestone bringing Herman Miller design, innovation and ergonomics to what we believe is an underserved market segment. And just two weeks ago we introduced a major revitalization of our storage offering in the core North American office furniture segment. In fact, we just won four awards at NeoCon, our industry trade show, for some of those new products including the Best of Competition among all new industry products for our Teneo filing and storage solution, and we’re not done. We have several new major products in the Q for release in the next couple of quarters.

We also enhanced our healthcare offering with the acquisition of Brandrud. The Brandrud’s portfolio of soft seating, our healthcare solutions will go further into patient rooms, patient treatment areas and public spaces. We saw double-digit sales growth in healthcare this year and we expect that to continue into the next year.

We expanded our distribution channel internationally and ramped up our new manufacturing presence in China. For the year we saw international sales up almost 18%, now representing almost 24% of our total consolidated sales. That’s a major shift from the 15% we were at just seven years ago in 2001, which by the way is also the last time, as I mentioned earlier, we broke $2 billion in sales. But back then, it was much more about the US market. And our work on disruptive technologies like Convia, earned us a spot in the Fast Company magazine, Fast 50 listing the world’s most innovative companies. And an appearance next week on CNBC’s Business of Innovation series.

To be frank, Convia is still a very small business but we believe this innovation and building infrastructure is foundational to the future of our business and well positioned for the challenges our customers and our country face. Convia can make a significant impact on the ability to monitor, control and reduce the consumption of energy and it will enable our customers to create environments that are more adaptable and pleasing to the user, while reducing the cost of change. To use an automotive analogy, we believe Convia is the Prius of our solution portfolio.

We also further strengthened or distribution efforts in the North American market and were named Manufacturer of the Year by the Independent Office Furniture Dealers Association. Finally our people practices and efforts around social responsibility earned us a ranking in the Fortune 100 Best Companies to Work For in America and recognition for having one of the five best diversity programs in the country. I could continue with a list of accomplishments; it’s something that I an all the employees of Herman Miller take a lot of pride in. But I’ll stop here and simply thank everyone across the company for the outstanding effort they’ve put in this year. It’s clearly visible in what we’ve accomplished.

So where do we go from here? We are keenly aware that the macroeconomic environment we face, particularly in the US, is challenging. In particular the demand picture for office furniture in the US is negative. And we face significant increases in input costs. We’ve already prepared ourselves for some of the challenges. In the fall we made changes to our operating cost structure to get ourselves leaner and better structured for further gains and efficiencies. In the spring we announced a price increase that will become effective this summer.

We are continuing to innovate and bring new products to the market and we’re continuing to expand in new and emerging international markets. Despite these timely and prudent actions, the macro factors will still have an impact on our financial performance in the coming year. And Curtis will talk about that later in the call. But we’re not changing our strategy. The vision is the same; to grow and diversify our business moving us from being primarily a US office furniture manufacturer to becoming a global habitat company with a formula centered around performance innovation.

We have a very strong balance sheet, excellent cash flow and ample cash to continue to invest through the cycle. And that is what we intend to do. We remain committed and focused on adding capabilities and building blocks that will enable us to grow and serve a broader set of customers. We have managed through cycles in the past. As investors you can be confident that we have and will continue to execute at a very high level and we will emerge from this cycle a stronger, more diverse company with a very bright future.

Our leaders and employee owners are committed to delivering on this promise and confident is well within our ability to do so. Now I’ll turn it over to Curtis and Joseph to take you through the details of our fourth quarter financial results.

Curtis Pullen

Thanks Brian, good morning everyone. There is a lot to talk about again this quarter. As you saw in the press release we experienced strong quarterly revenue growth of 7%. Our continued emphasis on operational efficiencies and cost management drove 130 basis point improvements in gross margin and a 350 basis point improvement in operating income as a percentage of sales compared to the fourth quarter of last year.

These items combined resulted in a fourth quarter record earnings per share of $0.71, a 42% increase over the prior year. Let’s look at sales and orders for the quarter. Fourth quarter sales of $519 million represented our 18th quarter in a row of year-over-year revenue growth. The 7% growth led sales above the range of our guidance of $475 million to $500 million, thanks mostly to really strong orders in the first half of the fourth quarter that we were able to ship within the quarter combined with higher then anticipated demand from our international entities.

North American sales experienced a solid increase of 6% over the prior year. Our healthcare business posted substantial gains both from organic growth as well as from the acquisition of Brandrud. In addition our North American business saw continued strength in Canada and Mexico. I should mention that the prior year fourth quarter included $5 million of revenue from previously discontinued OEM business that did not occur this quarter, so our real “same-store” growth was even stronger.

Non-North American sales increased 23% from the prior year fourth quarter with gains across the board in all regions; Europe, Asia and South America. We were particularly strong in the Middle East, Australia and Japan. Once again our international sales benefited from foreign exchange this quarter by approximately $8 million due to the weakened US dollar. About half of that was in the non-North America business, Europe primarily, and the other half was in Canada. The weaker dollar also increased the operating income of our international business by about $1 million for the quarter when compared to last year.

Looking at orders in total, orders for Q4 were $498 million compared to $477 million last year, an increase of over 4%. We experienced significantly stronger orders in our retail, healthcare and non-North American business as compared to the prior year fourth quarter. On a sequential basis, fourth quarter order rates were up almost 10% from our third quarter total of $454 million, partially a result of the traditional turnaround from the third quarter holiday season.

Looking more closely at the order information orders in North America increased about 3% versus the prior year. Our core US office furniture orders were down slightly reflecting the broad economic trends in the US. However this was more then offset by the strong order improvements in healthcare, as well as Canada and Mexico. Orders in the non-North American component of our business increased over 16% for the quarter, with the strongest gains coming from Asia, the Middle East and South America. 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 impact of the weakened US dollar.

Gross margin is next. We were once again very pleased with our gross margin performance for the quarter which ended at 34.9% of sales and represents an improvement of 130 basis points over the prior year of 33.6%. This strong performance was primarily the result of mixed shifts during the quarter to more profitable business units, along with continued efforts around cost improvement and increased leveraging of overhead resulting from the higher sales. We have also continued to realize margin improvements on products that have been recently introduced.

Additionally we had approximately $3 million of one-time benefits in margin from reduced inventory levels that generated a favorable LIFO adjustment as well as the realization of service revenue associated with a large project completion. On a sequential basis, gross margin improved from 34.3% recorded in the third quarter due to the overhead leverage of the additional volume combined with the one-time benefits I just mentioned.

Now let’s spend some time on a hot topic for the quarter; input costs. As expected we did experience an increase in input costs for the quarter primarily in steel and fuel, which drove about a $3 million year-over-year hit to the financials. Although unexpectedly it really didn’t start to show up until the month of May. So we only saw one month of the increase this quarter. This is likely to worsen in Q1 as we’re going to see a full quarter’s impact which is what’s baked into our forecast.

As you know we have implemented a price increase which is designed to offset some of this but we will not see the benefit of that price increase until our second and third quarter. I’ll get into this a little more when we discuss the forecast. Operating expenses for the quarter were extremely well managed and totaled $115 million or 22.2% of sales, compared to $119 million or 24.4% of sales last year. This represents a year-over-year decrease of about $4 million even though sales are 7% higher driving a reduction as a percentage of sales of 220 basis points.

The decrease in spending was driven both by our cost reduction actions announced during the second quarter as well as all of our teams having done an outstanding job in controlling expenses for the quarter yet at the same time getting all of our important work done. Sequentially operating expenses increased $7 million from the $108 million recorded in Q3. As expected we did see a ramp up of spending in connection with the 2008 NeoCon Trade Fair, as well as variable costs associated with the higher sales volume.

We are extremely pleased with the return on our investment in NeoCon including the Gold and three Silver Awards that go along with our new product Teneo having taken the Best of Competition Award as Brian mentioned. Gains in gross margins and reduced operating expenses drove operating income as a percentage of sales up to 12.7% for the quarter which is a 48% increase over the prior year and one of the highest operating income results ever recorded and certainly consistent with our goal of 13%.

Our effective tax rate for the quarter was 35.1% which brought us in line with our full year anticipated tax rate of 33.9%. You’ll perhaps remember that at this time last year our fourth quarter effective tax rate was 24.4%. The decreased tax rate last year was the result of favorable circumstances related to foreign tax credits and various tax reserves. That benefit during last year’s fourth quarter positively boosted our EPS for that quarter by $0.03, which makes our current year growth in EPS even more impressive.

Consolidated net income for the quarter was $39.5 million approaching 8% of sales and is a 25% increase over the prior year. Earnings per share for the quarter totaled $0.71, a record quarterly EPS and a 42% improvement over the $0.50 per share recorded at this time last year. Our strong operating results combined with the 12% reduction in the average share count produced these record numbers.

I’ll turn the call over to Joseph and he’ll give us an update on the balance sheet.

Joseph Nowicki

Thanks Curtis. Regarding the current quarter balance sheet metrics, higher net income and lower working capital requirements drove cash flow from operations up to a very strong $90 million in Q4 compared to $46 million in the prior year with a 95% improvement; a great quarter for cash flow.

And by the way, for the full year our cash flow from operations was an even more impressive $214 million. More working capital requirements drove a source of funds of $41 million in the current quarter as compared to $7 million sourced during the prior year. Lower accounts receivable balances due to the timing of sales and outstanding work by our collection teams combined with lower inventory levels and increased payables and accruals drove the majority of the change in working capital year-to-year.

Capital expenditures of $12 million for the quarter are slightly lower then the $13 million spending during the prior year; well within our planned levels. Full year capital expense was only $40 million. We did a great job of managing our capital requirements to slightly less then the prior year’s $41 million.

As you know earlier in the year we entered into a $200 million accelerated share repurchase agreement with Morgan Stanley. A portion of that agreement was completed during the quarter and as a result, they delivered 438,000 shares of stock to Herman Miller to close out on that part. On the remainder to be completed at the beginning of September we should get back approximately two million additional shares. Outside of the ASR there were no additional share repurchases this quarter, although we still have 171 million of share repurchase authorization remaining.

We ended the quarter with a cash balance as Brian mentioned of $155 million. Of this amount approximately $56 million is currently located in our international entities. We are also in a strong liquidity position having just renewed our revolver this past winter. We currently have approximately $237 million in unused capacity in that revolver. We are in compliance with all of our debt covenants and are currently running at a leverage ratio of approximately 1.3x EBITDA which is about in the middle of our targeted range of [inaudible] EBITDA.

As you heard Brian say earlier, we intend to use our cash balances and financial liquidity to continue to invest and grow our business. That’s it for now on the balance sheet for the quarter and I’m going to hand it back to Curtis.

Curtis Pullen

Thanks Joseph. We’ll look at the outlook next. We are starting the quarter with a backlog of $286 million which is about flat with last year. Our order levels were pretty consistent over the last half of Q4, although we remain cautious about the current overall economic environment, particularly in the US. In addition effective with the beginning of our fiscal year we sold one of our own dealerships as part of a planned divestiture. This transition will negatively impact our year-over-year revenue comparisons by approximately $8 million for the quarter.

When you put all of that together, we are expecting first quarter sales to be in the range of $470 million to $495 million which when you adjust for the dealership transition represents basically a flat forecast to the prior year. As I mentioned earlier, gross margins in our next quarter are expected to face headwinds from higher commodity prices. And while we expect to realize continued benefit from ongoing product cost improvement initiatives in place, these efforts are not likely to offset all of the likely upward commodity pricing pressure. We also have implemented a price increase, but as I’ve previously mentioned we won’t really see the impact of that until quarter two or quarter three.

We also won’t have the benefit of all some of these one-time favorable adjustments that we saw in the current quarter. As a result our gross margins are likely to decline in the short-term from where they have been in the past couple of quarters and be more in the range of 32.5% to 33.5%. However operating expenses are expected to be significantly lower then the first quarter of last year as a result of the cost structure changes we implemented last year and also the sale of the dealership mentioned above. Plus as you know, we have a variable cost structure, especially when it comes to incentive compensation and with lower earnings we’ll see lower bonus costs.

The effective tax rate for the first quarter is expected to be higher as a result of the expiration of the research tax credit and as a result will be in the range of 34% to 36%. Putting all of that together, in terms of earnings guidance with relatively flat revenues, higher anticipated commodity costs and lower operating expenses and higher taxes, we expect earnings per share to be in the range of $0.49 to $0.56 per share for the first quarter.

I’ll turn the call back over to the operator and we’ll take your questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Todd Schwartzman – Sidoti & Company

Todd Schwartzman – Sidoti & Company

What type of price increases have you announced if any, non-North American?

Brian Walker

We did a price increase in international. I think they’re all fairly consistent, somewhere in that sort of 4% range. We’re a little bit ahead in international. We did it in two steps. One of them came in a little bit faster then the one we’re doing in the US. But overall they’re all in about the same range give or take.

Todd Schwartzman – Sidoti & Company

Is there any way to quantify to what extent international sales might have benefited in Q4 from buying ahead?

Brian Walker

We don’t believe that there’s any impact of buying ahead in this quarter. That’s more likely to be seen as we get into—and it won’t show up in sales as you know if you’ve watched us in the past, as much as it will show up in orders right before the price increase. But to be frank, by the time—when we make the announcement, we don’t give anybody advance warning of the announcement so it’s not going to come in prior to the announcement, its going to come in prior to the effective date typically. We didn’t really announce the price increase until the very end of the quarter in May sometime. So very unlikely we’d see any impact of that other then—in fact I can’t think of any part of the business we’d have seen an impact of that in yet.

Todd Schwartzman – Sidoti & Company

I know you’ve mentioned some pockets of strength in the Middle East, South America, parts I guess of Asia, on the whole in the month of June, what type of change in business conditions are you seeing overseas?

Brian Walker

I would say we don’t have enough data yet on June to really make any comment on June. We’re only a couple of weeks in to June and right after year-end and first two weeks of any period, the data is hard to read because of what happens right before you finish a period so, I would say I don’t think we have any read there that would have been a change in June. Overall if you looked at the information that Curtis gave you, we saw pockets of strength throughout international in the fourth quarter. If there’s any area that we’ve looked at that we’re paying attention to is some of the big financial centers where of course all the issues come in with the bank would be the area that we’d be paying most attention to going forward.

Todd Schwartzman – Sidoti & Company

I know with respect to North America I know you said you were pleased with the growth that you saw in Canada and Mexico, in the US what are you seeing by geographic region?

Brian Walker

It is different by geography. Its certainly from, at least from our data, I don’t know if I can speak to this as an industry thing, if you look at the West, particularly the Southwest has been a tough area; sort of ground zero for all of the problems in the mortgage crisis. That’s certainly been a tough area. The Northeast actually has been quite strong for us as well as the sort of Upper Midwest and some of Texas, which makes sense obviously with what’s going on in the oil markets.

Todd Schwartzman – Sidoti & Company

And how much of the unusually high service revenue from that one isolated project, what did that contribute for the fourth quarter?

Curtis Pullen

Combined both of those were about $3 million; that LIFO piece and the LIFO piece keep in mind is just the result of the continued HMPS efforts and we’re running the businesses leaner and leaner every day so its not surprising to see inventory levels drop when you’re doing that kind of work but it’s a little unusual to talk about a LIFO liquidation during a time of rising prices yet we’ve got such an operational improvement that you start to see that. But together both of those were $3 million.

Todd Schwartzman – Sidoti & Company

And your CapEx budget for full year 2009? Is it around that $40 million still or higher?

Curtis Pullen

I think we’re $50 million or so. We ran $40 million this year, $41 million the prior year and we’ve got a plan of about $50 million maybe.

Todd Schwartzman – Sidoti & Company

The tax rate assumption I think you said 34% 36% for the quarter for Q1? Are you throwing out any number of the full year?

Curtis Pullen

Nope.

Brian Walker

The real question is going to be is what happens with some of the legislation so we really can’t see beyond the quarter at this point.

Curtis Pullen

That’s part of the reason it’s up right now, that things expired and kind of have to get back to work to put that back in if they’re going to.

Operator

Your next question comes from the line of Chris Agnew – Goldman Sachs

Chris Agnew – Goldman Sachs

First question on the international, seeing some leading indicators for instance, weakness in Europe; can you maybe just talk about the activity you’re seeing across some of the countries you operate in Europe?

Brian Walker

Remember that our business in Europe we play broadly but not deep in any one market with the one exception of that being the UK. So really when you look at the continent, we’re not as much driven by the economy because we’re not playing it kind of the major market share leadership position we have in the US or the UK. If there’s any market again and I’d said this earlier that we do watch and its not so much looking at country as its looking at, its sort of major cities where the money centers are where of course we’re nervous about the banks, in particular of course that would lead you to London as one of those. We are still seeing some good opportunities in the UK though around the government and smaller businesses but it’s the banks in particular or the financial sector that we don’t know what the impact is going to be around those big cities.

Curtis Pullen

I’d add to Brian’s comments that earlier in our international experience we were more concentrated in the city of London, but John [Forlock] the President of our business there, who lives in the UK as you know, has done a great job of diversifying our UK business away from just that London centric focus and we have a broad business across the UK today which has really helped.

Joseph Nowicki

And actually to support that with the numbers, to what Brian and Curtis just said, we actually did in the quarter see an increase in both our sales and orders in the UK so even with the financial district specifically and the city of London and others being soft, because of the diversification that Curtis talked about in the UK we saw growth both in orders and sales for the fourth quarter.

Curtis Pullen

Yes we probably see the UK being relatively flat which for everything you read about that’s not so bad given what’s going on in some of those sectors in London.

Chris Agnew – Goldman Sachs

On price, what’s the customer acceptance so far to price increases? What’s your confidence and ability to realize that and then maybe just a clarification, you talked about the price increase planned in August wouldn’t offset fully the inflationary pressures, were you just speaking to Q1, the timing impact, so therefore do you think it will offset as you go forward into 2Q and 3Q?

Curtis Pullen

You’re right, we have a sequential sequencing in experience that you’ll see in the first quarter whereby the price increase effective in August won’t show up in our results until the second and third quarter so those commodity prices we started to see moving up in May so we’ll see a full quarter’s impact on the input side both with diesel and with steel primarily and we think we can catch that up with the price increase later in the year and can we offset all that? We’ll see as we get there. Right now we’re thinking once we get to our run rate basis we should be able to have gotten those things ironed out across each other.

Brian Walker

Just to make sure that we’re clear, we won’t make up whatever we have the shortfall in the first quarter on the year, we don’t believe that so what we’re trying to do is have the price increase positioned so that on a run rate basis as it gets up to full speed, we begin to offset the commodity prices. Of course the question you ask is sort of the wild card in all of this. What will customer acceptance be? And the plain fact is we don’t know yet because it’s too early. These things—because we’re really in a contracting business we have to actually go out and negotiate that customer by customer so this is a bit of a—it’s a detailed job that will take place over the next several months.

I guess what gives you confidence right now is that I don’t think what we’re dealing with is a Herman Miller issue or even just an office furniture industry issue. This is a broad macro issue and almost any business leader I’ve talked to especially from an industrial company basis everyone is talking about price increases in the kind of 5% to 7% range. I think historically we’ve been able to when it’s been clear that this is a macro issue, we’ve found good acceptance by our customers, they understand that at some point we’re trying to offset as much of those increases through efficiency gains and execution and of course we’re trying to do that again.

So we won’t make all of it up through price increase, we’ll have to do some of it through efficiency gains and better execution generally, but we believe that the balance that we’ll be able to eventually offset. The question will be does the industry remain disciplined and does everyone continue to move forward in a way that says this is an industry problem and my believe is we have a very smart industry and the folks recognize that this is one that you can’t differentiate on because we all have the same level of issue.

Chris Agnew – Goldman Sachs

Okay and to follow-up to that, the balance of initiatives to the efficiencies and the price increases, is that to recover sort of [worse] the price of steel for example where it is today or are you still benefiting in 2Q and 3Q from maybe some longer term contract agreements and maybe an add-on to that, I know roughly is it two-thirds of your steel is bought indirectly through suppliers. What things can you do to sort of defray the cost pressures that they’ll sort of want to push through towards you?

Brian Walker

I’m not sure I can answer all those detailed let me just give you a broad statement. First of all, the impact of our contracting process delaying the impact, we saw the end of that for the most part in May that’s why you began to see the price increases hit us in May. Can we give a perfect forecast to how it’s going to roll in from here? Clearly we can’t. Will we continue to look for ways to move around within commodity zones like between hot rolled, cold rolled, all those kind of things? Absolutely. Are we working with out sub-suppliers on HMPS type efficiencies? Yes we’re doing that every day of the week. So those things combined are in our mind of what it takes to try to offset what is a veracious appetite for commodity cost increases. And to be frank, those things are down to levels of detail that’s probably difficult to talk about on a call like this.

On the other hand I guess what I can tell you is you have seen us consistently find ways to execute and improve our performance. We’re focused on that. We think between price increase and those things we can get to a point where we offset it. On the other hand the question will be doest the market accept it from the price side. We can be confident on our end but there’s a lot of things in there that we got to go out and talk to the market and I think as we finish we get into the end of the first quarter, for sure by the end of the second quarter; we’ll have a much better read of that. But it’s just going to take some time to work it through the system.

Operator

Your next question comes from the line of Budd Bugatch – Raymond James

Budd Bugatch – Raymond James

We’re sitting here in South Florida with a very, very broken and cloudy crystal ball, kind of looking forward and I recall back when I think revenues had ended at the $1.3 billion level and you were looking to double revenues in a five or six year timeframe, talking about the various levels of growth. I was curious if one you can update us on the longer range plan to get to that. I think your going to come short of those revenue growth and then for the year we’re just entering, you had in the third quarter given us a kind of a range of low single-digit to flattish revenue growth and I think an 11% to 12% op margin target, I wonder if you could update us on that?

Brian Walker

Well as you said, our crystal ball is no clearer then yours quite frankly at this point. As you I’m sure are keenly aware the macroeconomic picture is pretty cloudy. I think we have a better read on some things like where we think the demand picture is in the US as well as commodities. The international is harder to predict, so far it’s hung in there. Will it continue to do so I think is the question that’s on everybody’s mind at this point and quite frankly we don’t have a better crystal ball then that? So right now we’re pretty confident about what we see in the short run and we’re pretty confident in what we see and I would say short run being the first quarter, we’ve got good visibility there.

As far as the year, I would say its cloudy enough at this point that we’re not sure we got a better picture to give you. The short term is the quarter, we’re pretty clear. The mid-term, sort of the year, it’s cloudy. Longer term we’re confident that in the long run we’re going to do what we said we were going to do strategically and its going to have to be through a combination of internal development, getting the markets healthy and turned around and doing acquisitions that add to the capabilities that we need for both geographic expansion, which we think continues to be a good opportunity, what we see on the healthcare side. We think there are some product categories within the core business that are interesting to us that we don’t have a big piece of today that we can enter. And we continue to believe long run Convia will be a big part of our story.

So I would tell you our goals, while we may not hit exactly the goal we originally set of getting to $2.6 billion by 2010, we haven’t given up that we can’t get within spitting distance of that if we get a turnaround in the next 12 months of the economy. If it’s longer, we may not get quite there but it’ll be a matter of when, not if as far as we’re concerned.

Budd Bugatch – Raymond James

Do you still think revenues for this year as you’re planning forward are flat to low single? Or do you think there’s a larger risk now to the revenue target then I think you espoused in the third quarter?

Brian Walker

It’s a tough one to call right now but I would say probably that sort of flat number is what we’re looking at today and that picture will get clearer for us as we move through the balance of the year.

Curtis Pullen

As I think about your question I go back to some of the comments we made on the prior conference call which we really said there’s three factors that we see out here that are kind of big unknowns. What does the US economy do and what’s the sort of big enough piece of that because the big vital piece of our business is still tied at that traditional measure. What goes on in international, we’re seeing and describing a lot of opportunity there. And there’s this unknown across the commodities impact so as to how that affects our profitability. But from a growth standpoint I think Brian’s right to say we’re well positioned to look at all of these growth opportunities and go after them with abandon and to some of this extent it will depend on what happens in some of those places.

Budd Bugatch – Raymond James

Help me with a little bit of understanding on the verticals; I know you’re taking a dealer revenue out this quarter. Remind me I think you own three or four dealerships or remind me how many dealers you still own and what percentage of revenues that is today?

Curtis Pullen

Yes, there are seven dealers that we own.

Budd Bugatch – Raymond James

And how much of revenues is that or how much of incremental revenues because if you sold them you would get the wholesale side of that?

Curtis Pullen

Right, we really don’t ever get into that level of detail.

Budd Bugatch – Raymond James

But it would have an impact. If you sold this dealership. You’ve given us I think the impact for the quarter how about for the year since we have to take that out of the base?

Curtis Pullen

Probably figure that they’re running that kind of a number on a quarterly basis.

Budd Bugatch – Raymond James

An incremental or is that their total gross revenues which would include your wholesale portion?

Joseph Nowicki

I don’t have that at my fingertips right now but how about I get back to you with that.

Budd Bugatch – Raymond James

Can you give us any comment, you gave us the verticals in terms of growth and talking about retail and healthcare and non-North American, can you give us a feel for the composition of the verticals now?

Joseph Nowicki

As you know, this is one of those things that gets really tough because we can’t get more then what we give in the typical financial release. Otherwise we get into disclosing stuff that quite frankly I don’t really care to tell all my friends and neighbor about. So I guess the answer is not any more then what we disclosed in the financials just because it gets to be stuff in there that we’ve got moving around that we’d really not like to talk about.

Budd Bugatch – Raymond James

And what about the product composition, that will be in the K I believe?

Brian Walker

It will. There was not a big shift in the mix of product sales, as a percentage each of them stayed pretty constant to where it was a year ago and even the prior quarter so product mix stayed pretty stable.

Operator

Your next question comes from the line of Matthew McCall – BB&T Capital Markets

Matthew McCall – BB&T Capital Markets

I think last quarter you gave us some indication of the maybe order pattern as you finished, I think Curtis you said that the order pattern was consistent in the back half of the quarter, can you give us some kind of number to put behind that and then what type of order or shipment per week number we can, you are using in your assumptions?

Curtis Pullen

Yes, I think we’ve been running the kind of $37 million week kind of into the quarter and I don’t know that we’ve really seen much change on that.

Joseph Nowicki

The weekly average for the quarter orders averaged about $38 million and as we went through the quarter March was a pretty strong month for us in terms of order flow and that’s what really helped us. Curtis was describing before to fill the backlog in order to get those shipped out in the quarter so that’s what helped with the quarters. I think April softened up a little bit but then May came right back again. That would give you a rough idea of the order flow through the quarter. Nothing too dramatic, reasonably consistent but a little stronger in March and a little stronger in May.

Matthew McCall – BB&T Capital Markets

And are you assuming a continuation of the May trends through Q1?

Joseph Nowicki

For the most part if you do the math you would get to that same spot where you’d see that pretty much the trends of what we’ve been seeing as Curtis described would be what our expectation for the quarter is.

Matthew McCall – BB&T Capital Markets

I understand that the crystal ball is cloudy right now, and I understand that you have better visibility into this current quarter but when you look at yours sales pipeline, when you look at the mock ups, the bid activity, the customer visits, some of those are leading indicators, are those leading indicators providing any source of concern or are they still pretty consistent and up year-over-year?

Brian Walker

I would tell you overall, we still hear good things from the field sales group. They still seem pretty buoyant. We’re seeing lots of customer visits. So we haven’t seen any precipitous change or anything that kind of immediately tell you there’s something going on and those kind of what I call activity base measures. Of course pipeline is always a hard one for us because with the speed with which we turn product these days, our visibility from the point we got an order to when its shipped, is so much tighter then when I was first was doing these calls with you when we had 12 to 13 weeks of backlog. Now we can see what we’re going to ship in the next five weeks and we can kind of hear what’s coming over the next couple. But the distance between customer decision and us shipping is so tight that we really have to look at those activity levels.

But you also have to remember that you’ve got to sort of get your own judgment about what’s going on in the general economy at the same time. Because like everybody, those activities often aren’t a pure sort of reflection on what’s happening. So I would say to you we haven’t seen any change yet. All of what you hear from us is probably looking at the same cloudy crystal ball that you have about the general economy and then simply looking at what we’re seeing in current order trends and saying that’s about the best numbers we’ve got to base it on.

And beyond that only thing we can do is get out there and sort of fight in the trenches every day and keep delivering new products that enable us to create new opportunities to go after customers and service them like crazy and so what we’ve focusing everybody on to say, go out there and win the business that’s in front of you, ship it on time, make sure it’s a great quality. Do the best job you can managing costs and let’s keep working on new capabilities. And what I think you should see from us, what we can control and what we can manage, we’re doing a good job with. And beyond that the crystal ball will be what it’ll be.

Matthew McCall – BB&T Capital Markets

In the past you’ve talked about the breakdown of your business project versus that day to day business, any update there?

Brian Walker

Stayed about the same. The percentage of business that were the projects in the quarter that we got in were about the same as it was in the prior year and as in the prior quarter. It stayed pretty constant.

Matthew McCall – BB&T Capital Markets

And what about looking outside of the US and maybe breaking down the US versus your non-North American business, any changes within the different geographies?

Brian Walker

I don’t think we’ve seen any real pattern shifts across the business. The one part of the business that has been sort of the softest over a period of time has been the retail business but that really again fits with that more macro picture that you’re seeing if you’re watching the retail sectors. And in particular we had some retailers that we know pulled some inventory out of their pipeline this past year. We felt a little bit of that early on in the year. That’s probably the only macro sort of pattern difference that we’ve seen so far. Other then a general lower level of growth in the US. If you cut it out, beyond that and the other pattern that we’ve been talking about all morning which is in the commodity cost thing, which is the one that is the most visible and the most clear quite frankly.

Matthew McCall – BB&T Capital Markets

So no large projects in the non-North American in that market that maybe provided a boost to that non-North American business this quarter?

Brian Walker

Our international business as we’ve always said is more project-driven then the US business and I would tell you we could give you a list of big projects that hit this quarter but I could also give you the same list that hit the third quarter and the second quarter. That business does run on—we don’t have as many day to day, as much day to day base business in international as we do in the US although that is shifting over time and becoming more base business particularly in places like the UK but we still have to go out there and win a few big ones every quarter and often in all kinds of very diverse geographies. That’s how you build that business over time. So we could give them to you but it would be kind of a funny game because you’d have to take them out of every period and then I don’t know what you’d do with that data.

Matthew McCall – BB&T Capital Markets

Just no change I guess is the point.

Brian Walker

Nothing unusual I would say compared to what we typically see.

Matthew McCall – BB&T Capital Markets

And you mentioned the inflation again, I think last quarter you quantified in that $25 million to $30 million of pressure for the year, you saw $3 million from just the May time period this past quarter, what’s the expectation now for the full year and what’s baked into your Q1 guidance outside of any benefit from price?

Curtis Pullen

Sequentially from the fourth quarter we probably have a $7 million impact that will show up in Q1 which will be a $10 million to $12 million impact over the Q1 of last year and beyond that, we’re going to have to see where things kind of land for the rest of the year.

Matthew McCall – BB&T Capital Markets

If we just carried the current level forward, is it kind of $10 million to $12 million annualized?

Curtis Pullen

Yes, assuming there aren’t changes in these input costs because I don’t know where that’s going and we talked about the offsetting impact of the price increase which will start to pick up later in the year.

Brian Walker

If you take out price, for now the best estimate we have really is you can take that year-over-year increase in the first quarter and sort of assume that that’s going to run throughout the year is the best guess we have right now. Now, if we get something done around oil and some other things that might change. But what we can see today, that’s about as good an estimate as we’ve got.

Operator

We have no further questions, I’d like to turn the conference back over to our to speakers for any additional or closing remarks.

Brian Walker

Thank you all for joining us today. In closing I want to thank you once again for your continued interest in Herman Miller. I also wanted to express again my appreciation to all Herman Miller employees for their outstanding work and commitment to our shared success. As we look forward we understand the challenges that we face in the short-term, we are committed and confident that we have the right long-term vision for Herman Miller, the people that make it a reality and the financial resources to keep moving forward even in challenging time. That’s all for now, we look forward to talking to you again next quarter.

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Source: Herman Miller, Inc. F4Q08 (Qtr End 05/31/08) Earnings Call Transcript
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