Brian Walker - President, Chief Executive Officer Jeffrey Stutz - Executive Vice President, Chief Financial Officer Kevin Veltman - VP of Investor Relations and Treasurer.

Josh Borstein - Longbow Research Matt McCall - BB&T Capital Markets Budd Bugatch - Raymond James & Associates Catherine Thomas - Thomas Research.

Good morning everyone, and welcome to the Herman Miller, Incorporated Fourth Quarter and Year End 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 Security and Exchange Commission. Today's presentation will be hosted by Mr. Brian Walker, President and Chief Executive Officer; Mr. Jeff Stutz, CFO; and Mr.

Kevin Veltman, VP of Investor Relations and Treasurer. Mr. Walker will open the call with brief remarks, followed by a more detailed presentation of the financials by Mr. Stutz and Mr. Veltman. We will then open the call to 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 us today. Our results this quarter are encouraging on a number of fronts and we are pleased to end the fiscal year on a note of steady improvement.

This capped the year highlighted by strategic milestones including the acquisition of Design Within Reach, investments in new products and selling tools and the expansion of our global manufacturing capabilities.

At the same time, fiscal 2015 brought with it clear challenges, including sluggish growth rates in our North American contract business and significant global currency pressures. I’ll begin this call – begin the call this morning with a review of these areas by business segments, both for the quarter and fiscal year.

I’ll then turn it over to Jeff and Kevin to cover the Q4 financials in more detail. To begin, consolidated net sales in the fourth quarter of $551 million were in line with guidance with that we provided back in March and adjusted earnings per share of $0.47 came in ahead of our expectations driven by continued gross margin improvements.

As expected, growth rate across our international operations were again negatively impacted by the relative strengthening of the US dollar. With that aside, we delivered year-over-year organic sales growth and order growth on a constant currency basis in all of our segments this quarter.

Importantly, the initiatives we outlined last quarter to reignite the growth of our North American segment are progressing at an impressive pace, and while it is unlikely these actions impacted our fourth quarter sales in a significant manner, we are pleased by the positive feedback from our dealers and among our sales teams.

Clearly, work remains on this front. Nonetheless, we were encouraged by an acceleration of order rates in the fourth quarter in our North American segment. Taking a step back, the economic backdrop to our business remains mixed globally, but there are a number of factors that give us a reason for optimism in the near-term.

The US continues to experience a strong labor market, businesses are reporting healthy cash positions, and growth in non-residential construction remains encouraging. All of these factors are helping fuel business industry growth to the expectations for the balance of this calendar year and next.

Despite these positive indicators, we remain cautious on the near-term outlook for key economies outside of the US, particularly in light of the slower than expected growth in China and ongoing struggles in the Eurozone.

Before taking a closer look at our segment results, I want to address two special items which impacted our reported GAAP earnings per share for the fourth quarter. The first of these is a non-cash charge of approximately $11 million or $0.15 per share related to the write-down of the POSH trade name carrying value.

You may recall, we’ve recognized a similar charge last year at this time driven by the same factors under GAAP accounting rules, which require that we evaluate certain intangible assets for impairment. While POSH performed well this past year, posting a year-over-year improvement in profitability, it has not kept pace with its original business plan.

Accordingly, we are required to recognize an impairment charge. Having said this, I want to be clear that POSH remains core to our aging strategy. It represents a leading furniture brand in China with a powerful dealer network and great products, all of which position us for further growth in Asia.

The second item relates to the implementation of a new international holding company structure aimed at supporting our strategic emphasis on global growth. This project reduced our effective tax rate during the fourth quarter and had the effect of increasing GAAP earnings per share by $0.07 in the period.

Moving to a review of our other segment results, I’ll begin with our North American contract business.

As we outlined to you last quarter, we launched a number of initiatives to reinvigorate order growth in this segment, all with a focus on getting closer to our customers and dealers with solutions needed to create the office for today’s changing landscape.

We implemented changes within the structure of our sales organization, and announced key leadership appointments to effectively oversee this plan. We resolved gap in our selling capacity, launched key new products, and reset our showrooms to better reflect the solutions that we offer including our newest product and Living Office insights.

I am pleased to report that we made good progress on all of these areas, but the benefit of these actions will take some time to fully materialize. We are encouraged by the acceleration in North American order rates in the fourth quarter, which were up nearly 4% on an organic basis over the same period last year.

This represents a clear improvement over the growth rate we reported last quarter and you can be sure that we are intensely focused in driving towards higher levels of growth in the near-term. As I said in March, we have our arms around the issues, the right strategy in place and a talented leadership team to execute our strategy as we move forward.

Down this near-term focus across the North American business, we’ve made meaningful progress throughout the year, implementing and refining our Living Office initiatives. As a reminder, Living Office is a research-based suite of knowledge, tools, products, and services, designed to help our customer realize higher performing environments.

It represents the first element of our Shift strategy aimed at transforming Herman Miller from a product provider to a solutions provider. Earlier in the year, we invested heavily in training both our sales team and dealers and this insight-lead approach.

We match this investment with our people – in our people with an aggressive new product development agenda launching several important new products that complement the Living Office store including the Mirra 2 Chair, Locale, Public Office landscape, Renew sit to stand table, and most recently canvas dock.

Collectively, these initiatives represent a bold step forward in establishing a leadership position in a new landscape of work, and we’ve been encouraged by the positive reactions from our customers, designers, and dealers.

Outside of North America, our Europe, Latin America, and Asia business segment continues to deliver solid performance despite currency headwinds and pockets of economic uncertainty in the key regions around the world.

On a constant currency basis, this segment posted order growth in the fourth quarter of 8% bringing organic growth for the full year to 9%, equally encouraging on the improvements we’ve made in segment profitability in a phase of the currency headwinds with operating margins for the year -- for the full year improving more than 100 basis points from year-ago levels.

This ELA segment performance highlights the successful execution against another key element of our Shift strategy. Our focus on leveraging our brands and capabilities to enhance profitable growth around the world.

To further support this ambition, we made good progress this fiscal year on a number of facilities projects aimed at improving our operational efficiency and global reach. In the second quarter, we broke ground in our consolidated UK manufacturing distribution site, which is expected to be operational later this summer.

We are also nearing completion on construction of a new lead facility in India, which we expect to be fully operational beginning with chair assembly later next month. Our Specialty and Consumer businesses represent some of the most exciting areas of growth within our business.

These segments directly address the final two elements of our Shift strategy. Moving beyond the traditional office to serve customers in a variety of environments and expanding the reach of our brands to the consumer. Our Specialty segment continued to gain momentum in the fourth quarter posting year-on-year growth in sales, orders, and profitability.

Our Geiger subsidiary delivered its best financial performance in years during fiscal 2015, the strong sales growth and improved profitability. The team’s relentless focus on improving quality and operating efficiency has helped Geiger bolster its reputation as a benchmark in craft wood furnishings for the contract market.

Three years following the initial launch the Herman Miller collection has found its stride delivering double-digit sales and order growth in fiscal 2015 driven by a focused selling model, diverse slate of new products and like Geiger, and impact and focus on quality in detail.

Maharam, our third specialty business and industry-leading brand for performance textiles remains a key contributor to the segment profitability and long-term growth potential. Maharam provides a great platform for us to leverage the brand and penetrate new categories offering attractive growth and margin opportunities.

Our Consumer segment delivered solid results this quarter with strong sales growth anchored by the addition of Design Within Reach, and our fast-growing e-commerce platform. For the quarter, the segment as a whole, posted organic sales growth and a sequential operating margin improvement of 170 basis points.

Since completing the acquisition of Design Within Reach last summer, we made significant progress integrating our combined consumer office offer. The transition has gone extraordinarily well and it could be happier with the combined effort and attitude of our team under the capable leadership of John Edelman and John McPhee.

For the full year, excluding purchase accounting adjustments the addition of DWR to our combined consumer businesses was accretive to earnings per share by approximately $0.03.

At our Investor Day last July, we outlined our rational for the Design Within Reach acquisition along with two drivers we view as key contributing a long-term shareholder value. As we approach the one year mark, I thought it will be helpful to review our progress against those drivers.

First of these relates to DWR’s real estate strategy which centers on the conversion of its legacy, small format studios to larger footprint locations which have this far proven to be a much more efficient selling model.

At the time of the acquisition Design Within Reach had a full of 39 studios and outlet locations of which only nine were large format studios. Throughout fiscal 2015, the team reached its goal by – goal of converting for opening two new locations plus a new outlet store in Brooklyn.

Today, Design Within Reach has a total of 35 studies and outlets, more fewer than we began with, but has increased its retail square footage by 11%. Going forward, we’ll be aggressive at our studio conversion plans with six additional locations anticipated for fiscal 2016.

The second value driver we outlined was our intent to increase Design Within Reach has made some exclusive product designs including Herman Miller brand products. These products offer significantly higher gross margins than a non-exclusive designs sold through Design Within Reach.

Our consumer team has made good progress through this end and today our exclusive product mix stands at around 62%. Our longer-term goal is to increase this mix to around 70% and we are working aggressively to achieve this. Overall, fiscal 2015 has been a productive year at Herman Miller.

I am encouraged by the sum total what was accomplished strategically and what we have delivered financially. Net sales for the full year exceeded $2.1 billion representing an increase of 14% despite currency pressures. This growth in the top-line helped drive a 14% increase in adjusted EBITDA as well.

We generated $169 million in cash flow from operations and achieved a return on invested capital of 20% for the full year. We also made significant progress paying down the debt we incurred to fund the Design Within Reach acquisition.

Even after three years of significant investment in acquisition and new product development, our liquidity and cash flow profile remains healthy and today are well positioned to return more cash to shareholders.

Accordingly, we’ve announced an increase in our quarterly cash dividend moving to just under $0.15 per share beginning in October of this year. This represents an increase of over 5% from the current levels. In short, we entered fiscal 2016 with a positive operational and financial momentum, a clear strategy in place to drive the business forward.

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

Thank you, Brian. Good morning, everyone. Consolidated sales in the fourth quarter of $551 million were 13% higher than the same quarter last year. Excluding the impact of DWR, dealer divestitures and foreign currency translation, sales increased almost 4% than the prior year.

Sequentially net sales in the fourth quarter increased 7% from the third quarter level while orders improved 11%. Within our North American segment, sales were $310 million in the fourth representing a 1% increase from the same quarter last year.

Adjusting for the impact of foreign currency translation and divestitures, segment sales were up nearly 3% on a year-on-year basis. New orders in this segment totaled $322 million in the fourth quarter.

This reflects an increase of almost 2% from last year on a GAAP basis and an organic increase of nearly 4%, a marked improvement over the year-on-year order trend we reported to you last quarter.

It’s also important to note that orders in the fourth quarter of last year reflected an incremental $10 million from one particularly large project in the Energy sector. This project alone pressured our year-on-year growth comparison by a full three percentage points in the North American segment this quarter.

Our ELA segment reported sales of $103 million in the fourth quarter reflecting a decrease of 6% compared to last year.

New orders totaled $93 million representing a slight year-over-year decrease, excluding the negative impact of currency translations, segment sales increased 3% and orders were up over 8% relative to the fourth quarters of last year.

Sales in the fourth quarter within our Specialty segment, totaled $59 million representing an increase of 12% over the same quarter last year. New orders in the period of $58 million increased 8% from a year ago.

Importantly, sales and order growth that we reported in the quarter was broad base across each of these three business units that comprised the segment. Our Consumer segment reported sales of $79 million in the quarter, an increase of $61 million from the same quarter last year.

Now of course, the addition of DWR drove the majority of this year-on-year sales growth. New orders in this segment totaled $84 million, an increase of $70 million over last year. As Brian mentioned in his opening comments, we continued to experience headwinds from the strengthening of the US dollar.

The translation impact from changes in currency exchange rate had an unfavorable impact on consolidated net sales of $13 million in the quarter. Our consolidated gross margin in the fourth quarter was 38.1%, a 140 basis point improvement over last year’s fourth quarter gross margin of 36.7%.

The addition of higher margin DWR products, operational improvements within our Specialty and ELA business segments, net price realization and favorable commodity trends all combined to more than offset the pressure from foreign exchange of approximately 45 basis points. I’ll now move on to operating expenses and earnings in the period.

In total, operating expenses in the fourth quarter of $162 million compared to $132 million in the same quarter a year ago. This represents a year-over-year increase of $30 million, the majority of which relates to the acquisition of DWR.

On a GAAP basis, operating income this quarter was $37 million or 6.7% of sales compared to $26 million or 5.4% of sales in the prior year period. Excluding the impact of impairment expenses discussed earlier, adjusted operating income was $48 million or 8.7% of net sales.

By comparison, we reported adjusted operating income of $45 million or 9.2% of sales in the fourth quarter of fiscal 2014. Also as Brian mentioned at the start of the call, during the quarter, Herman Miller implemented a new holding company structure for certain non-US subsidiaries.

This structure facilitated or facilitates more efficient utilization of cash held outside the US providing a platform to fund foreign investments such as our new Melksham manufacturing facility in the UK.

In connection with establishing this new structure we recognized a $3.9 million income tax benefit in the fourth quarter, the cash benefit of which will be realized over the next few quarters. Inclusive of this benefit, our GAAP basis effective tax rate in the fourth quarter was 29.5%.

Excluding this one-time tax benefit and the impact of asset impairment expenses, the effective tax rate was 35% in the fourth quarter and 33.9% on the full fiscal year. Finally, net earnings in the fourth quarter totaled $23.4 million or $0.39 per share on a diluted basis.

Adjusted diluted earnings per share in the quarter excluding the one-time tax benefit and impairment expenses were $0.47. This compares to adjusted earnings of $0.50 per share in the fourth quarter of last year.

I would also note that the translation impact from changes in currency exchange rates had an unfavorable impact on EPS of approximately $0.05 in the quarter relative to the fiscal 2014 comparison. And with that, I'll turn the call over to Kevin to give us an update on our cash flow and balance sheet..

Thank you, Jeff. We ended the quarter with total cash and cash equivalents of almost $64 million, an increase of $2 million from where we ended last quarter. Cash flows from operations in the period were $58 million, which reflects an increase of $19 million over the same quarter of last year.

Changes in working capital resulted in a net cash inflow of $12 million in the quarter with the largest contributor being higher accounts payable level. For the full fiscal year, cash flows from operations were $168 million. Capital expenditures in the quarter were $20 million bringing the year-to-date total to $64 million.

We also made meaningful progress paying down the debt incurred in the July acquisition of Design Within Reach with repayment of $87 million in borrowings during the fiscal year. Cash dividends paid in the period and full year were $8 million and $33 million respectively.

The dividend increase we announced yesterday increases our expected annual dividend payout level to approximately $35 million. We remain in compliance with all debt covenants and as of quarter end our gross debt-to-EBITDA ratio was approximately 1.3 to 1. The available capacity in our bank credit facility stands at $152 million.

Given our current cash balance, ongoing cash flows from operations, and our total borrowing capacity, we are confident we can meet the financing needs of the business moving forward. With that, I’ll now turn the call back over to Jeff to cover our sales and earnings guidance for the first quarter of fiscal 2016..

All right, thanks, Kevin. We anticipate sales in the first quarter to range between $545 million and $565 million. This implies revenue growth of between 7% and 11% over Q1 of last year. We estimate the year-on-year impact of foreign exchange on sales for the quarter to be approximately $12 million.

So on an organic basis adjusted for both DWR and foreign exchange translation, this forecast implies revenue growth of approximately 4% at the midpoint of the range. The consolidated gross margin in Q1 is expected to be relatively consistent with the fourth quarter level ranging between 37.5% and 38.5%.

Operating expenses in the quarter are expected to range between $163 million and $167 million and we anticipate earnings per share to range between $0.44 and 48% - or $0.48 in the period. This also assumes an effective tax rate of between 32% and 34%.

Now before we open the call for your questions, I do want to take a moment to update you on some factors that we are considering in our outlook for the business beyond the first quarter of fiscal 2016. First, as we’ve described, foreign exchange translation proved to be a significant headwind to our growth this past year.

This was particularly true during the back half of the fiscal year as the US dollar strengthening accelerated relative to the functional currencies of our international subsidiaries.

Considering current exchange rate forecast, we expect these year-on-year headwinds to continue with the most significant impacts expected in the first half of the fiscal year and extending into the earlier part of Q3.

We estimate that full year impact on sales will range between $25 million and $30 million with a corresponding impact on EPS of between $0.10 and $0.12 per share relative to the fiscal 2015 comparison. Second, our sales growth this past year benefited from a number of large project wins.

Now many of you are aware of one notable project in the energy sector which is now mostly complete, the absence of this project in our sales run rate will make our gross comparisons this next year particularly challenging.

The net year-over-year comparison impact from this single project is expected to be approximately $35 million and will be most significant in the second half of the fiscal year. The third factor to consider relates to the timing of the DWR acquisition, which was completed in July of 2014.

Accordingly, Q1 of this fiscal year will reflect a full quarter of activity, whereas the comparable period last year included only five weeks of DWR revenue. This is expected to contribute approximately $40 million of non-organic sales growth in the upcoming quarter.

We expect the operating contribution margin on these additional sales to be around 5%. We also plan to invest in a number of areas this year in support of our strategy and these investments will drive incremental expenses.

Given the success of the large format studios for DWR, we will pursue an aggressive conversion schedule in fiscal 2016 with plans to open six new studios, three more than we completed this past year. The opening of these stores will require incremental conversion costs as well as increased spend on marketing and promotional support.

We are also continuing to invest in our showrooms and are commencing plans to open a new Herman Miller contract and retail flagship showroom in New York City.

This new space will enable the consolidation of our existing New York contract showrooms and design offices and will serve as a product showcase for both the contract and consumer size of the business.

Additionally, achieving our operating plan for the upcoming fiscal year will drive incremental incentive-based compensation expenses over last year’s level. On a collective basis, these factors are expected to add incremental operating expenses of $14 million and $16 million in the year.

Ultimately, we are making these investments to drive further growth in areas where we see the opportunity for significant long-term value creation. At the same time, we do remain focused on maintaining an efficient cost structure and we’ll continue to seek opportunities to realize cost savings across the business.

Finally, while our gross margins over the past several quarters reflect a generally stable discounting environment, we continue to see aggressive competitive pricing within key markets and certain product categories and project sizes.

While pricing is only one aspect of our overall value proposition, this is an area we are watching closely as we move forward. And with those comments, I’ll now turn the call back over to the operator and we’ll take your questions. .

Thank you. [Operator Instructions] Our first question comes from the line of Josh Borstein with Longbow Research. Your line is open, please go ahead..

Yes, good morning everyone. Congrats on a nice quarter. A few quick questions for you.

Back in the third quarter, you plugged the staffing gaps and you said that the time that they would take a little bit of time to go from wins to orders to revenue, just curious where you are in that spectrum now?.

Josh, it’s Brian. I would tell you that, as we said, I don’t think we saw much impact from the things we did in terms of showrooms and products and those kind of things. There is a little bit we saw some on canvas dock as an example in the quarter from an orders perspective.

But what I would say is, we hear from dealers and from our sales folks that we are seeing on the win side, but most of that stuff I would say will start to see it impact order entry, I would think late part of the first quarter and into second quarter before we’ll really know how much traction we’ve got. .

Okay, great.

And then, another piece of the puzzle, you are getting back to a more normalized levels, was greater focus on small to medium size projects, can you discuss your efforts there, also if you are just seeing more of those types of jobs on the market relative to large projects?.

Certainly, there continues to be, in our view a trend, at least from what we’ve seen from an order entry standpoint, and the small to mid-size projects. It is part and parcel of the whole thing.

The sales deployment model that takes, you’ve got to make sure you have enough folks to cover those rather than fewer large things, you just need more folks to get around to cover all those. That also means, deployment with the dealers becomes more important because often they are the ones on the frontline on that.

So, we have spent, as an executive team, a tremendous amount of time out in the field with dealers over the last 90 to 120 days to make sure that not only that we know what their needs are, but to make sure that we are tuning our offer and all aspects of the company from products to the way that we approach those opportunities from a contract and pricing standpoint to the way that our options or custom business is lined up to make sure that where we need to tweak a product or a solution, we can do it most effectively.

So it’s really on all of those fronts. So we are feeling good that we are at better shape. I’d also say by the way, there is a good number of not super large, but large opportunities out there across the marketplace that also are encouraging as we get into next year.

Now, whether most of those will impact next year is a real question mark, because, again on those large ones, I think a little longer to work through the system as you guys saw with a big energy one we did a couple of years ago.

But there are some good size opportunities out there with a number of companies looking to reset their corporate headquarters or expand. .

Okay, great. And just last from me, Restoration Hardware is introducing the new home furnishings collection centered on the modern aesthetic which seemingly would represent a direct competitor to DWR. One, do you think that’s the case? And two, do you have any plans on addressing that at all? Thanks. .

Well, I mean, first, we think it’s probably, it’s nothing else but the validation of our strategy and the belief that modern as a category within residential is growing. And at one level, we’d say more folks validating that in fact and talking more about modernism and the attraction to it.

We think it does nothing, but actually probably expands the consumers’ knowledge of that segment, and as they expand the knowledge teams, we believe we are the world’s leader in authentic modern, we believe that that move simply helps us – they’ll help us see the market that we believe we are the leader in.

So, we don’t believe we have any need to do any direct response to them other than the things that we already have planned for Design Within Reach in terms of expanding our offer, expanding the number of studios that we have, implementing the large studio model which enables people to envision better their places.

Those things that we have planned will continue to be on our agenda regardless of what Restoration Hardware or anyone else does. .

And the plan for this year is six net new stores, is that right?.

It’s not six net new, because it’s six total stores that will be converted or new. I think it’s four of those are conversions and two are new. So when we say, six, I mean in some cases, take Scottsdale Arizona as an example of one of the six, it's a new location.

That is that we have an “additional store” but we’ll have a new location that will be significantly larger. I think in the case of Palo Alto, it’s actually an expansion in the current space or a space nearby.

So, some of them are conversions where we are moving between new locations within the same geography and we have a couple that will be new geographies or additions to a market we are already in. .

And the two new locations like you are talking about, where are those locations going to be?.

I don’t think we’ve gone public with those and we’ve got several different locations we are looking at, but that’s probably competitive information we wouldn’t want to give out in public. I would say, just – we have a number of areas the team is looking at, and we think we’ve got some great opportunities there. .

Got it. Great, thank you very much. .

Thank you. And our next question comes from the line of Matt McCall with BB&T. Your line is open. Please go ahead. .

Thank you. Good morning everybody. .

Hey, Matt. .

So, Jeff, you mentioned in your outlook for 2016, you talked about discounting pressures and you said, I think you said categories, product types, project sizes, I think I wrote that down right.

But can you talk about more specifically, where you are saying that discounting pressure increased?.

Sure, this probably won’t be a surprise to you, but the greatest pressures are in those areas of the business where we start before, where it’s getting increasingly difficult to differentiate. So you’ve got ongoing pressure around some of the benching type applications.

Case goods remains an area where it’s highly competitive and other areas like, even just simple product categories like tables, so those are been the ones I’d point to Brian, is there anything do that?.

Yes, I don’t think it’s – it’s not necessarily Matt, we describe it by category and I would say increased pressure, I think that’s just partly as we talked in the third quarter, we believe the industry had already become more, a little bit more aggressive and we were a little late responding to that.

So, I think in some ways, that is what we have outlined in the third quarter as we recognized that we needed to get a little more aggressive, especially in that mid to small-sized projects.

So I’d describe it more from that end, then I would necessarily, a product line perspective and certainly ground zero for competition and the industry tends to be really heavily into the systems where all of our folks are trying to get the anchor at the center of the offer.

And that’s not new news, but certainly as we look at, as we came through the second quarter and into the third, we recognize people are a little bit more aggressive in that zone than we had been and we’ve been sort of tuning our offer to make sure we can respond. .

So, you mentioned the mid and small sized projects, as you look at the industry data, it looks like some of the smaller competitors maybe performing a little bit better and I am assuming they operate with smaller customers, maybe smaller and mid-sized projects.

So as that volume continues to improve, do you anticipate this discounting pressure to dissipate, I recall that’s historically how it works, but is there something that’s different this time from a product perspective or competitive or foreign exchange, anything like that that’s changed that dynamic?.

Well, first Matt, I’d say, I think when you see the growth in the small and the smaller competitors, I don’t think that’s all just related to project size, I think what you are seeing is, and this directly relates to some of the things we’ve done is, many of the smaller competitors didn’t play as heavily in things like the systems world, that played in the other areas around systems and certainly some of the other categories have been growing faster.

Hence the move we’ve seen with Geiger and with the collection or I’d say our growth rates are probably in those same kind of neighborhoods when you look at them.

So I think it’s more a rotation towards what are the areas of solutions that are growing faster more than I think that that growth rate is tied to the size of the customer necessarily would be my guess.

Now, there may be some of that related to smaller companies growing faster than large companies or projects, but I think it’s probably more a category issue and the changing dynamic of what’s on the floor play..

And Matt, Jeff, I might just tag on you asked about exchange, I mean, without a doubt, there are with the crazy movements we’ve seen this last year and moves on the exchange front, that does create some advantages and disadvantages depending on where you source and where you may in facture.

So that is a factor and if you happen to be in an area where, let’s take can as an example where you get a built-in advantage from a cost standpoint that works in your favor now as we all know. That moves around and none of that is necessarily permanent, but as it certainly has been the trend of late. .

Okay. .

Matt, I guess, the end of your question was, do you think the current trend towards more aggressive pricing is going to dissipate over time. .

Correct..

To be frank, that’s not our planning assumption, our assumption is that, that is the way that competitors are choosing to compete and I guess, our service stance is, we are not going to let anybody beat us simply by trying to play a price card.

We think we are as efficient operator as anybody and if that’s the way the industry is going to compete, we then will compete. .

Okay, got it, got it.

Brian, you mentioned something about facilities, efficiency efforts, I think this is in ELA, can you, we talked about projected savings from what you are doing over there or is that the way to think about it?.

Yes, I wouldn’t say it’s much a savings issue Matt, it’s much as it was making sure that we have the capabilities to market or service people on a local base, Take India as an example. I mean, it was largely imported into that market in the past pretty much 100% of the offer. We’ll get closer to the customers.

We’ve built a nice distribution channel across most of India. It will just give us a better ability to service that marketplace as it grows. The UK, we will see some efficiencies, it’s not super-significant but essentially we are going in the UK from two facilities to one on the operational side. There will be efficiencies that come from that.

Of course, that will be a little bit offset from some higher appreciation rates, because we are going to own the building and you are going to brand new equipment.

So I think from an EBITDA cash flow basis, we’ll see it, you may not see it in an EPS level as much as we’ll see on the cash flow basis and as we get a few years under our belt, that will start to really pay some dividend as we think.

And that facility, I think as you know, we use the – our bases in the UK to really service all of Europe and a good junk of the Middle East and Africa as well. .

Okay, okay and then, the last one, since you brought up the full year 2016, I’ll ask more about the full year 2016, but can you talk about, maybe the first one from you Brian, the baseline assumption that you are using for the industry this year? And then, in your planning and then, Jeff, maybe from an incremental margin perspective after Europe sub-10%, does that understand some of the pressures you talked about, but does that create an opportunity for a bit of a rebound on the incremental margin net of all these pressures in 2016? Thank you..

Well, Matt, first of all, I think, we are not wildly different than what this was saying for the forecast this year. We probably use a 4% to 5% sort of number is what we think is out there for our fiscal year. All that of course depends on what happens with the economy overall. But I think that’s a reasonable spot to start with.

Of course, for us, the two things you are going to have to factor into that is, part of that US number for us and the North American number does include Canada which we have a little bit of currency headwind inside of that number which Jeff mentioned. A lot of the currency hits are non – our ELA segment, but a bit of it does hit North America.

The other thing, we do have some hurdles to get over in terms of business that we did this year the one that that’s early repeat to that kind of scale. That was – I mean, we said we won’t but, that’s the challenge in front of us that we got to go get after, especially as we get outside of the first quarter. We got some business to go make up. .

And Matt, this is Jeff, to your second question and I understand the order of your question makes sense, because we know we are not giving a full year revenue guide. You’ll have to decide what you want to model to, but I get that, once you have that assumption, the question is, operating leverage.

As you know, historically, we’ve talked about this business and I’m particularly talking about the core business here. We’ve been able to lever kind of structurally between the 20% to 25% level to operating income line.

Those factors that I listed for you today were intentionally meant to point out that there are – those would be some incremental spend that would go against that typical leverage factor.

So you’ll have to pick your revenue number to get you there, but we thought it was important to point out things like, if you hadn’t already done so, the DWR impact, right, which is non-organic growth in the quarter.

The currency pressures which we can’t, we don’t have perfect visibility, but certainly what we have in terms of line of sight right now, we expect some pretty significant currency pressure both in the top-line and as we reported and as we talked about in the outlook, we expect we’ll have a bottom-line impact and then the incremental spend on the OpEx side, do keep in mind that in the short run, we do have variable costs in our structure up to an including incentive bonuses right, that if you don’t pay a full target in one year and then if we deliver on our plans in the next year, you are going to see some incremental spend.

So all of those factors will be incremental levels of spend against than historical normal leverage. But we are not going to give you full year revenue guide, nor we are going to give you a full year earnings guide at this point. .

I think Matt, what I would add to that is, as we told you guys leaving the third quarter, we have a lot of – we have a bunch of actions we are going to take, really as I said in my opening comments really pleased with how the organizations responded, I am encouraged by what I am hearing from the dealers.

But, because we are only, sort of 90 days into that, it’s a little hard to predict yet exactly how that’s going to play out for the year.

So the year is a little bit harder to predict and I would say, normally at this point, I think as we get into the first quarter, we are feeling pretty good about with that first quarter forecast in terms of what we are seeing and if we continue to see the dynamics be good, we’ll know a lot more coming out of that period about what the balance of the year is going to look like..

Okay, thank you, Brian, thank you, Jeff. .

Thank you. And our next question comes from the line of Budd Bugatch with Raymond James. Your line is open. Please go ahead. .

Good morning. Thank you for taking my questions.

I am a bit confused on the guidance and I want to – for at least the guidance you’ve given, and I was hoping that if you could get a more clarity on the cost factors too, but let’s just go to the first quarter, I think you’ve given us a range of revenue and a range of EPS, if I do the math at the midpoint, it says to me that the operating margin is down something over a 100 basis points or about 100 basis points year-over-year.

Am I correct on that? Is that the way to do the math?.

Budd, I have to, I guess, I don’t, of course don’t have your numbers in front of us, so..

Well, I can get to about an 8.4% operating margin and last year’s adjusted operating margin was 9.3% if I remember right, if I have it right in my model. I guess, that math is down about 90 basis points or 100 basis points. .

Yes, I don’t think that’s – I mean, that’s certainly at the midpoint of the guide for Q1, that you are on for sure. .

Okay, and so, what is in there? You’ve given us, I think a $12 million impact on foreign exchange, right, what are the other impacts that, what’s the impact on earnings of foreign exchange?.

We expect that to be on the order of about $0.05. .

$0.05 in the quarter?.

Yes..

Is that right?.

Yes, I mean, Budd, our guide for revenue pressure on currency is about the same..

100 points..

Yes, it’s about the same as what we just experienced in the fourth quarter. .

Which is with you already there..

Yes, I got that.

And so, that’s and in fact, it looks like, we are using about an $0.80 or $0.81 Canadian dollar and $1.9 or so for a euro?.

You’ve got it Budd, this is Kevin. Both of those were what are in our model. .

Okay. .

Which is probably the biggest part of that delta year-over-year, Budd, in the operating income line. .

Say again..

So that’s going to be a big chunk of that delta that you are seeing year-over-year in the operating income line. .

Are there other factors show, are there other factors in the earnings that we haven’t yet that we can quantify for at least the first quarter? I know you have and you don’t want to give – we have given some guidance beyond the first quarter, but we don’t have it in a quantified way..

Yes, the other thing that I’d point out and I referenced this in my prepared remarks, but that’s why we wanted to make sure we were straight on the DWR growth, right, we are going to pick up some incremental revenue with DWR, we expect that comes in below the corporate average right at the op margin level. So you are going to get….

I get about $38.6 million incremental to get you to the midpoint, to get you to the 4% at the midpoint. So, I think that’s the way that math works.

Right?.

Yes, so, you’ve got that. That was the other thing that I’d point out that would be a drag on year-on-year, right. .

Yes, I am certain, I am sure you got that. Understood that. That was – so I am just trying to get to the EPS number because, the revenue number doesn’t let you get to the EPS number unless you’ve got some other factors in there that we can’t see. You’ve been over some of them in a way that I am not sure I got them on my brain.

So, I was hoping maybe to get that. Is there anything else from the first quarter other than the effects that we need to consider.

Those expenses for example, any of the additional operating expenses to open DWRs or any of those affect the quarter?.

Yes, there we’ve got some additional expenses on the OpEx side that are incremental year-on-year and you really got two factors, you do have some DWR for sure.

The other you have, because you are doing some ramp up stuff that were stores that will open in the second quarter, the other thing you got, Budd, is we are spending more than normal in the first quarter on some dealer training and around products.

We are actually going to do a national dealer event in West Michigan or bringing dealers into see all of the new products in one place across the entire company from Herman Miller to Design Within Reach to Geiger to Maharam, all in one location where we bring in dealers and their people and our sales people too and we are going to spend a significant amount of more money than we normally spend in the first quarter on that kind of training and development which heavily relates to the plan we rolled out in the third quarter.

.

Do we not then have significantly more – is can that be a number?.

Well, Budd, it’s incorporated in the – if you look at the sequential move in OpEx in total from Q4 to Q1, that’s that – these factors collectively make up the midpoint guide for the operating expenses. So, I don’t think we are going to part that all..

Then it becomes, Jeff, a question of what's a one-timer and what's continuing, so that we can get to either a contribution margin, or some way to try to make – what you told us we had to do is model for ourselves, what these quarters two, three and four look like and the out years.

So we got to be able to figure out what's continuing, what's not, right? I mean, that's a rational way to go about it..

Yes. It’s fair Budd, and I think, if Brian is right on, that we do have some, we get abnormal or significantly abnormal spend related to this – some of this dealer product rollout. I would say that, that’s sub $1 million go in terms of the one-timer..

So, it's about $1 million. Okay, that's – that’s good. I can deal with that. Okay, thank you. And, I guess, finally a couple of areas, just comps for DWR, I know that it was not in the base last year, but John and John know what the comps are, and I'm sure you know, Brian, what the comps are.

How do the DWR comps looks? How do they – how are factoring on a pro forma basis?.

So, Budd, this is Jeff, let me take this one. So, on a same-studio basis in total, there are stores – revenue in the quarter was up 14%..

On same-studio. That's great..

Same-studio and on a large format basis, that’s even better than that, which I think lends to our intent to I guess, ramp up as you will are a bit more aggressive in the conversion plan for this next year because it’s proven thus far to be working. It’s closer to 18% comps..

Hey, Budd dealing it I don’t want to make sure because, so that we don’t over say. There was a bit of a non-comp move year-over-year within DWR Herman Miller consumer that the Herman Miller sale this year was in May where traditionally has been June. So we dropped, we moved the outdoor sales to June and moved Herman Miller sales to May.

So there is a little bit of a crossover there, that those numbers, but overall though, week-by-week numbers look pretty good as Jeff said. But I would just be careful to say there was a little bit of a movement there that will go the opposite direction next quarter. Just so that when we get there we not surprised by that..

So, pinging inside of the consumer number, which was 38.6% I think, in the first quarter of last year.

Would a number like $80 million be kind of a right - to get to the midpoint, would that be where you were thinking would be in the first quarter?.

Yes, you are in the hunk that might be a little over baked but you are not too far out of the discount buying stretch..

Okay, all right. And – what you haven't talked about is Maharam. That was what we bought a couple of years ago.

How does that do in the quarter? What's the year-over-year look like in that?.

In the case of Maharam, I would say, the profitability of Maharam has gotten – got significantly better throughout the year and they starting to pick up better growth rates in the second half of the year. We did some things on the product side there as the team did a great job of rebalancing some of their portfolio and that made a difference.

And so, we are really encouraged going into next year as well as we have some product development in place to get them into some new categories and the covering segment generally that we think are going to be pretty interesting. Most of that won’t help us. We get a little bit of next year, most of it will help the year after.

But overall, Maharam is pretty close to where we thought, that would be a little light on the top-line and now pretty much in line on the bottom-line as we got through the balance of the year..

Yes, Budd, just one other bit of color there that started off lighter than we had hoped in terms of the overall top-line momentum but the end of the year stronger to Brian’s point, it was up kind of around that 6% level year-on-year for the quarter..

But the bottom-line was almost baked in, because we've got the roll-off of some of the purchase amortization right now.

So, are you talking about operating margin excluding the PA costs?.

I would say both improved throughout the year, Budd. Some of that stuff rolled off, but I’d also say the team did a great job particularly, they got a little bit higher margin contribution. But the business – it’s that’s why that is pretty much in line with where we thought we get to..

Okay and lastly for me, Jeff, I would just encourage you if you would, you give us a lot of factors after the talk about guidance and the effected Qs 2, 3, and 4, and the second half versus first half, I’d encourage you to put something on the website that maybe gives us a breakout, a schedule of some of those expenses to the area that you are comfortable, I think, that disclosure would be helpful for people to understand what are the numbers and where they're going to vary this year, because it looks like you've got the moving parts that are very hard to bake in – for at least for this old brain, anyway.

.

Well, I hear you Budd and I think that’s a very fair request. I understand some of those factors are hard for us to tag and bucket it by quarter, I mean, take the outlook commentary around margins, right, we are simply pointing out that that’s an area we are looking at closely.

That’s not something that we can quantify and breakout by quarter, but certainly things like foreign exchange, I think we can take a stab at that, the DWR factor and the large – particularly large project that we keep alluding to, we can certainly provide some detail there..

Well, I’d just say for a venerable company like Herman Miller, which is such a great company - I know that you can give us some help on that. Thank you..

Thank you. [Operator Instructions] I am showing that we do have a question from the line of Catherine Thomas with Thomas Research. Please go ahead..

Hi, thanks for taking my question today. Just going back to your initiatives that you outlined in the prior quarter, I want to dig a little bit more into the early indicators that these are in fact, working.

We would assume it would be an improvement in order rates which you saw in the quarter, or are there any other metrics that we should pay attention to?.

Catherine, this is Brian. I mean, the key points we are trying to move which is top-line, there was – we didn’t do a lot of things on cost, in fact we are dealing on cost it was probably going in the other direction.

So, the majority of this was all tuned around what could we do to get order rates moving versus what we saw happening in the industry overall. So, we are primarily talking about the North American contract business. So, that’s the metric to watch.

Of course, in our end, we are trying to watch win rates prior to things churning the orders and that’s why typically, you are going to see a 6 to 9 month lag between when you start to win projects and you actually see those things showing up in orders. So, it will take a while to work its way through the system..

So the improvement in order rates we saw in the current quarter really doesn't reflect these initiatives?.

You know, I’d like to believe that certainly have some impact, but you are just trying to be realistic with yourself about whether that’s really there yet or not. My gut is, we probably saw, the showrooms are better and people are there, it certainly helps. But I don’t think we’ve seen a significant amount of it yet in the quarter.

I think it will start in the first quarter and then we’ll probably see it as we get into the second quarter more pronounced. .

Okay, tagging along with that, how much did higher promotional activity in Q4 drive improvements in orders or not was it not?.

You are talking about, as it relates to Design Within Reach or the Consumer business in particular?.

Yes..

Probably not a lot from Q3 to Q4, a little bit like I said, because of putting the Herman Miller sale in Q4 versus Q1. I was going to peg it, we are probably talking $3 million to $5 million in that range..

Okay, perfect. And then, just for us to think about with the DWR dynamic, higher gross margins, but also higher SG&A.

As you think about the detail that you gave in prepared comments for that operating expense and also the gross margin, are you able to parse out how much of the higher gross margin and higher SG&A are from DWR and it will also help us just put into perspective some color as we think about the full year?.

First, I think that, overall, certainly a movement in our margin and first of all, I think you have to be careful, people refer to it as DWR, I think you got to think about the consumer business model..

Yes..

Okay, just to be careful, because it’s not just – it’s not just DWR, the wholesale side that we do from Herman Miller as well as the web business. So, both of them drive the higher gross margin side as well as higher operating expenses. So you got to think about it in total not separate.

There is no doubt that a good chunk of our margin movement over the last couple of years has been driven by higher segments, higher margin segments, not just the consumer business, that’s also true that Maharam which has much higher margins than the average, it’s also true a place is where we have invested like the collection and that just starts to drive higher margin.

So, if you start to pick it up by piece, I’d say the best place to look at that is to look at the segment reporting which actually describes that stuff in detail what the margins are by segment including operating margins.

Now, to me the good news is, if you want to step back is, this past quarter, you look at EBITDA margin as a percentage of sales, we got to the point that all of the segments were running above that sort of 10% level. That one, that’s only the be the case every single quarter.

I think the one that was not above 10% was actually the ELA segment, but we are starting to see the traction we have in the specialty business is starting to pay dividends and an operating income line, that’s important and that’s been after a couple of years of fairly significant investment in both products, channel, channel in this case in terms of sales people.

The consumer side last year, if you look year-over-year dropped a bit, Catherine. A lot of that is, we knew that DWR was at a point that they were at the early stage of their growth that was going to start to turn margins – operating margins around.

We certainly saw that as we got into the balance of the year and remember the first part of last year after the acquisition, particularly the month we had them in the first quarter and the second quarter included some one-time acquisition-related charges where we had write-up inventory and write it down.

So, I think if you look past and if you look at that segment reporting, which I think was in the pre-package, you can actually see those margins by segment there..

Okay great. Thanks for taking my questions today..

Thank you. And I am showing no further questions and I would like to turn the call back over to Mr. Walker for any further remarks..

Thanks again for joining for the call. I hope this discussion gives you a deeper understanding of our recent performance as well as our commitment to positioning the company for long-term growth and performance. We look forward to updating you again next quarter and hope you have a great day..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day..