Brian C. Walker - President and CEO Gregory J. Bylsma - EVP and CFO.

Josh Borstein - Longbow Research Bobby Griffin - Raymond James Matthew McCall - BB&T Capital Markets Todd Schwartzman - Sidoti & Company.

Good morning, everyone, and welcome to this Herman Miller Incorporated First Quarter Fiscal Year 2015 Earnings Results Conference Call. This call is being recorded.

This presentation will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

These risks and uncertainties include those risk factors discussed in the Company's reports on Form 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. Greg Bylsma, Executive Vice President and Chief Financial Officer.

Mr. Walker will open the call with brief remarks, followed by a more detailed presentation of the financials by Mr. Bylsma. We will then open the call for your questions. We will limit today's call to 60 minutes and ask that callers limit their questions to allow time for all to participate.

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

Good morning, everyone. Thank you for joining today's call. As you've seen in yesterday's earnings release, we delivered solid financial results in the first quarter, highlighted by some notable areas of sales and order growth and continued strength in gross margin.

Margins in the quarter were bolstered by a combination of favorable product mix and channel diversity that was enhanced by the addition of DWR. These factors were complemented by continued operational improvements in key areas of the business and well managed spending levels.

In my opening remarks I'll offer more on these highlights and the general market conditions we're seeing. To begin however, I want to provide a brief review and update on our acquisition of Design Within Reach, our most recent keystone investment aimed at accelerating our strategic vision.

Many of you've joined us at our Investor Day event in July where we shared a detailed review of our growth strategy and updated three-year financial goals. For the past several years, Herman Miller has been pursuing a strategy built around four fundamental shifts that we are making in our business.

Our acquisition of Design Within Reach specifically advances two of these key elements. The first is our shift to be an industry plus consumer brand, expanding our opportunity to connect directly and more powerfully with consumers of our products. With our rich history of design leadership, Herman Miller is a brand that people desire and want to know.

We believe the addition of Design Within Reach gives us a potent new platform of connecting and communicating that design legacy to consumers, both as individuals and as businesses, and will help pull them to us.

Design Within Reach's experienced leadership team brings valuable retail expertise to the management of our consumer segment, while expanded product portfolio and development capability will also create added value in our contract channel.

Design Within Reach is a critical investment that will also advance another of our key shifts as we grow from office to everywhere. We are expanding our channels, products and services so that Herman Miller can enhance our customers' lives throughout their day, from the workplace to home and multiple points in between.

In successfully executing this shift, we are growing our total market opportunity while creating greater awareness and preference for the Herman Miller brand in each of our segments and businesses. I understand as a result of our Design Within Reach acquisition, there have been suggestions that we are deemphasizing the contract business.

I want to be absolutely clear, this is not the case. We believe there are great synergies between our contract and consumer businesses and our strategic plan is congruent with this belief.

In fact, we think Herman Miller is uniquely positioned to create a lifestyle that fits with the growing realization that people want to live an integrated life that doesn't require them to make artificial trade-offs.

Further, since 2009 we've made a number of keystone investments in the business including expanding our leadership in healthcare settings, extending our ability to better serve the needs of customers in new geographies, acquiring leading positions in contract textiles and ergonomic tools, embarking on the most aggressive slate of new product development in our Company's history.

The bulk of these investments initiatives have been focused on our global contract businesses and two of our other shifts outlined in our strategic plan. Before I review some of the segment highlights, I want to update you on a change in the way we are reporting our results.

Following the acquisition of Design Within Reach, we realigned the composition of our segments to reflect the new operational and management divisions of the business. As a result, our previously defined Specialty and Consumer structure has been divided into two separate segments.

The Specialty segment includes the operations associated with our Geiger, Maharam and Herman Miller Collection business units. Under the new structure, the Company's Consumer business segment includes the results of our combined North American consumer wholesale and retail business including Design Within Reach.

The North American and ELA segments are not affected by these changes. With that reminder, let's review Herman Miller's performance in our North America segment and some related observations on market conditions.

We believe the overall economic environment in North America remains constructive, highlighted by improving employment and ABI trends, strong corporate profits, and more recently a long-awaited acceleration in construction activity. Those indicators are reflected in BIFMA's positive forecast for 2015.

While we're not certain industry will achieve their projected 9.6% growth assumption, we do subscribe to further improvements in demand. This positive operating environment was reflected in our order volume this quarter which for the North America segment were up 6% on an organic basis relative to last year.

One unexpected positive in the quarter was the strength we saw in the U.S. federal government orders which were up substantially from last year. This is particularly encouraging given the challenging environment we've seen in the federal government sector in recent years.

In fairness, the increase we saw this quarter was primarily driven by a single large project. So we should be careful not to extrapolate too much from this. However, we are encouraged that our business with the federal government has stabilized over the past four quarters.

Another area of business that has faced difficult market conditions in recent years is our North American healthcare business. While external indicators are still mixed, there are some positive signs that providers are gradually moving from dealing with reduced reimbursement levels to expansion as the overall demand for services increases.

This is supported by the recent trend we've seen in the institutional ABI metric which recently reached its highest level in two years. We are hopeful these signs point to a return to market growth in 2015.

Meanwhile, our healthcare leadership team is appropriately focused on balancing improved near-term efficiencies with the forward investments necessary for long-term success.

The operational priorities of our commercial contract business remain focused on our Living Office framework of knowledge, proprietary diagnostic and application tools and multiple new product introductions.

We're beginning to see real signs of success from these efforts and our inside-led approach is resonating with customers including some of the largest and most progressive companies in the world. While there's much work to be done, we're encouraged by our progress in establishing a leadership position with Living Office and the new landscape of work.

Our ELA segment delivered good results with double-digit gains in both sales and orders, driven by increasing order momentum throughout the quarter. Sales across our international footprint started the quarter slow but gained traction and ultimately delivered year-over-year growth across all of our major regions.

Near-term, international economic and geopolitical risk in Europe, the Middle East and Ukraine created considerable uncertainties. However, we remain confident in our global strategy and our growing reach and capabilities to profitability serve customers around the world.

Our Specialty business units are off to a good start for the fiscal year with each component business reporting year-on-year sales and order growth. On a combined basis, segment sales increased 5% relative to last year while orders grew 7%.

The results at our Geiger subsidiary were particularly encouraging, reflecting a step function improvement in gross margin performance driven by increased operational efficiencies.

The Geiger and Collection teams are gaining momentum in the market as interdependent brands supported by an integrated leadership structure and we continue to build out an effective specialty sales organization and product development queue to further segment growth. In our Consumer segment, the integration of DWR is well underway.

The team led by John Edelman and John McPhee is highly engaged in moving ahead aggressively on near-term priorities and plans. Just before the acquisition was completed, we added a new format studio in Chicago, in June a new studio was opened in Houston, and in July we opened in Seattle.

We have completed leases for our new studios in Toronto and Cambridge and a new outlet center in Brooklyn, New York. All of these conversions to the new larger format stores, all of these are converted to the new larger format stores that we believe are one of the key drivers of revenue and margin growth.

We're also encouraged by the near term indicators such as comparable same-store sales which increased 10% in our first month of operation together, and new format stores continue to grow at a multiple of that rate.

We're also moving quickly in a number of other objectives including identified opportunities for cost savings as well as enhanced operating efficiencies through leveraging the respective strengths of our operating infrastructure. Marketing and channel plans and investments are also progressing.

To my earlier comments regarding synergies with our contract business, the team is also examining Design Within Reach's originated products and their potential in Herman Miller's contract dealer channel.

Overall, we continue to be excited by the range of opportunities we see ahead for the Consumer segment and a strategic complement to other businesses in the long-term. With those brief opening comments, I'll turn the call over to Greg for a more detailed review of the results..

Thanks Brian. Consolidated net sales in the first quarter of $510 million were 9% higher than the same quarter last year. Orders in the period totaled $517 million, nearly 10% above the prior year level. The acquisition of DWR in July added approximately $22 million of sales and $20 million of orders to our consolidated results in the quarter.

On an organic basis, excluding the impact of DWR, dealer divestitures and foreign currency translation, sales increased 5% and orders increased 7% from the first quarter of last year. Also as an encouraging side note, DWR sales of $22 million in the month of August represent a growth of approximately 30% from the same period last year.

Sales in our North American reportable segment of $320 million were up 1% from the prior year. New orders in the first quarter totaled $313 million, reflecting an increase of 5%, and showed continued improvement in the U.S. federal government project activity.

Segment sales and orders increased 2% and 6% respectively compared to the first quarter of fiscal '14 on an organic basis. Our ELA reportable segment posted net sales of $95 million for the quarter. This represents a 17% increase from the same quarter last fiscal year and reflects growth across each of the segments, primarily geographic regions.

New orders in this segment totaled $112 million in the quarter representing a year-over-year increase of nearly 13%, and on an organic basis segment sales increased 15% and orders increased nearly 11% from the first quarter of last year. Net sales in the first quarter within our Specialty segment totaled $55 million.

This represents a 5% increase over sales in the same quarter last year. New orders in the quarter of $57 million increased 7% from the year ago period. Our Consumer segment reported net sales of $39 million in the first quarter, an increase of 137% from the same quarter last year.

Orders in the first quarter of $35 million were 78% increase above the prior year level. On an organic basis, adjusting for the partial quarter consolidation of DWR, segment sales increased 14% while orders declined 19% from the prior year.

The decline relates to orders in the prior year with DWR that are now treated as intercompany orders and therefore are eliminated from the consolidated total.

We estimate the translation impact from currency and currency exchange rates to increase our consolidated net sales and orders in the quarter by approximately $1 million relative to the first quarter of last year. This resulted from the general weakening of the U.S. dollar against other major currencies compared to a year ago.

I'll now review our gross margin performance in the quarter. Our consolidated gross margin in the first quarter was 36.4% which compares to 36.3% reported in the same quarter of last fiscal year.

In each of these periods, the reported gross margin was reduced by expenses associated with the valuation of acquired inventories as required under GAAP purchase accounting. Our results this quarter reflect $3 million of these charges related to the DWR acquisition.

By comparison, the prior year first quarter included $1.4 million of purchase accounting expenses associated with Maharam inventories. Additionally, our reported gross margin in the first quarter of last year included approximately $1 million of legacy pension expenses associated with the defined benefit pension plans that have since been terminated.

Adjusting for these items, our fiscal quarter gross margin improved 20 basis points from the same period in fiscal 2014. This year-over-year improvement is primarily attributed to favorable product and channel mix, including the addition of DWR. I'll now move on to operating expenses and earnings in the period.

Operating expenses in the first quarter of $143.4 million compared to $130.9 million in the same quarter of fiscal 2014. The expenses this quarter reflect $2 million in transaction expenses related to the DWR acquisition. Operating expenses in the prior year included approximately $2 million of legacy pension charges.

Adjusting for these items, operating expenses increased $12.5 million from the first quarter of last fiscal year. The increase relates to the addition of DWR and variability driven by net sales growth. Operating earnings in the first quarter were 8.3% of sales compared to 8.4% reported in the prior year.

Our earnings in the quarter were reduced by $5 million in costs associated with the DWR acquisition, including transaction expenses and the amortization of costs capitalized in the inventory under purchase accounting.

Excluding these expenses, adjusted operating earnings in the first quarter were 9.3% of sales, a result that was in line with last year's performance. The effective tax rate this quarter was 33%, which was at the low end of the guidance we provided at the start of the quarter. Last year the effective tax rate was 34.7% in the first quarter.

Finally, net earnings in the first quarter were $25.2 million or $0.42 a share on a diluted basis. This compares to diluted earnings per share of $0.38 in the same quarter last fiscal year.

Excluding the acquisition related expenses recognized in the current period, adjusted diluted earnings per share in the first quarter totaled $0.47, and this compares to adjusted earnings of $0.43 per share in the first quarter of fiscal '14. I'll now move on to cash flow and give an update on our balance sheet.

We ended the quarter with total cash and cash equivalents of $67 million, an amount down approximately $34 million from where we ended last quarter. The decrease was driven by the acquisition of DWR which we financed through a combination of existing cash and borrowings on our revolving credit facility.

Cash flows from operation in the first quarter totaled $42 million. Capital expenditures in the quarter were $8 million and we anticipate full year spending to be between $65 million and $70 million. Cash dividends paid in the quarter were $8 million compared to $7 million in Q1 of last year.

On July 21, we completed an amendment of our existing unsecured revolving credit facility. This new five-year agreement provides us with up to $250 million in revolving variable rate borrowing capacity.

In addition, it includes an accordion feature giving us the option to pursue up to $125 million in additional credit, subject to the approval of participating banks. We borrowed $127 million on this new facility in connection with the DWR acquisition, though the balance was reduced to $100 million by the end of the quarter.

Our available capacity on the line, which is also net of outstanding letters of credit, stands at $139 million. We remain in compliance with all of our debt covenants. As of quarter end, our gross debt-to-EBITDA ratio was approximately 1.6 to 1.

We are confident we can meet the financing needs of the busine6ss moving forward given our expected cash flows from ongoing operations and available borrowing capacity. And with that, I'll now move on to our sales and earnings guidance for the second quarter of fiscal '15.

We expect sales to range between $550 million and $570 million in the second quarter. This guidance implies total revenue growth between 17% and 21% over Q2 of last fiscal year. On an organic basis excluding the expected contribution from DWR and the impact of dealer divestitures, this range suggests growth of between 4% and 8% over last year.

Similar to what we reported this quarter, we are expecting to recognize additional expenses in Q2 related to the step-up valuation of DWR inventories under GAAP purchase accounting. These expenses are expected to reduce our second quarter pre-tax earnings by approximately $4 million.

Gross margin in the second quarter is expected to range between 37% and 38% excluding the impact of inventory step-up expenses. The operating expenses in the second quarter are expected to range between $156 million and $160 million. This estimate includes approximately $26 million from the full quarter consolidation of DWR.

Adjusted earnings per share in the quarter are expected to be between $0.50 and $0.54. This estimate excludes the impact of DWR inventory step-up charges and this guidance assumes an effective tax rate between 33% and 35%. And with that, I'll turn the call back over to the operator so we can take your questions..

(Operator Instructions) Our first question today comes from the line of Josh Borstein of Longbow Research. Your line is open. Please go ahead..

Could you just assess the trends you're seeing right now in North American office, maybe contrast that with last quarter? Just trying to get a sense if customers are still being deliberate and cautious in their plans or is there a sense there's a greater willingness to pull the trigger and commit to projects..

Josh, I don't know that we sense any change other than what you can see coming through from the BIFMA data. I don't think we can give you anything on a particular kind of customer tone.

I would say, activity levels remain pretty darn good, although obviously we've not all seen the strength that we might have thought coming into last calendar year from a BIFMA perspective because it has backed down. But I would say, overall the level of project activity is pretty good..

Okay.

And would you say you feel any more or less optimistic about the trends you're seeing than you were three months ago?.

I think that as we look – especially as you look at the second quarter, you'd have to say we're a little more optimistic because even if excluding DWR, we move the top line up a little bit. So I'd say, yes.

I think the question really that is I think everybody feels is, you feel good about activity levels, it still bounces around a lot and then you're looking at all the geopolitical stuff, and I think that's the big question mark out there for all of us, as how is that – when or how is that going to potentially impact us..

Okay.

And again with North American office, what were the trends like during the quarter? Did you see any acceleration as the quarter progressed?.

Josh, this is Greg. I don't have the monthly numbers off the top of my head. I know that as we sort of monitored the forecast that what you're seeing is a shift to more larger projects which then make the number get more bumpy.

So it's hard to say that in any one – because of that bumpiness, it's hard to say that that bumpiness relates to a trend, if you follow me..

Sure, okay.

And how you're feeling about Herman Miller's position, market position right now? Do you think you've gained any share or lost any share or maintaining right now?.

We think over the long run we've been gaining share over the last three to five years and I think the trend is continue to be kind of a steady, a bit of a steady climb, some of that because of course we have more places that we're playing now, in areas that we just weren't present in four or five years ago like ergonomic tools.

With things like the SAYL chair, we've certainly expanded the range or reach of the price points we're in. So I would say it's come from some of the things we've done strategically, and certainly with Nemschoff we're playing a broader part of the healthcare piece.

So it's a combination of growing through the new products that we've done as well as gaining new customers. That market share number has moved around in this industry depending on if you happen to have very large projects running through. So it's always one of the things.

We try to look at a long-term trend rather than any one month or even three month line, it's more what's it going to be over a year or two as you watch projects move in and out..

Okay, thanks for that. And then just last one for me. Can you discuss a little bit the profitability in North American office? Even margins were down year-over-year on slightly higher revenues.

Is there a mix issue there or something else going on that we should look for?.

No. I mean I think overall the profitability in the North American business has actually been fairly steady. I mean you can see it move from quarter to quarter based on the mix in products or projects, but there has been no significant change to it. In fact, the operating margins were quite high.

If there's an area that has been a little difficult, is around the healthcare side. Although healthcare has been improving from a gross margin perspective, we didn't quite get to the revenue number we needed in that, and that thing is combined in that North American number that pulled down the total a little bit.

So the office side was actually quite strong from a profitability standpoint..

Great. I appreciate it. Thanks and good luck..

Our next question comes from the line of Budd Bugatch of Raymond James. Your line is open. Please go ahead..

This is Bobby actually filling in for Budd. Congratulations on the quarter and thank you for taking my questions. First question, on last quarter's call, we discussed lead times extending and project business being pushed out.

Is that trend still continuing in the office segment?.

No, Bobby, I don't think we – the pacing that we normally scheduled to was much more consistent in this quarter than what we've seen historically, or I should say is exactly what we've seen historically. The blip that we saw in the late kind of February-March-April timeframe seems to have gone back to normal..

Alright, thank you. That's helpful.

And then excluding GSA, can you maybe comment on what other vertical segments in the office segment showed some strength during the quarter?.

Bobby, financials did well, business services did well, and oil and gas did well..

On the large energy project, can you give any color on how much of that contribution was the quarter and what really is left there to ship, where we can try to get our models accurate?.

I don't know off the top of my head the quarter, I know that that project is supposed to complete by next May, and I know it's going to be a pretty consistent march between now and I think March timeframe from a manufacturing perspective for us, which will obviously then tail into the fourth quarter with installation and final revenue recognition..

Alright.

And then looking at the ELA segment, is the kind of outlook there really just centered around the geopolitical risk? Because this quarter showed some very strong revenue growth and if you try to parse the remaining nine month gross to get to your FY '15 goal, you're actually getting that relatively flat or even down-performance for the remaining nine months.

Is that centered just around the geopolitical risk or is there something that we should be accounting for in our models going forward?.

I think, Bobby, remember even when you look at the first quarter and the growth on the first quarter, in part that number is so big because of the first quarter last year and the performance last year. I think we only did like $84 million, $85 million. The rest of the Q2, Q3 and Q4 last year, we were closer up to that $95 million to $100 million.

We did surprised ourselves a little bit with how big the order rate was in the first quarter. So I wouldn't necessarily read into our forecast or that goal, the goal that we have out there for growth, as some sort of minimizing relative to these risks.

They are certainly out there and it's important to pay attention to, but I don't think – I think it's a function of prior year as much as anything..

Alright, thank you.

And then lastly on CapEx, is it still expected to be between $70 million and $80 million?.

I think we kind of revised that number down a little, Bobby, to probably $60 million or $70 million..

$60 million to $70 million, and can you remind me what portion of that $60 million to $70 million is probably for the DWR buildout for the stores?.

It's not a giant number, Bobby. I can't remember off the top of my head. The big number in that $60 million to $70 million is the U.K. manufacturing building which is about $22 million..

Okay, perfect. Thank you for taking my questions and best of luck going forward..

Our next question comes from the line of Matt McCall of BB&T Capital Markets. Your line is open. Please go ahead..

Back to I think it was Josh's question about the activity.

Greg, you didn't have it in front of you but I think we saw June industry down about 7, July industry up about 7, so by the [older] [ph] trends it looks like maybe August looked more like July than June and can you comment on I assume from the guidance you're seeing consistent trends with that in September?.

Yes, I think the August to September trends, the first two weeks in September, I think have been right in line with where we've been running. So we are pleased by the first two weeks. I mean the first week was a shorter week with Labor Day but I don't know the exact August percentage, Matt.

Let me look it up for a second, maybe we can get to you later on it, but like I said to Josh, because of the project sizes you can get this bumpiness that goes on in the order picture. So any one week or any one month that has a big giant project that lays into the number gives you – it doesn't tell you a trend.

It's like we talked earlier, Matt, about the base business versus the project business and it continues to be that same theme where you have a decent number of projects out there in the funnel, in the queue and won, and when they enter it causes the sort of bumpiness that takes place. I don't know you can really read the trend from it..

Okay.

So switching to DWR, remind me, the seasonality tied to the catalog and the Web business similar to what we can calculate based on the data in the supplemental from the stores, is there any differences that we need to think about?.

Modest but there are some..

I would tell you that that's why we kind of gave you that data, Matt, so that you can see that. I mean DWR's strongest quarter will be – it sort of lines up with our business, that the second quarter tends to be a really good one. Most of their holiday sales really happen maybe the first week of December but really kind of into Q2.

So they'll line up [fully] (ph) with us. So I will take that supplemental data and say, look that's typical..

Okay.

And then maybe the comment about not reading too much into the rest of the year in ELA because of Q1, is there anything, Brian, that you provided at the Analyst Day that you now have – and I guess this would be mostly about DWR, but you have a few more or a month or two more of data and you can maybe tweak your outlook a little bit for this year, anything that's really changed? And I know you were hesitant to give an EBIT or EPS outlook then.

Are you closer to doing that now?.

You mean for the full year, Matt?.

Correct. I think you just gave EBITDA..

Correct..

Matt, I don't have any – I would tell you all the data so far that we had that we provided to you guys there, I would say all looks like anything we've had since then has been nothing but confirmatory towards what we presented at that day. There's nothing that would tell me to modify it in a big way up or down.

In fact, other than this little I would say upward revision we did on the next quarter, the question we can't really answer yet because of course we're still learning our way through this, as Greg said, and to be frank we moved DWR's periods around because they were a calendar year company.

So we're learning a little bit amongst ourselves about what does it mean to shift that to our quarters and so where do things fall in from a comparability standpoint. We've still got some work to do around that.

I would say right now though everything that we talked about then, we feel pretty good about and I wouldn't move it directionally a long way away other than by what you've seen through the first quarter and what we're talking about for Q2..

Okay, alright. Thanks Brian. One more.

We think about the margin projections that are out there and we'll just stick to EBITDA, is there anything outside of just volume improvement that we should keep in mind that will help – I think somebody asked about the margin in North America, is there anything from a margin perspective that's kind of beyond volume, that's more in your control, are you doing anything at the factory level, are you doing anything at productivity level that will add incrementally to margins this year or next?.

First of all, I think if you look, the one place that was a negative in the quarter actually which, it's hard to tell which way it's going to go, is currency. I mean Greg and I were looking in the paper before we got on the call, and if you look I think currency took about – what Greg, about $1 million out of the quarter.

So that's one I think, Matt, that as you look at is probably the one that kind of ties this whole geopolitical question of what's going to happen from that perspective. So not in our control of course but one to just pay attention to that when you look at results, they are probably actually stronger if you looked at them without the currency impact.

Other areas that certainly will help over time, as we talked to you guys about in August, is the more we have proprietary products at DWR, both theirs and ours, the margins are a little bit stronger.

So as they continue to build out new products, that helps, and certainly the bigger format studios help because this is not a merge to have those be dominated by us or them because we still want it to be a marketplace, but when we have more space we can bring more products to bear with consumers and that's going to help on that side.

On the contract end, the biggest place [for] (ph) margin improvement is on the healthcare side. Some of that is volume related. We still have efficiency work to do particularly around Nemschoff where we're just not where we need to be in terms of operating that business from a gross margin perspective.

It's gotten better to be frank and we've seen signs of being much better but we've got work to do there. We have additional work to do that Greg is all over on in-sourcing a few things, both in West Michigan and in North Carolina. This should help over time.

Now those will take multiple quarters to get implemented but that's why you've seen the kind of steady margins. Greg's team working on some of those in-sourcing things and combining that with a little bit of volume, that's how we're going to get gross margins to move..

So on the in-sourcing front, what's the savings that you can point to thus far, either percent or dollars?.

Matt, I know as we talked on prior calls, last year we probably had $10 million to $14 million year on year improvement last year from things we were doing in-sourcing-wise and value engineering. I think second quarter last year we talked about a $4 million year on year.

And I think we have, from operational standpoint we've been digesting new products here over the last two quarters, which has really been our main focus, and now that those are sort of digested, it will allow the ops guys to get back into the march of HMPS and value-added engineering work and some other stuff that will continue to drive that number forward.

It is – I mean we have numbers that are obviously baked into our targets. The question is, your question really is, is there something else that gets us there faster or bigger, and you know one of the things that I personally look at HMPS, it's always hard to predict how soon you get them.

We just know that you do get them based on our historical march down the path. So we'll keep driving and they'll keep coming..

Okay, perfect. Thank you, guys..

Our next question comes from the line of Todd Schwartzman of Sidoti & Company. Your line is open. Please go ahead..

First on pricing in North America, where are you with realization on that most recent increase?.

Todd, it's right in line with our expectations and what we normally see..

Okay.

On ELA, if you could maybe give us some puts and takes by country as far as orders in Q1?.

I don't know by countries as much as probably by region, Todd, because we as a country, some of those get to be sort of micro and we play off of a lot of regional structure as you guys know. If you look at it, as we said in the release, on a revenue basis, every region was up pretty substantially.

If you looked at it on an order basis, the orders were strongest in Europe. The one place that was not quite as strong in Europe actually was the Middle East which we include in our EMEA segment. So that was down a little bit. Asia, Greg, I think if I'm right was maybe down a little bit largely driven by – if we've seen a softness, it's been in China.

We have seen some bounce back in other parts of Asia. Particularly Australia has been better. If you remember, Australia got pretty tough. It's come back a bit. Latin America on the order front, overall has been too bad and that one bounces around a little bit, it's a little bit more project focused.

So if you look at it, the big strength on the order front was in Europe with of course a lot of that going to be in the U.K. just because that's a big base for us. So I would say, you get the biggest strength in Europe, Asia was down a little bit, if I remember right.

Greg, is that right?.

Herman Miller products in Asia were actually up quite a bit. Our POSH branded products were down a little bit..

And since August 30, again keeping with ELA, anything substantive, anything of note in the way of cancellations?.

No..

Okay, thanks. A couple of just quick housekeeping things. Did you offer gross margin outlook for Q2? I think I missed it..

Yes, gross margin outlook is between 37% and 38%..

Okay.

And also what were the DWR sales for the month?.

Those were $22 million for August, $21.6 million if you want to put in your models..

Okay, thank you.

And lastly the DWR openings, the studio openings, were those – all the cities that you called out, were those all new stores or are there any relocations included in that?.

They are all new locations but not new cities, if you know what I mean. So for the most part, as we said during the Investor Day, largely what we're doing is not increasing the studio count or necessarily the city count at this point but actually moving to new locations within those markets, often moving to the larger format. So Chicago is an example.

There were three stores previously in Chicago, we now have one with a larger format.

What we're planning to do in Cambridge as we have a store today in Boston, a small store in Boston, a small store in Cambridge, and we'll combine – first we'll open a much larger location in Cambridge, longer-term the small location in Boston when the lease ends will probably go away, although we'll keep looking at Boston to see if we need another store there.

Bit currently all the ones I'm talking about are essentially new locations in the same city with a bigger format..

So in terms of total store count, irrespective of size and which format we're talking about, if you look out let's say year-end fiscal '15 as well as year-end fiscal '16, what do you project the total store count to be?.

Exactly what we told you guys in August or July in the data that we provided. We have 38 stores today. We don't think that will change dramatically. It will be right around 38, 39, kind of depends on whether there's a lease ending, when a new store is starting, but the number around fiscal '15 will not be a lot of new stores.

Again, there'll largely be conversions. What you do have to pay attention to though, if you looked at the supplemental data, even the square footage is growing, right, because the key is larger format stores, not greater number but more square footage..

And what about the cost per square foot, what can you tell us about the incremental lease expense and whether you're moving from B locations to A or just sizing up but staying within an A type location?.

Generally other than market movements in cost per square foot, we're not seeing a big change in cost per square foot..

Okay, sounds good. Thanks a lot..

(Operator Instructions) Our next question is a follow-up from the line of Josh Borstein of Longbow Research. Your line is open. Please go ahead..

Can you, Greg, touch upon – you talked a little bit about resourcing and back-sourcing.

Is this a product that's coming back from low cost countries or domestic sources?.

They are primarily what we're talking about, are things that we may have originally done with a supplier. They are generally in the U.S. But it's not one or the other and it's not because of changes in economics.

It's much more that we know that we have room as we free it up around HMPS and we have room, we have space as well as some of those are capabilities that we think we want to own in the long run.

So it's kind of a mix of us looking out at capabilities that we think are important to own in the long run, as well as we have capacity particularly in metal, in some areas around wood where we have capacity and we've just said why don't we figure out how to build those capabilities ourselves..

I see, okay, thanks.

And then just last, can you talk a little bit about the momentum in height-adjustable desk, if what kind of trends you're seeing, what percentage of revenue maybe is coming from height adjustability now versus a prior time period?.

I don't know if I know percentages for that off the top of my head. Certainly the industry overall I think you're seeing a continued increase in the mix of height adjustable tables and workstations. So that trend seems to be very, very strong.

I would imagine if you look at as a percentage of the industry dollars, still it's probably not that big of a percent. I don't know that number off the top of my head. Certainly for us it's become a bigger part of the business.

It isn't one though that I would say is like as big as something you might think of like in seating or something to that effect, but certainly it's a capability that is important to have in your portfolio if you're going to compete for the big projects..

And how do you regard your portfolio for height adjustability versus your peers?.

Leading..

Leading. Okay, great. Thank you..

And I'm showing no further questions in queue. I'd like to turn the conference back over to management for any closing remarks..

Thanks everyone. We appreciate you joining us today and your continued interest in Herman Miller. We look forward to reporting further advances in December and the opportunity to talk to you again. Have a great day..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day..