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

Kathryn Thompson - Thompson Research Greg Burns - Sidoti Matt McCall - Seaport Global.

Good morning everyone, and welcome to this Herman Miller Incorporated First Quarter Fiscal Year 2018 Earnings Results Conference Call. This call is being recorded.

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

These risks and uncertainties include those risk factors discussed in the company's reports on Form 10-K and 10-Q and other reports filed with the Securities and Exchange Commission. Today's presentation will be hosted by Mr. Brian Walker, President and 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 thanks for joining us today. I'd like to start with a brief overview of our quarterly results followed by highlights of the progress we made during the quarter against our key strategic priorities.

I’ll close with the view of the current economic backdrop before turning over to Jeff and Kevin for more information on the financial results including the change we announced earlier this week to our segment reporting structure.

In short, the quarter reflected better than expected demand patterns as organic order growth of 8% over the prior year was a clear highlight and we finished the quarter with organic backlog up 8% over last year. Adjusted earnings per share of $0.57 met our expectations for the quarter.

Our North America ELA, and consumer segments all delivered strong order growth for the quarter.

In addition to the ongoing work to transform our real estate footprint in the consumer business by increasing selling square footage, our consumer business also delivered its fifth straight quarter of comparable brand growth as our efforts to accelerate revenue growth across our consumer sales channels gain traction.

Gross margin was near the low end of our expectation for the quarter. This was driven in large part by a strong demand for some of our more capacity constrained product categories, namely height adjustable tables and laminate storage. As we work to keep pace with demand, we incurred additional overtime and outsourcing costs.

Our operations team has done a terrific job responding to the challenge and while some of these pressures are likely to continue in the near term, we are moving quickly to add capacity in key areas of operations. We also incurred higher than normal warranty expenses this quarter.

These expenses impacted the profitability of each of our segments, but had a disproportionately large effect on our specialty and consumer segments given their relative size.

Despite this, I am very pleased with the way in which our teams across the organization have managed overall operating expenses, which helped offset the gross margin and warranty pressures we experienced in the period.

Our cost savings initiatives is one of the key areas of strategic focus and we’re making good progress towards our ultimate savings goal. Now with that overview of the quarter, I would like to update our progress on our five key priorities.

These priorities are aimed at positioning us for the trends we see in our customer base, distribution channels, technology, and the changing nature of work as we focus on driving sustainable profitable growth for the long-term.

As a reminder, the five strategic priorities that we are focused on across Herman Miller are; first, scaling our consumer business; second, realizing the next generation of our living office proposition; third, leveraging our dealer ecosystem; fourth, delivering on our cost and improvement goals; and last, the continued commitment to product and service innovation.

I would like to focus on specific highlights of progress during the quarter on these priorities. As we mentioned last quarter, we have brought in fresh outside perspectives to challenge our thinking about ways to drive profitable growth as we scale our consumer business.

As a result of the first phase of this work, we have growing confidence that we can meet our goals for profitable growth in this business and are targeting specific work in the areas of pricing, strategy, sourcing, logistics, and e-commerce.

There is more work to do as we create detailed implementation plans, and this effort will result in short-term costs as we develop these next steps.

That said, the path forward is coming to view and we have growing confidence that this work will contribute meaningfully to achieving our stated profit improvement objectives, namely driving consumer operating margins toward a 10% level. We will have more to share on upcoming quarters as we make further progress.

Our ongoing real estate transformation to expand the footprint of design within reach retail studio is progressing well. In total, we expect to add an incremental 60,000 square foot of selling space by the end of May.

As sales of the new and expanded studios ramp up over the first 12 months to 18 months of operating, their profitability will increase as they mature and help drive operating margin expansion.

Despite our growing confidence in the long-term profit potential of our consumer business, the operating results this past quarter did not meet our expectations. This was due in part to the product warranty costs I mentioned as well as expenses arising from bankruptcy of one of our past suppliers.

Aside from these transitory issues, it is also important to point out that we currently have seven new studios, plus a new West Coast outlet that are in the early maturing phase.

While this remain a drag in earnings in the near-term, the consumer segment has a double digit revenue growth opportunity that we believe can increase operating margins for this segment from 2% last year to at or near 10% over the next three years.

In addition to the profitability improvement initiative and real estate transformation continuing to increase the mix of higher margin exclusive product designs and driving growth through our catalog contract and digital channels will also support this growth opportunity.

As we work to realize the next generation of Living Office framework, we have been focused on adding new product and technology solutions in addition to new research highlighting the benefits of applying these concepts.

As a part of this effort, bringing Herman Miller quality and innovation to a broader range of price points will create new volume opportunities for our business. The recently launched Versus task chair and a number of new desking products in the pipeline reflect product categories that we saw particular opportunity in to drive sales growth.

While still in the early days, our live OS technology platform makes furnitures smart by providing robust space utilization data as well as wellness benefits and enhanced user experiences. The new program has strong initial momentum with 2 beta installations since June and several more customer sites scheduled to install in the coming months.

The platform has an active sales pipeline, particularly with large corporate customers that seek to better understand how their spaces are being used. The live OS platform will grow over time with a smart version of the remastered Aeron chair and meeting room sensors being developed for launch in the second half of the year.

These will provide further data insight for real estate professionals along with enhanced comfort and personalized experiences for people during their workday. Moving to our cost initiative, we are making solid progress on our target of gross annual savings of $25 million to $35 million by fiscal 2020.

During the quarter, we implemented additional actions, and we estimate our gross annualized savings run rate today is approximately 15 million.

Looking ahead, this effort will not only help offset the potential for wage or material inflation and fund a number of key growth initiatives, but ultimately this initiative plays a key role, and our goal of increasing consolidated operating margins above 10% over the next three years.

Finally, we are advancing toward our goal of fully leveraging our dealer ecosystem. To simply put, increase our share of wallet.

Over the last few months, we have enhanced our order fulfillment capability enabling our dealers to more easily order and specify products across the entire Herman Miller Group of brands, including key contract focused products from design within reach.

The progress we have made in this area sets the stage for additional work planned in the months ahead aimed at further improving our digital specification tools for dealers. With that update on our strategic priorities, let me provide some specific points about the current macroeconomic picture for our business.

While order levels for the North American contract industry remains choppy for month-to-month, we saw a clear improvement this quarter in both the pace and consistency of order patterns across much of our business.

This is encouraging and appears consistent with what remains a fairly positive economic picture overall, supported by positive data around confidence measures, service sector employment, architectural billings, and non-residential construction activity.

While uncertainty persists around the US administration's timetable and approach, tax reform has the potential to be a tailwind for our business through higher employment levels and increased investment spending.

The devastation from the recent hurricanes and earthquakes in North America has a potential for near-term disruption in the impacted regions as they focus on recovery. That said these events have little to no impact on us for the first quarter.

None of our dealers in those regions sustained significant damage to their physical spaces, their people are safe, and relative to the recent hurricanes the dealers have resumed operations. On the consumer front, Design Within Reach has studios in Houston, Miami and West Palm Beach that were impacted by the Hurricanes.

Here is while our people are all safe and none of the studios sustained significant damage and have already reopened. The concern is, of course the impact of businesses disruption as the surrounding areas undergo the clean-up and rehabilitation phase.

Like many in the retail space there may be a boost in demand that comes out of this as customers receive insurance settlements and begin the rebuilding process. Both for our dealers and retail operations there is potential that we could see some near-term demand impact as businesses and consumers begin their rebuilding process.

Given the level of uncertainty tightness to this issue, we have provided a broader range for Q2 revenue on EPS guidance than we typically provide.

Relative to the macroeconomic future for North America Consumer space, improved Consumer spending, low unemployment, strong equity markets, historically low interest rates, and limited unsold home inventory combine to provide a positive consumer environment.

While the picture is fairly stable globally, the ELA segment will have to deal with pockets of disruption in some areas, including navigating Brexit, softness in various oil producing regions, including the Middle East, and continuing uncertainty of the geopolitical climate surrounding North Korea.

Encouraged by the strong consolidated demand levels this quarter, we will continue focused on executing our strategic agenda for Herman Miller. We see the profitability improvement potential on our consumer business and have identified the areas that will release that potential.

Our five key corporate priorities will guide our efforts as our multi channel business continues to deliver leading designs and innovations to new audiences virtually everywhere in the world. With that overview, I’ll turn the call over to Jeff Stutz to provide more detail on the financial results for the quarter..

Alright, thanks Brian. Good morning everyone. So, before I begin I want to cover some changes to the way we report our business results across each of our business segments. Effective in the first quarter, we moved our Nemschoff subsidiary out of the North American segment and into the specialty segment under the leadership of Steve Gane.

This change was made to better leverage the unique skill sets and capabilities of our specialty business teams, particularly in the areas of craft wood and upholstery manufacturing, and also provide a strong fit for this segment's focus on the architect and design community.

In addition to this move, we’ve refreshed our methodology for allocating functional SG&A expenses to the business segment. Our business has changed significantly over the past few years and this change better reflects the utilization of these services across our Herman Miller Group of businesses.

We’ve also identified a pool of corporate support cost that will no longer be allocated to the reportable business segments. Rather these costs will be tracked and reported as corporate unallocated expenses.

This change to more closely aligns to industry practice and provides a better reflection of how we will measure and manage our business going forward.

And finally, we’ve expanded our supplemental disclosure information to include gross margin results for each segment to help investors better understand the financial profile across our business segments.

Given these changes, we filed an 8-K earlier this week that provided a restatement of our segment results by quarter for fiscal years 2016 and 2017 in order to be comparable with this new approach. With that bit of housekeeping out of the way, I’ll now cover the results for the first quarter.

Consolidated net sales in the quarter of $580 million were 3% below the same quarter last year. As a reminder, the first quarter of fiscal 2017 included an extra week of operations. In addition, during the quarter, we made a change to our standard customer shipping terms at DWR.

This change impacts the point at which revenue is recognized on product sales in general moving it to the point of shipment rather than delivery.

The effect of this is purely one of timing, but the change this quarter resulted in approximately $5 million of revenue being recognized that would have otherwise been deferred into Q2 under the previous terms.

On an organic basis, which excludes the impact of this change in terms, as well as last year's extra week foreign currency movement and dealer divestitures, consolidated net sales were 4% higher than last year's level. Orders in the period of $595 million were flat, compared to the same quarter a year ago.

And on an organic basis orders were 8% higher than the first quarter of last year. Our backlog last year included approximately $12 million in orders related to dealers that have subsequently been divested.

Excluding the impact from the dealer divestitures, the ending backlog for the quarter was 8% higher than last year's level, which as Brian highlighted gives us a nice tailwind that we enter Q2. Within our North American segment, sales were $329 million in the first quarter, representing a decrease of 5% from a year ago.

New orders were $335 million, reflecting a slight increase from last year. However, on an organic basis, we posted year-over-year revenue growth of 3%, while orders were 9% higher than the same quarter last year.

Higher order levels during the quarter were led by medium and large size projects noting in particular that we saw a marked increase in large projects from what we had been seeing in recent quarters.

Sector results showed fairly broad based growth led by communications, wholesale, and manufacturing, partially offset by lower demand in business services, pharmaceuticals, and computer equipment.

Our ELA segment had a relatively slow start to the fiscal year from a revenue perspective reporting sales of $93 million in the first quarter, a decrease of 4% compared to last year on a GAAP basis, but organically sales were up 3% in the quarter.

New orders totaled $109 million, which is down 1% from last year on a reported basis, but up 7% organically. The year-over-year order growth on an organic basis was driven by strong activity in Latin America, Australia, and Europe, partially offset by lower demand patterns in the UK, Middle East, and China.

As mentioned earlier, our specialty segment now includes the results of our Nemschoff subsidiary. Sales in the first quarter within our specialty segment were $75 million, a decrease of 5% from the same quarter last year. New orders in the quarter of $75 million were 7% lower than the year ago period.

On an organic basis, net sales were 1% higher, compared to last year, while orders decreased approximately 2%.

The decrease in orders was primarily due to year-over-year declines at Geiger in the face of a large project reflected in last year's order patterns, and partially offset by year-over-year growth in orders for Nemschoff, Maharam, and the Herman Miller Collection.

Profitability within the segment was lower than last year tied to a number of transitory factors in the quarter. This segment bore a relatively large share of the warranty cost that Brian referred to earlier.

Nemschoff also experienced a supplier quality issue during the quarter that negatively impacted their sales and the operational productivity in the period.

The consumer business reported sales in the quarter of 83 million, an increase of 10%, compared to last year, driven by strong growth across our studio, catalogue, e-commerce, and contract channels. New orders for the quarter of $76 million were 7% ahead of last year.

On an organic basis, which excludes the impact of the change in shipping terms on net sales and the extra week last year, sales were 11% higher than Q1 of last year, while orders improved 13%. On a comparable brand basis DWR revenues for the quarter were up 12%.

Related to consumer operating earnings for the quarter, we estimate the additional revenue resulting from the change in shipping terms increased operating earnings by approximately $1 million in the quarter.

While operating earnings for this segment continue to be limited by the rollout of new studio locations and other investments that we believe are necessary to support our longer term growth potential. As Brian mentioned, we see a path where operating margins near double-digits for this business over the long-term.

During the quarter, we estimate the unfavorable impact to operating earnings related to this drag from new studios that have not yet reached full maturity with approximately $2 million. Additionally, warranty cost and the write-off of a claim against the supplier negatively impacted segment profitability in the quarter by approximately $1.5 million.

Consolidated gross margin in the first quarter was 37.4%, which was 100 basis points lower than the first quarter last year, and near the low end of our expected range coming into the period. As we outlined in the earnings release, we saved some capacity challenges in the quarter, given strong demand for certain product categories.

This resulted in additional labor and outsourcing expenses necessary to meet our customer delivery commitments, a factor that we estimate reduced our Q1 gross margin by approximately 20 basis points. In addition, we continue to feel the impact of higher steel prices and experienced lower production leverage in the ELA and specialty segments.

Operating expenses in the first quarter were $166 million, compared to $174 million in the same quarter last year. The prior year included approximately $2 million in expenses related to dealers divested since that time. After adjusting for those items, operating expenses were $6 million below last year due to a variety of factors.

The primary factor was the prior year reflected an extra week of operations. As Brian noted, we also made good progress on our cost savings initiatives this quarter, which contributed to lower operating expenses.

We also benefited from favorable claims experience for healthcare benefits and had lower incentive compensation levels, compared to last year. This favorability was partially offset by higher warranty cost, increased occupancy, and staffing costs related to new DWR studios, and investments and growth initiatives.

Next, our teams have been very focused on managing operating expenses across the organization and it is making a difference. To be sure, the walk toward our ultimate goals for profitability will not be an even one, as required investments for growth are not necessarily linear with our cost reduction plans.

However, we feel very good about the progress our teams are making and we feel we are on track with the cost reduction plans we’ve previously outlined. Restructuring actions involving certain workforce reductions that were announced in the first quarter resulted in a recognition of severance and outplacement expenses in the quarter.

We also recognized other charges related to the consulting fees associated with our profitability improvement initiatives for our consumer business. On a combined basis, these amounts total $2 million in the first quarter. On a GAAP basis, we reported operating earnings of $49 million in the quarter.

Excluding restructuring and other charges, adjusted operating earnings this quarter were $51 million or 8.8% of sales. By comparison, we reported operating income of $56 million or 9.4% of sales in the first quarter last year. Effective tax rate in the quarter was 30.5% and this compares to an effective rate of 32% in Q1 of last year.

Finally, net earnings in the first quarter totaled $33 million or $0.55 per share on a diluted basis. Excluding the impact of restructuring expenses and other charges, adjusted diluted earnings per share in the quarter were $0.57, compared to $0.60 per share in the first quarter last year.

And as a reminder, the first quarter of last year included the extra week of operations and we estimate that extra week contributed approximately $0.05 of earnings per share to the first quarter in that period. With that I’ll turn the call over to Kevin to give us an update on our cash flow and balance sheet..

Good morning everyone. We ended the quarter with total cash and cash equivalents of $80 million, which reflected a decrease of $16 million from last year.

Cash flow from operations in the period were $19 million, compared to $30 million in the same quarter of last year, primarily due to a one-time contribution during the first quarter of $12 million to increase the funded status of our UK pension plan. Capital expenditures were $25 million in the quarter.

Cash dividends paid in the quarter were $10 million. As a reminder, last quarter we announced a 6% increase in our quarterly dividend rate that will be paid beginning in October. This increase brings our expected annual payout level to approximately $43 million. We also repurchased approximately $11 million worth 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 $388 million at the end of the quarter, which includes $150 million set aside to repay the private placement notes that are due in January 2018.

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 now turn the call back over to Jeff to cover our sales and earnings guidance for the second quarter of fiscal 2018..

All right, thanks Kevin. We anticipate sales in the second quarter to range between $590 million and $620 million.

While the midpoint of this range reflects our best estimate for the period, we are providing a wider than normal range for sales and earnings this quarter to reflect increased uncertainty resulting from the recent storms in Texas and the Southeast.

We estimate the year-over-year favorable impact of foreign currency on sales for the quarter to be approximately $4 million. On an organic basis, adjusted for dealer divestitures and the impact of foreign exchange translation this forecast implies a revenue increase of 6%, compared to last year at the midpoint of the range.

We expect consolidated gross margin in the second quarter to be between 37.5% and 38%, operating expenses in the quarter are expected to range between $172 million and $176 million. And finally, we anticipate earnings per share to be between $0.55 and $0.61 for the period. And this assumes an effective tax rate of 30.5% to 31.5%.

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

[Operator Instructions] Our first question comes from Kathryn Thompson with Thompson Research. .

Hi, thank you for taking my questions today.

Just following up on specialty, wanted to get a little bit more clarity on the order decline and was the higher warranty cost the primary driver for the margin decline in that segment?.

Kathryn this is Brian. I will start with the revenue discussion and then I’ll let Jeff talk a little bit more about the warranty impact. We had a big quarter last year in the first quarter for both Nemschoff and for Geiger that was, I would say, largely project related on the Geiger side. Nemschoff, same thing largely big projects last quarter.

Those businesses tend to bounce around a little bit by that. Nemschoff was also impacted a bit this quarter on the revenue line by some of the supply chain challenges we had, particularly the foam supplier that caused them to be a little bit late with some shipments. So when you add those two things together, that was the majority.

I would say the textile side was down a little bit too year-over-year. So, overall there was just some softness across that business, the collection side of it did really well. We feel really good on the order front, in particularly in Geiger that had a really good quarter in orders, can see really good activity as we look at the second quarter.

That’s also true in the collection. Nemschoff I would say we are going to have to see what happens as we get some of these challenges behind us on the supply side. And Maharam, we have a number of really great ideas in progress to expand the breadth of the textile price points we cover, a number of new products which are getting good reviews.

The leather business is just ramping in that business and we are doing pretty well on the rug side. So, we feel good about the balance of the year at Maharam, although there was a little bit of a light start to the year to be Frank, and then like I say, really good momentum at both Geiger and the collection.

So, we’ve got work to do in Nemschoff to be Frank. We’ve made a number of leadership changes in that business in the first quarter that were needed. We’ve done some retooling of sales leadership there.

We think those things combined, we’re getting their product pipeline ramped up will be important for that business, but we have got work to do in that one..

And then Kathryn this is Jeff.

To your question on segment profitability for the specialty group, there were really two fundamental issues I alluded to in my prepared remarks, but if you quantify it - there was warranty, which we talked about, but then there was a fairly significant supplier issue that we think we’ve got our arms around at this point, but it definitely impacted our Nemschoff subsidiary in the quarter.

The supplier issue was actually the larger of the two. The combination of those, however, was about $1.7 million on the period. So, if you normalize for that, you kind of get more to a 4.4% operating income.

Now that’s still lower than last year, but as Brian pointed out, we had particularly tough comps in a couple of those businesses and much higher volume as a result that drove, and then within that, I think we had a little less favorable channel mix across our businesses this quarter than a year ago. That moves around period-to-period.

So that will be the big driver..

Okay great, thank you.

And then on pricing, it seems to be a theme within the industry, discounting and just overall pressure as you see a greater preponderance of ancillary type products becoming more competitive, are you seeing pricing pressures and other regions outside the US or maybe just focus a little bit more on what you’re seeing in pricing in general company-wide? Thank you..

Yes. I would say, Kathryn, this is always a very competitive industry on pricing, especially on the contract side because you are often bidding project-to-project.

I don't think by the way I would say it’s more a queue in ancillary areas, in fact I would argue some of those newer areas or less driven by price overall because you don't tend to play in as much bulk often.

So it may be more than it used to be, but I wouldn't say that is where you see the significant price pressure typically is on the workstation side. I don't think pricing this period got significantly different than what it’s been in the past. In fact I would call it fairly stable in our view.

It is competitive, but it is not more competitive than what it’s been.

I do think you see a lot of folks, including us trying to figure, trying to make additions to their product portfolios be that through acquisitions, be that through internal development or alliances or whatever to broaden the breadth of their offers to cover more of the new types of settings that are out there, and/or to broaden the price points in which they cover as we are continuing to figure out how are we going to continue to get the share of wallet from customers across their floor plate or of dealers.

I think at one level, I think we were a bit ahead of that curve when we made the moves; we made with the collection a number of years ago.

The addition we made with not one, the acquisition of DWR and to be frank the addition of Nemschoff a number of years ago, so we have been playing towards those themes for four or five years that the work isn’t done and it won’t be done that we have to continue to rotate into those new areas, but I think I would say those are things we saw coming as we rolled out the living office.

That is actually one of the reasons we began to try to even talk to our own folks about thinking about the office is having a wider variety of settings and types of places that people go, and then aiming both our development engine and our M&A engine at making sure we could fulfill those needs. And we feel pretty good about where we are at there.

There is always more work to do, and certainly making sure that we’ve got kind of a full bell shaped curve of price points that we can play at in almost all of the areas that we play is going to be important going forward..

Okay great, thank you.

And then could you give a little bit more color on the strong growth in consumer and any color on areas either it be a geographic product or is it just really reaping the benefits or the changes that you have been ongoing with DWR?.

I think the growth in the consumer business, which was quite strong and I think the team has done a really good job. I am getting the revenue line moving again since the hiccups we had. I guess now two fiscal years ago when it hit us really started right about this time two years ago.

The drive if you look underneath the volume, first of all we’ve launched, I think the number Jeff is around 100 new products in that business, which we are seeing really good day take up of new products. We of course have really been hitting the mark in terms of getting new studios open last year. We opened a number of new studios this year.

That’s certainly helping.

Probably the biggest standout if you look at where we were two years ago and where we are today if you set aside the disruption that happened with ERP system is actually the greater productivity that we’re getting out of our catalogue and how that is also feeding into the web and because we’re seeing significant growth online, in fact in one level the online segment of the business is growing faster now.

If you look at especially the unit level than what’s coming through the studio that we’re - because we’re really are an omni-channel model, it’s hard to tell, you know they come into the studio in order, but I would say online is growing quickly and we think there is room to continue to accelerate that.

The last thing that I would point to is the addition and focus of DWR and the contract channel has also been a help and we’ve seen significant growth on the contract side.

Some of that being through Herman Miller dealers, I would say we are in the early innings of that, that’s also DWR's own contract focus, whether that’s hospitality and those kind of places that they also play.

So it’s really a combination of four or five things that have worked quite well on the top line and like I said, we think the work we have done around e-commerce we think there is more work to be done inside of DWR.

We also well in this next quarter be implementing the new DWR e-commerce platform for hermanmiller.com, which we are seeing significant benefits from that new platform because it’s mobile, works much better, and I believe the target consumers and connect - and make sure that we would eliminate the amount of drop cards in those kind of things.

It’s just a much better platform. So we're really excited that we’re going to have that platform up and running, I think it’s about 30 days from now, we will cut over certainly in time for the Herman Miller online sales.

So, really good work by the team and I think the work that we’re doing with the outside firm is giving us a lot of confidence of additional levers that we can pull, both levers in terms of expanding the price points we cover, one of the things we talk about is a segment we call HENRY, those are our high earners not rich yet and how do we get to them, but additional things we think we can do around the price positioning of the total assortment working harder in a supply base.

We think those things can actually drive additional revenue and better profitability. So we're not done yet, I wouldn't call it - we wouldn't declare a victory, but certainly from where we were 12 months ago our confidence level is increasing that we have got the right folks, we're working on the right things and we can see the next set of steps..

Great. Thank you very much. I appreciate it..

Our next question comes from Greg Burns at Sidoti..

Good morning.

Just in terms of the order growth, could you give us a sense of - particularly in North America, is it coming from a handful of large projects, is it more broad-based, just where is that demand coming from?.

I would say it’s generally broad-based and now that we certainly saw, we didn’t have any, in fact there was an area that was down, I would call the super large project with an area that we didn't see nearly as much of as we saw a year ago or even two years ago. So, I would call it is more in the mid-size to small projects as where we are seeing it.

I think Kevin if I remember it from the data project activity actually percentage of project business was actually up this quarter, compared to last year that’s correct. So projects were up, but I would say they did not range into that, kind of very large, which we typically talk about as projects above 5 million.

I think that category overall was actually down a bit, if I remember the data, is that correct Kevin?.

I think that’s right. The 1 million to 5 million was strong..

Okay thanks.

And looking at the guidance for OpEx for next quarter this was like, it’s going to be up sequentially, is that seasonal factors or is it just increased investments on your part?.

Hi Greg this is Jeff. I’d say really it is two things. Number one, you’ve got, obviously our guy calls for quite a bit higher top line and with that we have got volume-related increases.

I would say in total, the volume related increases, and I would point to variable selling and incentive cost account for about $4.5 million of the increase, and the remaining volume related is really investment at the consumer level that are somewhat seasonal, which are seasonally high period for that business.

That increments for about $2 million of the total increase. And then above and beyond that we’ve got some - net of our cost saving initiatives we’ve got some growth investments.

Some of that is initiatives that have been planned for this time of the year, some of it candidly is timing spill over from Q1 into Q2, but I would - you might call that another 1.5 million, I think that accounts for the bulk of that increase.

Now I will tell you and I would be remiss if I did not say, we give a range on operating expenses for a reason and clearly we’ve done a nice job the past three quarters really doing I think a good job managing cost towards the lower end of the range we’ve been given.

That’s our goal and we’re not going to stop with that focus, but those are the categories that account for that increase..

Okay, thank you.

And then lastly in terms of the margin potential in the consumer segments, where can that go just based on getting the existing studio footprint of the maturity versus some of the incremental initiatives you have in place with the outside consulting firm and what you plan to implement? So I’m trying to understand like, what will just naturally accrue to the bottom line of that segment based on kind of the maturity of the studio footprint versus kind of what you can drive incrementally your over time?.

So Greg, this is Jeff again.

I would say it is a little difficult to answer just from the standpoint of studios because obviously we’ve got growing elements that business across other channels, Brian mentioned contracting e-commerce, but I would say is that within our existing studio footprint in combination with those other channels, I think you could see that growing 7% to 8% range up income over time now.

We’re making, obviously incremental investments in additional studios, additional square footage that we think can help us leverage that higher, that’s why we talk about our ultimate goal of being approaching that 10% level, but that’s how I would view the business right now given our current footprint..

Okay, thank you..

Our next question comes from Matt McCall with Seaport Global..

Thanks, good morning guys..

Hi Matt..

So, forgive me I had a few technical difficulties, so wanted to first hit North American margins, I like the new detail and trying to compare and contrast across the industry and trying to understand some of the differences, but maybe start with the operating margin, I think your 14%, 15% in North America, Brian you talked about the number of initiatives you have ongoing, but what’s the right level of operating expenses, what’s the right level of gross margin for that business? There is the potential to use that profitability to maybe drive top line or is the goal still to expand those margins further?.

I don't think our margin expansion; if we are looking at operating margin line is going to probably come from that business over time. We think we can continue to grow the top line, but it’s probably not going to come from lots of expansion at the operating income line.

The place for operating income improvement for us is really going to be focused, I think Matt largely in the consumer business, as well as in the specialty businesses. Those are the places we’ve got work to do. Certainly Greg will continue to work on efficiencies. He’s got cost savings goals just like everybody.

Part of that is, how do we continue to find ways to be more price competitive at the same time, not give up margins? So that is a lot of Greg. The objective is, how do we continue to find ways to be able to be more competitive across every place that he plays, including by the way, we know that there is going to be a lot of wage pressure.

So, we are trying to get in front of that because you can see it every day on the specialty of the direct labor side right now, where we are making a number of investments in that business over the next three years in new manufacturing equipment, some of it I would call maintenance, but a big chunk of it will also drive greater efficiency so that we can, to be frank, be able to run with fewer people that will largely be how do we not replace folks that are retiring and at the same time be able to grow volume.

So, I don't think it will be margin expansion, I think it will be growth and revenue in that business and if you could look at the other two or three segments, if we can get each of them up in that kind of 10% range that really helps us get to our goal obviously..

Okay.

Just to clarify that, the operating expense, the percent of sales will that be, Greg’s going to drive some efficiencies in the factories, but is the operating expense, I think I just did the math, about 21, 22 or so in that 21% range, is that the right percent number, is that going to remain steady so you will may be spend more there, keep that percentage unchanged and maybe drive a little bit of efficiencies that will help offset it?.

Hey Matt, this is Jeff. Let me try to take that one. So one of the things we clearly benefited from this quarter, notwithstanding some of the noise around the warranty causes that we talked about, but in total operating expenses, particularly for the North American business we are very well managed. We had some of that that was a timing element.

So, overall profitability in that segment is very strong this past quarter. We continue to expect that to be our leading profit segment for the business just because it’s the big leverage play, but ongoing, particularly as it is reflected in our Q2 guidance, you are going to see some of that timing turnaround in operating expenses.

So, I would not view our Q1 operating expense if you will burn rate, but that business has been normalized. I think if you look at overall operating profitability over the near term i.e. the balance of the fiscal year it is probably more in that 14% to 14.5% range is more of a reasonable expectation..

Got it. Okay. I am looking back the last couple of years it’s been close to 22.5, 23 operating expenses, okay, sorry [indiscernible]..

Matt let me just point out. Obviously, we’re working hard on the cost side, right. So our goal is to focus on that and drive some improvement. So don't take that comment as same as last year, but nonetheless I just want to point out that you wouldn't expect our Q1 run rate to necessarily repeat over the balance of the year for that segment..

Okay. And I don't know if Kathryn asked about price cost, but did you quantify the inflationary pressure? Did you quantify the pricing pressure, any discounting? I didn’t hear the numbers if you did, I'm sorry..

We didn’t, but I am happy to on the steel side in particular, year-on-year we felt about $3 million drag from commodity prices. I would say that as mainly steel and other metal component..

Okay, and then on the pricing and discounting?.

That was a slight loss above 500,000 year-over-year..

Okay. So, I think you said that the backlog, and I don’t remember if it was you Brian or Jeff, but backlog ex the dealer divestitures that provide 8%, the reported number up 3.6%, the revenue outlook looks to be up about 5.5%, the mid-20 had some good things to say about the order trends.

I don't know the timing of the top of my head of when the dealer divestitures anniversary, so is the 5.5% meant to be an acceleration from the backlog that was up 3.6% or deceleration from the backlog that was up 8%?.

Matt, the one thing that you always have to be careful with by the way, don't assume all backlog ships to next quarter to start with because you do get projects date out. So be careful that you don't drop too high of a correlation between those two.

I also think when you look at the range that we gave, you remember Jeff pointed out that we expanded the range out a bit with some concern which probably is almost unknowable at this point of what is going to be the impact from some of the storms.

So that pulls the midpoint down a little bit as we looked at taking, making sure that we give enough room to what account for, what could be some disruption in the Southeast and in Texas that’s ongoing in the quarter. So that could have two effects. A, it could slow some order patterns down in those markets.

It could also delay projects from being implemented as folks are trying to see as they are building actually ready now to accept furniture, right. So, I don't think we’re trying to signal acceleration or deceleration with any of that.

The one thing you do see that happens in the second quarter, don't forget is, it is one of our heavier promotional periods in the consumer business. So the second and fourth quarter tend to be the largest two quarters in that business because we have three sale periods in both of those where we typically are running to a quarter on the other.

So, I do think you get a little bit of difference in the year that the second and fourth tend to be a little bit larger and then of course the third quarter you get impacted by the holiday season. So, I did give you, I don't think I would read too much into the differences between backlog and order rates..

Got it.

Okay, just making sure - and then finally I’m going to go back to the puts and takes on the cost line, looking forward, what’s the price cost expectation and any other items like warranty expense that we should keep in mind as we progress through the year, either that will occur this year or that occurred last year?.

So Matt in terms of commodity, one of the things we do have is our comps for steel pricing are easing a bit. Our guide implies between $0.5 million and $1 million worth of pressure year-on-year. So that’s on the commodity front.

In terms of price and discounting, we don't have enough of a crystal ball to have agreed on that necessarily, so I think our assumption is something that kind of what we experience year-on-year in Q1.

Make sure I get all your question Matt, what else where you asking?.

Well I was just thinking the warranty expense was high, I don't think anybody else had that modeled, anything else that we should think about that you know about today that is either in the guidance or would be expected in the rest of the year?.

So no, clearly on the warranty and some of these supplier issues there is nothing that we see because that’s the trouble with these things is that you can't ever predict them, but nothing I would point to.

We do have some potential for impact from a change in shipping terms at the consumer business in the near-term here that is potential and Brian in terms of I don't know that you want to quantify that matter, I am not sure I can give you a number..

Yes, Matt what we’re doing is, we did a deep dive - those are one of the things we did with this outside group although we were looking at it ahead of time. We got two things going out at once, we’ve done some - we’ve changed our logistics model to further consolidate shipments. That helps us drive down cost of delivery.

At the same time, we’re making some changes on the other side to how we bill out, how we bill customers for shipping, as you know there is a lot of pressure on that as folks have gone to a lot of free shipping. One of the things we’ve done is we had a model that was more driven as a percentage of the order plus and up charge to do white glove.

Our intention is to move more to a flat rate on white glove without the percentage. We think that will more drive more people towards white glove; it will become more of a default. We believe in the long run, actually there is two things that will occur with it.

A, it will reduce the number of returns, and problems we have in shipping; and it will increase customer satisfaction.

There will be - and the question will be, how close can we match the consolidation gains to the flat rate, and how much of that flat rate can be hold on because we know a number of shipments today you’ll often work with the customer and you’ll allow the sales team when they need to make changes on what they are really going to charge the customer.

So it is a question of how much we will re-coop, that’s one that I would say, we could see a little bit of movement around in the margins, in the gross margin on the consumer side. We think by the time we implement all the other changes we have that will turn out to be not a big deal, but we could see some movement next quarter.

I don't know how to even really quantify because there are so many moving parts in there, but I will tell you if there is one that certainly we as a team are watching, it’s that one..

Okay, thank you guys..

And I’m not showing any further questions at this time. I would like to turn the call back over to Brian Walker..

Thanks for everyone for joining the call today. We appreciate your continued interest in Herman Miller and look forward to updating you next quarter. Have a great day..

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day..