Kevin Veltman - VP, IR Brian Walker - President & CEO Jeffrey Stutz - EVP & CFO.

Matt McCall - Seaport Global Kathryn Thompson - Thompson Research Group.

Good morning everyone and welcome to the Herman Miller Incorporated Second Quarter Fiscal Year 2017 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 these forward-looking statements.

These risks and uncertainties include those risk factors discussed in the company’s report on Forms 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 CEO; Mr. Jeff Stutz, Executive Vice President and CFO, and Mr.

Kevin Veltman, Vice President, 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 and thank you for joining us today. Yesterday we announced our financial results for the second quarter of fiscal 2017. Our consolidated sales and orders for the quarter were $578 million and $576 million respectively and GAAP earnings per share were $0.53. Sales for the quarter were lower than we expected.

The softness was primarily in our North America contract-furnishing segment as ELA specialty and consumer each delivered mid to high single digit growth for the quarter.

In the face of challenging comparisons to the prior year and an uncertain near term business environment, consolidated orders posted a modest decline this quarter particularly in the North America and Specialty segment, both of which experienced double-digit organic order growth last year.

Adjusted earnings per share of $0.54 for the quarter met our expectations and the organization did a good job delivering manufacturing efficiencies and adjusting spending to the demand levels across the business.

Before Jeff and Kevin provide a more detailed breakdown of the results for the quarter, I’d like to share my perspectives on the economic backdrop as well as the overall direction of the business. Despite the impact of low energy cost and interest rates, growth and productivity in the U.S. and abroad remained tepid.

The contentious political environment in Europe and the recent U.S. elections have combined to increase volatility over the past several months.

Contract furniture industry in North America has echoed this mix environment, with choppy order levels and lower architectural buildings activity at odds with support of service sector employment and non-residential construction activity. Our North American business has reflected this cautious environment.

Sales and order rates within our North America segment did not meet our expectation this quarter. On an organic basis, net sales decreased 5% and new orders were down 3% compared to the year ago period. This quarter’s results were challenged by a particularly difficult prior year comparison and a competitive pricing environment.

Looking at the data on a two-year stack basis, order growth for the second quarter was approximately 3%. This exceeds the growth within a broader North American contract industry, which over the same time averaged closer to 1%. This data reflects the project nature of our business and the broader uneven demand patterns.

Pricing is also impacting top line metrics. We estimate that 200 basis points of the year-over-year decline in sales for this segment was due to increased discounting, and we know this reflects a broader trend towards value engineered solutions.

Looking forward, our sales team remained optimistic and continue to report an increase in qualified projects in our funnel. This is further supported by an increase in contract activations and customer visits. With that said, the conversion of this activity into orders has been muted in recent months.

We anticipate the next couple of quarters will remain choppy, but we should see business confidence to mere the increasing optimism in equity markets as a result of the new administration plans to lower taxes, reduce regulation and ramp up infrastructure spending.

The competitive pricing environment requires a constant focus on value engineering our solutions and finding ways to reduce the cost of manufacturing.

With industry bringing new products to markets faster than ever before, the recent changes we’ve made to our new product commercialization process will drive even greater throughput, and we have a robust development pipeline, strong lineup of recently launched products including the remastered Aeron chair with meaningful material and technology innovations that will extend the life of this powerful franchise.

Moving to our other segments, on the consumer front, the high end of the housing market has been soft, but overall existing home sales and new housing start have generally shown gains in the past few months aided by rising household incomes and relatively low interest rates.

While interest rate changes will impact the housing markets, the upper end consumer should be bullied by lower tax rates that are being ventured about. Our consumer business generated high single digit sales in order growth during the quarter.

We are especially pleased with the topline acceleration as we began to overcome the challenges our team experienced in the second half of last year. At first blush the topline improvement appears to have not translated into improved profitability as compared to last year.

However, because we are opening new studios at a faster rate than in previous quarters, we have increased free opening cost and there is a drag in profitability as the sales levels build towards maturity over the first 12 to 18 months of operation.

We estimate the unfavorable impact from these new studios operating at less and full efficiencies combined with incremental free opening expenses with approximately $2 million this quarter at the operating income level. So looking through this impact, we believe the operating profit is improving.

Having said that, we are focused on increasing the profitability of this segment through growth, product development and operational improvements. We believe there is significant opportunity to reduce our logistics cost and further integrate the consumer operations of Herman Miller and Design Within Reach.

We also continue to execute against our strategy to expand our real estate footprint in addition to the Paramus studio that opened during the second quarter, we have another five studios under contract that opened by the end of the fiscal year.

This past quarter we also opened the first Herman Miller retail store in North America located inside our New York City flagship. Having a branded retail space in a prime Metropolitan area marks a significant milestone and our efforts to further connect the Herman Miller brand of consumers.

While the specialty business delivered broad based sales growth totaling 5% this quarter, new orders were down 11% relative to last year. Project timing played a large part in this as the business experienced very strong order growth in the first quarter of this fiscal year.

Additionally, last year’s second quarter posed a challenging comparison as order growth in that period was up 16%. Overall, this segment is well positioned to remain a growth and profit engine for our business, particularly as the industry trends continue to embrace the application of ancillary furnishing in their office design.

The ELA business delivered strong sale results this quarter led by double-digit growth in Asia Pacific and Latin America. Orders in the second quarter were 3% below last year’s level on an organic basis, largely reflecting the uncertainty in the U.K. and oil producing regions and to some degree the project based nature of the contracts business.

These declines were offset by a broad based growth in Latin America as well as gains in Mainland Europe and Japan. I would note that customer activity remains robust, as there was a sizeable increase and new opportunities during the quarter when compared to last year.

Overall, this team is performing very well given the macroeconomic and geopolitical headwinds and is gearing up for a number of new product launches for both the Herman Miller and POSH brands. Considering the various dynamics within our business right now, we are focusing on the following steps as we move forward.

While we’ve always believed the key to profitability is growth, one of our core initiatives in the coming year is to look for places to drive efficiency and leverage as well as eliminate ways to cross our global business.

This is especially important given the current environment and our firm commitment to grow operating profit and continue to provide cash flow to investors. We are developing details of this work and we’ll have more to report as the year progresses.

It will also help us to mitigate industry price competitiveness and free up resources to appropriate levels of investment in support of our long-term growth initiatives.

We are also focused on improving profitability of the consumer business by continuing to expand our retail footprint through the Design Within Reach studio opening, increasing the mix of exclusive product offerings and growing our contract catalog and digital channels.

Finally, because involving customer needs are affecting the industry in terms of what’s being sold, we believe that fully activating our ancillary furnishings channel is a key area of opportunity. We’ve significantly expanded our portfolio of products and believe there is an untapped potential to gain share of our dealer and customer wallet.

To that end, we recently established dedicated resources to best position the Herman Miller collection, Geiger Design Within Reach and not one brand for further growth in this space. As these capabilities are fully integrated, we’ll be in a good place to go squarely after the broader opportunities and drive greater sales flow through.

Our strength has always been our ability to understand changes in society, design solutions to help our customers navigate these changes and reinvent the way we do business. We end this calendar year being recognized once again by contract magazine as the number one furniture brand that inspires.

Guided by our hallmark excellence and design innovation, and grounded by our values of purpose driven organization, Herman Miller has been a pioneer in the industry every step of the way.

Our significant investments in recent years to build a multi channel business and powerful family of design brands is to ensure we maintain this leadership in the years to come. Now, I’ll turn the call over to Jeff to provide more detail on the financial results for the quarter..

Thanks Brian and good morning, everyone. Consolidated sales in the second quarter of $578 million was slightly below the same quarter last year. On an organic basis which excludes the impact of foreign currency translation and a dealer divestiture, sales were 1% higher than the prior year.

Orders in the period of $576 million were 4% lower than last year. On an organic basis, orders decreased 3% from the second quarter of the prior year.

I’d also note that while our reported backlog was 6.5% lower than last year the balance in that period included approximately $20 million in orders related to the Australia [ph] dealer that we divested at the start of this fiscal year. Excluding this amount, backlog was approximately 1% lower than the same quarter last year.

Within our North America segment, sales were $330 million in the second quarter representing a decrease of 5% from the year ago period. New orders in this segment were $338 million in the quarter reflecting a decrease of 3% from last year.

Orders from project sizes above $1 million were up compared to last year which was a contributing factor to discount levels during the quarter as larger projects generally carry a higher volume discounts. Orders from project sizes below $1 million were down year-over-year.

As expected in an uneven business environment order activity by industry sector was mixed. We saw a growth in business services, manufacturing and state and local government while energy as we have seen in the past few quarters along with wholesale, healthcare and financial services were lower than last year.

From a regional perspective we saw modest order growth in the west and east regions. While order levels in the Central regions were down significantly given it closed high for the energy sector.

As a result of these declines linked to a challenging energy sector in the Central region, North America order levels were unfavorably impacted by roughly 300 basis points in the quarter. Our ELA segment reported sales of $108 million in the second quarter reflecting an increase of 7% compared to last year.

New orders totaled $100 million an amount 12% lower than the same quarter last year. On an organic basis, which excludes the impact of the dealer divestiture and currency translation, segment sales were 17% above last year led by growth in China, Mainland Europe, India and Latin America. Organic orders were 3% lower than last year.

This year-over-year decline was primarily due to lower demand levels in the U.K. and Middle East tied to the uncertainty in these regions as well as reduced year-over-year order levels in China related to project timing. This was partially offset by strong demand across Latin America.

Sales in the second quarter within our specialty segment were $61 million, an increase of 5% from the same quarter last year and reflecting growth across each of our specialty businesses.

New orders in the quarter of $55 million were 11% lower than last year and as Brian mentioned the lower order levels was primarily due to a challenging prior year comparison and the timing of order placement for the Geiger business, partially offset by order growth for the Herman Miller collection.

The consumer business reported sales in the quarter of $80 million, an increase of 8% compared to last year. New orders in the quarter of $83 million was 7% ahead of the same quarter a year ago. On a comparable brand basis, revenues for the quarter were up nearly 9%.

While the comparable brand sales growth was partially related to softer sales a year ago during the ERP implementation at the start of that quarter, our marketing investments particularly in the areas of catalog and digital have gained significant traction.

Consolidated gross margins in the second quarter was 37.7%, which is a 100 basis points lower than the second quarter of last year. As Brian alluded to on a year-over-year basis, we felt the impact of comparatively deeper discounting.

As we noted in our outlook last quarter, the recent increases in steel prices had an unfavorable impact on us compared to the same quarter last year. As a reminder, we are planning a price increase at the beginning of February to help address these commodity pressures.

These factors were partially offset by continued operational improvements and lower incentive base compensation. In total, operating expenses in the second quarter were $167 million compared to $169 million in the same quarter a year ago.

The prior year included approximately $2 million in operating expenses related to the dealer in Australia that was divested at the start of this fiscal year, after adjusting for those expenses operating expenses in total were flat compared to last year as lower incentive based compensation and medical costs were offset by expanding our new product development and marketing initiatives as well as higher occupancy cost and incremental preopening expenses related to new DWR studios.

Additionally during the second quarter we announced restructuring actions involving certain workforce reductions. These actions resulted in a recognition of severance and outplacement expenses totaling approximately $1 million. On a GAAP basis including restructuring expenses, we reported operating earnings of $50 million this quarter.

Excluding these charges, adjusted operating earnings this quarter were $51 million or 8.8% of sales compared to $55 million or 9.6% of sales in the prior year period. Effective tax rate for the quarter was 32% and this compares to an effective rate of 33% reported last year.

Finally, net earnings in the second quarter saw $32 million or $0.53 per share on a diluted basis. Excluding the impact of restructuring expenses, adjusted diluted earnings per share for the quarter were $0.54 and this compares to $0.57 per share in the second quarter of last year.

With that brief overview, I’ll now turn the call over to Kevin to give us an update on cash flow and our balance sheet..

Thanks Jeff. We ended the quarter with total cash and cash equivalent of $68 million, which reflected an increase of nearly $3 million from the last quarter. Cash flows from operations in the period were $60 million compared to $40 million in the same quarter of last year.

The increase in cash flows from operations was primarily due to higher cash inflows from working capital resulting from higher accrued liabilities offset by increased accounts receivable and inventory levels. Capital expenditures were $25 million in the quarter and $47 million year-to-date.

We anticipate capital expenditures of $85 million to $95 million for the full fiscal year. Cash dividends paid in the quarter were $10 million and we repurchased approximately $5 million of shares during the quarter. We remain in compliance with all debt covenants and as of quarter end our gross debt to EBITDA ratio was approximately 0.821.

The available capacity on our bank credit facility stood at $372 million at the end of the quarter. Given our current cash balance, ongoing cash flows from operations and our total borrowing capacity we believe we continue to be well positioned to meet the financing needs of the business moving forward.

With that, I’ll turn the call back over to Jeff to cover our sales and earnings guidance for the third quarter of fiscal 2017..

Okay, with respect to the forecast we anticipate sales in the third quarter to range between $520 million and $540 million. We estimate the year-over-year unfavorable impact of foreign exchange on sales to be approximately $2 million.

On an organic basis, adjusted for the dealer divestiture and the impact from foreign currency exchange this forecast implies flat revenue compared to the same quarter last year at the midpoint of the range. On a two year stack basis, this reflects organic sales growth of approximately 3%.

Consolidated gross margin in the third quarter is expected to range between 37% and 38%. This assumes the relative seasonal slowdown in factory production that we normally experience around the holiday period and in the month of January.

It also assumes the expected impact of higher year-over-year cost for key commodity inputs offset by continued productivity gains and improved channel mix.

Operating expenses for the quarter are expected to range between $164 million and $168 million, and we expect earnings per share to be between $0.31 and $0.35 in the period assuming an effective tax rate of between 31% and 33%. With that, I’ll now turn the call back over to the operator and we will take your questions..

[Operator Instructions] Your first question comes from the line of Matt McCall with Seaport Global. Your line is open..

Thank you. Good morning, everybody..

Hey, Matt..

Hey Matt..

Good, so maybe, Jeff let's start with the guidance here if you can help me a little bit with the margin outlook. So you did -- you said 37% to 38%. It sounded like there was some inflation but you were going to offset that with some efficiency. You did 38.7% a year ago.

Can you just help me, in an organically flat top line environment, how do we project 100 -- whatever that would be -- 120 basis points of pressure at the midpoint?.

Yes, Matt so I mean I guess maybe I’ll start with the quarter that we just reported.

We were 100 basis points down year-on-year with the big kind of the big drivers that we’ve been talking about being primarily the impact of steel pricing which I think in the quarter was somewhere on the order of $3 million year-on-year pressure and higher discounting pressure which in rough estimate somewhere in the order of $8 million year-on-year of incremental discounting.

Our anticipation as we move in the third quarter as you mentioned is slightly lower revenue at the midpoint of the range but still somewhat in line with what we just did in Q2 in terms of the year-over-year, those same factors apply and are implied in the guidance. It’s well as I mentioned, so we’ve got another 20 basis points of erosion.

We tend to see a bit of de-leveraging as we move into the third quarter around that holiday period. So it’s the same factors plus a bit of incremental pressure from some de-leveraging. Now we are always really focused on driving efficiencies into the operational efficiencies I think the team has done a great job, we did a good job this quarter.

Our expectation is we’ll see some benefit from that and that’s why I alluded to that being a partial offset, those would be the big factors though, Matt..

Okay, okay. And so when I think about the pricing commentary and my understanding has always been that when deflation flips to inflation, that it helps the pricing dynamic for this industry.

So, is there no expectation -- I guess the question is, is this a -- is that a bigger factor or is the mix -- I think, Brian, you referenced some of the mix toward value dynamic that's going on. There are expectations out there that the macro is going to be more supportive.

Is the pricing dynamic just not something that's as much within your control as it once had been? Has something changed? Is mix the bigger impact? Can you just help me understand what's going on there?.

Matt, it’s Brian. First of all there is no doubt when we look at the data particularly again in the core business, the contract business, there is no doubt that the pricing environment just at a discount level has been, I don’t if I’d say, very aggressive but it certainly has been aggressive.

You often see it if you see the industry bumpy, you know, if there are projects available people are going after, right, so that’s pretty natural.

I think you’re point about the inflation period of course as you know the general economy has not talked about inflation, in fact neither we until the last what nine months when we start to see steel really move.

In fact, pre the election you started to see steel kind of receipt back and we had pretty good hopes that actually we’re going to see steel back off. That’s changed since all of the discussion about increases in infrastructure spending. We saw steel immediately jump back up, back into 800. So, we have a price increased plan in the third quarter.

We won’t see any benefit in the third quarter. I think we’ll be able to like normal capture some of that.

Now, I think the other things that’s happening overall in the industry is there is no doubt that everybody is focused on value engineering everything, so you may not even see it always in a discount level, you might see it by value engineering a particular solution, by trying to get to that solution with a product line that has been, I’m not even say de-featured, but certainly optimize around what a costs and the things it takes to do it.

That actually is interesting, so some way it drives higher unit levels for the same or less dollars if you follow me.

So, I won’t say its not, is there still a lot of it is within the control of you as a competitor to how good you can be it value engineering your solution where you’re not giving up profitability in the terms of margin percentage, but you’re also still trying to figure out how you can be competitive at those kind of de-featured levels..

Okay. I think that actually leads to my final question, and that's the reference to these core initiatives you're going to pursue. My question was going to be just I'm trying to understand -- you didn't give a lot of details.

It sounds like you're going to give more later on, but if you think about the focus of these initiatives, is it more back office improving the operational side of the Company or is it more the customer facing? Is it more this value engineering effort? I'm just trying to understand what you're referencing when you are talking about these core initiatives.

Is that you're going to change something looking outward or look more and work within the Company to try to improve your efficiency and I think you said drive leverage?.

Yes, Matt. I think you know the team has spent a lot of time on this past quarter. As we look, we’re in the middle of doing our planning, normal annual planning.

So I’d say out of that process, and looking at the choppiness of the industry, by the way looking back at the things we’ve done over the last four or five years where we’ve acquired things, we just been looking for where are the places that we think we have opportunities to find integration points, places of leverage and simply put our efforts towards things that we are more believe are going to be more value-added going forward.

So, it is a range of things, it’s a little difficult because we haven’t solidified all the plans, but I think its important to note that we recognize given where we are, we think it can help us drive more top line to be frank in places that we’ve not get as much as share wallet as we expect to, which those things are tending to drive higher margins.

As an example, one area we’re looking hard at within the consumer business and the team there has done a really good job is around logistics.

We haven’t seen a ton of benefit from it yet, but they are making some changes on the logistics side that we think can both drive better customer satisfaction as well as drive lower costs of getting the product to the consumer.

We’re also asking ourselves where can we leverage Herman Miller distribution routes if you well, trucking routes to be able to combine in a way that let’s us drive greater efficiency on logistics amongst us. So that an example.

Certainly, we’re also looking at places where as we continue to build things out, where can we greater leverage a particular facility, Greg has been super focused on where he can find leverage from in sourcing. So, it’s a host of things. We’ll have more to talk you about at as we finish up some of that planning in the next three months or so..

Okay. I’ll leave it there. Thank you Brian..

Your next question comes from the line of Budd Bugatch with Raymond James. Your line is open..

Good morning. This is David [ph] on for Budd. Thank you for taking my question. Jeff, I was hoping you could provide maybe your expectation of the headwind from steel pricing you'd expect to see in the upcoming quarter. I think you mentioned it was about $3 million of pressure this quarter.

We've seen steel ramp back up or move higher in price since then? Any thoughts there?.

Absolutely yes, so a little additional commentary, steel pricing actually was a little better in the second quarter than we had initially thought with our guide. So that ended up being a bit of positive. But to your point, David, we’ve seen a tick back up.

Our expectation was implied in our guidance is a $4 million year-on-year headwind at the gross margin level. Now bear in mind that’s at a lower top line, so you adjust for that if you will and keep that in mind, but above $4 million..

Okay. Thank you.

And what’s the normal seasonality on gross margin in the third quarter based on the lower plant activity you mentioned? Can you quantify that?.

Well, it has moved around a little bit year to year, in some cases due to things like movement, incentive bonus --incentive compensation accrual and experience with medical claims, so those can be noise factors in the gross margin.

I would tell you generally when you move from Q2 to Q3 you see a negative impact, a modest negative impact from loss of productivity, because the factories -- in December we tend to have pretty good flow through in the factories and we tend to see just a seasonal depth in January and early February.

And I think I alluded to 20 to 30 basis points would not be an unusual or unreasonable expectations from that kind of an impact..

Okay, great. That’s really helpful.

And, finally, last question, on the negative impact from energy in the energy markets, when do you see that? When do you see yourself starting to anniversary that or move past it? When does it go from becoming like you had mentioned a 300 basis points headwind roughly in orders I believe, to no longer being that much of a headwind and maybe even just flat year-over-year?.

Dave, its Brian, I think we should be for sure about the end of this fiscal year we should have it fully anniversary. I think some of them are more recent pricing action in the oil market will tell you that probably there are signs of life in those regions, although nobody seen it fully yet.

So I think for us by the way lot of times we don’t even – we don’t think about this.

One of things in retrospect that made this quarter comparisons as we look outside, very difficult, its not only were we up 10% last year in the second quarter when the industry was up 1% to 2%, we also last year not only we’re up 10, we’re up 10 with the loss of a very large order from the prior year, so that number last year was really, really big beat kind of difficult comparison.

I think that’s may, we probably under estimated the impact of that as we came in to the quarter a bit, and we’re looking at what order entry levels were. So I think as we get to the end of this fiscal year we should be beyond that comparison..

Yes. And this is Jeff. One little bit of color on that. Just to make sure that we’re clear. The impact of the relative weakness we found in the central region of the U.S.

that I alluded to, certainly a big driver of that is the energy sector, but don’t read that as it was purely the energy sector, a lot of what we’re seeing is its kind of tangential or some spillover effect into just general business activity into some sectors that are adjacent to energy but maybe not -- they may not fall right into the energy sector from a classification code perspective, so I think it just spill over effect of that across the region when you get into the areas like Houston and Calgary, clearly energy sector big driver, but elsewhere, the Great Lakes region, Ohio Valley and so forth we’ve seen lower activity and I think its largely somewhat related to energy, but not necessarily all within that sector, if that makes sense to you..

That does. Thank you. Thank you very much for taking my questions..

Yep..

Your next question comes from the line of Kathryn Thompson with Thompson Research Group. Your line is open..

Hi. Thanks for taking my questions today. Just wanted to close the final loop on higher steel costs. In the past, last quarter you said the gross margin impact was about $5 million on a year-over-year basis, sequentially about $1.5 million increase.

But also you were managing some of the pricing flows because you had locked in pricing for a period of time, which impacts how that margin eventually flows through.

But understanding that prices peaked in Midsummer and have been coming down but have been inching back up, what was the dollar impact in the quarter just reported? I know you gave some outlook for Q3, but how do you anticipate managing that more theoretically once we go into next calendar year, particularly because we don't necessarily see a huge amount of abatement and cost and we see the higher overall structurally next year?.

No. Good morning, Kathryn. This is Jeff. So, let me try to parse your questions here a little bit. First of all to answer the impact on the quarter, about a $3 million year-on-year drag at the gross margin level from steel pricing.

As I mentioned in my response earlier that was a little better than what we had thought coming in with our Q2 guidance that help – so we got a little bit of help from just a lower, I think some of that’s product mix driven as much as anything. Our guide for Q3 is an expectation as I said around $4 million.

You’re right that we have somewhat of a natural hedge in pricing with respect to how we lock in pricing. We do a trailing three months average pricing and we lock-in with suppliers and then it reset in three months increments.

So, we never feel the immediately effect that will ramp up in steel as we’ve talked in the past that tends to layer in as pricing get reset.

And we are constantly working with our supplier to as Brian alluded to what we’re trying to do on the sales front, we’re also doing it on the engineering front try to value engineer cost out of product and find other ways to offset through efficiency.

And as I said we’ve done a good job of achieving savings, that continues, but the pricing dynamics that I just describe that will be subject to those as we move into the first half of this next calendar year, and depending on where steel goes that will be effective. That’s why we’re moving ahead with the plant price increase..

Would it be feasible to have multiple price increases in order to manage higher costs next year?.

Kathryn, it’s Brian, yes, I would tell you it’s unusual to do more than one in a year. We’ve done it from time to time when we’ve seen something move dramatically.

The issue is -- remember this isn’t like consumer setting that you just reduce -- increase prices and they are up tomorrow morning, you have to go back though lot of your large customers and renegotiate contracts. That’s not an easy thing and it takes a lot of time and it takes a lot of selling capacity.

So you want to be very, very, careful when you do it. I would say what you probably do more likely is believe that the industry would all look and I think this goes to Matt’s question earlier, the industry is in total would start to say, wow, we’re going to have to also moderate discounting to be able to offset some of that.

So I think you play it in a couple of different ways, right. You look for places where you can move steel commodities where you can. You’d look to do some value engineering.

You certainly would ask when is my next price increased is going to be and probably on that front you’ll be trying to get a higher capture rate by not driving as much discounting and loosing some of what you do on --at the list level..

Okay. That’s helpful.

Appreciate your color earlier on your efforts to cut operating expenses and some fundamental changes you’re working throughout the company, but how much of what you discussed are more permanent cost take-outs or structural changes versus things that were done in a quarter just to response slower top line?.

There was a combination in the quarter and I would say, we got started later in the quarter. Its one of things we’ll be focused on here in a early part I would say is just managing it, giving the level of top line and beginning to figure out how do we implement some of the longer terms changes that we expect to put in place.

I don’t think we’ll see most of those impacts of third quarter, they’ll probably be more as we get into the fourth quarter and more likely into the first quarter and next year.

And I think those will be a combination of just tighter cost management to be frank and things that we can do sort of mid-term and then something that will be more, will take multi-months to implement because will have facility things to do in those kind of changes which usually take a little bit longer, but you tend to hold on to them longer..

Okay, thanks.

And then post-election, could you give any type of color in either daily order rates or overall trends in the U.S.? Also are you seeing any optimism in ELA at least to have U.S, elections behind us?.

Well, its interesting – this been an interesting period, I think, Kathryn watching -- I’ll say it from watching project activity and what feels like a fairly robust period with customer engagement and what we believe is actually an improved pipeline of things that we believe we won, but we’ve not seen orders for.

Immediately following the election, the week of the election, I know that this is interesting having both businesses now we saw a very significant drop in order activity immediately following the election in the consumer business.

Now, the good part is that came back pretty strong when we got into the Herman Miller sales and we’re actually able to get to largely to the forecast we had for the quarter in the consumer business. So the good news is it came back. Of course the contract business has a longer reaction period by the way both up and down, right.

I think – this is my gut. I can’t prove with data, but listening to other competitors talking about things that are dating out later from when they were normally expect it from an order perspective, we’ve seen a longer window from the point of a win to when we have an order.

My suspicion is that had something to do with the lot of noise in that two to three week period around the election. It’s hard to tell right now because now we’re into holiday period which also creates a level of noise which makes anything look a little complicated to pay attention to.

If you back up and look at it from the broad perspective on the other hand, like I say, we’ve seen good customer what we call contract activation, which mean, we’ve had some sort of a win with the customer, might be a win of a relationship, might be a particular project, might be for a just a specific thing that they want, but we’re setting up a new contract for that customer.

Activations have actually been quite good especially on the west coast and the east coast, little softer in the center of the country as Jeff mentioned, but overall pretty good. Customer visits have been up, which has been interesting.

And like I say, the funnel of things that we believe we have a 75% or greater potential for order entry in the next quarter actually higher than they were year ago, yet we’ve seen softness in order entry, that makes me believe that there is some level of I don’t know if the right word is dislocation, but certainly some impact from the election.

Of course now what you don’t know is it seems like most of what’s being talked about from a tax and regulation perspective, should buoy business confidence in the U.S. I don’t know whether there will be any delayed impact because there are some of these talks about things being fully tax deductible for capital goods at purchase.

That should actually be good for us, it should be good for the industry, will that cause some delaying and when people do things is an interesting question, but typically if you are already in a process of building a building or moving you know you can’t really adjust that very easily based on facts, right..

Yes, understood..

I think on an ELA perspective, Europe certainly is still jittery particularly where we do a lot of business in the U.K. about what is going to be the impact on the Brexit in terms of bank staying in the U.K.

we are very much trying to be nimble about where our people and our resources are so if those opportunities are greater in the continent, are we better aligned to go do that. So our teams are thinking about that every day of the week.

I think the big question right now globally is going to be as we put in place what appear to be pro business changes, what is the reaction to other folks, to those pro business changes. I feel good that Herman Miller is largely set up in a way that we make and buy things locally within the regions in which we do business.

That’s not completely true, but it is largely the case and because of our operating model, we are pretty nimble about resourcing things where we need it to be, because we rely so heavily on our supply base.

So in general, I think most of the -- if I step back and look at what’s being talked about, I think most of it is actually positive for us assuming there is no backlash against the American goods in some of those countries..

That's very helpful. Thank you very much..

I am showing no further questions at this time. I would now like to turn the conference back over to Mr. Walker..

Thanks for joining us on the call today. We appreciate your continued interest in Herman Miller and look forward to updating you next quarter. On behalf of all of us at Herman Miller, I want to wish you and your families a wonderful holiday season. Have a great day..

Ladies and gentlemen that concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect..