Brian Walker - President, CEO Jeffrey Stutz - Executive VP, CFO & Principal Accounting Officer Kevin Veltman - VP of IR & Treasurer.

Matt McCall - Seaport Global Steven Ramsey - Thompson Research Group Greg Burns - Sidoti & Company.

Good morning, everyone. And welcome to the Herman Miller Incorporated Fourth 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.

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

realizing our vision for the Living Office; delivering on our new product innovation agenda; leveraging our dealer ecosystem; scaling our consumer business; and driving profit optimization. Let me spend a few minutes highlighting our progress in each of these areas.

Our Living Office framework for helping our customers design compelling, high-performing workspaces is a critical foundation for setting our innovation agenda and leveraging our dealer ecosystem.

In the past year, we added significantly to our research into workplace environments with a number of studies demonstrating the meaningful impact that applying Living Office concepts can have for our customers.

We also launched the new Live OS technology platform that provides real-time data insights to help individuals and organizations improve workspace performance and achieve wellness goals. Regarding our drive for innovation, 2018 was an active year for new product launches.

New products introduced over the past four years accounted for 29% of total sales for the year, well above our annual target of 20%. This quarter, we announced the upcoming launch of Cosm, a great new addition to our leading performance-hitting lineup, that will be available for order by the end of July.

We were pleased to be recognized at the recent NeoCon industry show with a Best of NeoCon gold award in the ergonomic seating category for Cosm. This is just one launch from a robust pipeline of new contract furnishing launches, 46 in total for last year, plus the number of upcoming launches that we shared at NeoCon.

Altogether, our new products have the Herman Miller and dealer sales team energized and well positioned for the opportunities ahead.

I'll begin the discussion of leveraging our dealer ecosystem with the recent announcement of our planned investment in Maars Living Walls, a global leader in interior wall solutions, focused on design, acoustics and fireproofing. Now more than ever, customers are demanding flexible environment and modular solutions for their open spaces.

Maars products will be a key part of our offering in the fast-growing enclosures category. In addition to our 48% equity stake in Maars, members of the Maars management team and select Herman Miller dealers have partnered in this investment.

In addition to Maars, we've also expanded our enclosures offering with two new product lines and an exciting alliance partnership. Prospects is a recently launched line of freestanding furnishings that help create a sense of privacy in thoughtful space delineation.

The next product called Overlay is a soon-to-be-launched system of sub-architectural, movable wall and ceiling elements, which can be used to create flexible freestanding rooms. In addition to these new products, we've recently entered into an alliance partnership with an innovative company called Framery.

Based in Finland, Framery creates a beautifully designed, high-performance, soundproof enclosures, offering customers elegant and cost-effective solutions for acoustic privacy and open plan office environments. Beyond these initiatives, fiscal 2018 was a year of accomplishment in several other areas of our dealer ecosystem effort.

The Herman Miller Elements team is helping our dealers fully understand the breadth of our offering across the Herman Miller group of brands in the fast-growing ancillary space.

In addition to the Cosm chair launch that I mentioned earlier, we also expanded our range of performance seating options with a recently launched Verus task chair and upcoming Lino chair that provides two distinct aesthetic options and have comfort, quality and accessible price points in common.

To further support our dealers, we've made significant progress this year enhancing our digital tools to make it as easy as possible for dealers to order, specify and visualize the entire product offering of the Herman Miller group of brands. We'll continue to enhance these tools with new search and visualization futures planned for the year ahead.

Finally, our recent investment to acquire a 33% interest in HAY supports our priority to scale our consumer business and is another building block in our dealer ecosystem. HAY is a Denmark-based leader in ancillary furnishings in Europe and Asia and active in both the contract and residential furnishings markets.

This transaction expands our portfolio of leading global brands and allows us to scale the consumer business by accessing a growing customer base that prioritizes both industry-leading design and value. It helps us in our efforts to target the segment we call HENRY, high earners not rich yet, with HAY's portfolio of authentic modern designs.

We also acquired the rights of the HAY brand in North America. In the first year, we plan to launch an online store, open four HAY retail locations in North America and make an assortment of HAY products available in Design Within Reach studios. HAY products will also be integrated across our contract furnishings dealer network.

Given only 4% [ph] of HAY's revenues come from North America today, we see great opportunity to bring this fast-growing design brand through a -- through our multi-channel distribution. Jeff will unpack the financial elements of the Maars and HAY transactions further in a few moments.

In addition to this important investment for the future, fiscal 2018 was a year of great progress for our consumer business. Revenues in this business grew by 12% over last year as we grew comparable brand sales each quarter and expanded our selling square footage by 40,000 square feet.

We also continue to expand our mix of exclusive products designed by modern design leaders exclusively for Herman Miller and Design Within Reach. Finally, we made great progress this year in our corporate-wide profit optimization goal, our fifth strategic priority.

Given inflationary pressures over the past year, this work is proving to be critical, and we have a number of actions we're focused on.

While I'll share more specific details in a moment, let me start with an overview of the impact of this initiative and how it is and will help us address inflationary pressures and drive improvements in operating margins.

Across the three phases of work that is in process, we're building line of sight toward achieving between $60 million and $90 million of profit optimization. Today, we've realized approximately $30 million of those annualized benefits.

Unfortunately, most of the benefits realized at this point have been offset by inflationary pressures and increased discounting.

Therefore, as we discussed in the third quarter, we have increased the scope of our efforts in the North American business, combined with pricing actions we implemented in Q3 and a planned increase in January of 2019, we are confident we can both offset the emerging inflationary pressures and achieve the consolidated operating margin goal we established for fiscal 2020.

The actions to achieve these benefits are at varying stage of development and implementation, so we'll see the benefits begin to ramp into the results over the next 6 to 8 quarters. To be clear, this will not be an even distribution as the work we started this past quarter is significant.

When we first announced this priority 18 months ago, we established a target goal for gross annual cost savings of $25 million to $35 million by fiscal 2020. For the initial phase of this work, our rationale for pursuing these initiatives was threefold. First, to provide an offset to potential inflationary pressures facing our business.

Second, free up operating headroom necessary to fund strategic growth investments. And third, improve operating leverage on our path towards achieving our 10% operating margin goal to consolidated level. Today, we've achieved approximately $23 million of these actions - $23 million of the actions we originally identified.

And we believe, $5 million is yet to be realized from our manufacturing consolidation efforts in Asia and the U.K. These actions are underway and we expect to have them completed by the end of this fiscal year. In August of last year, we began work on a focused initiative within our consumer business utilizing help from a third-party consulting firm.

We have continued to refine this work and our estimates each quarter. We now believe the ultimate benefits will range between $15 million and $20 million of profit improvement for our Consumer segment. This past quarter, we estimate that this work can enhance profitability in this segment, excluding any fees paid to the consulting firm, by $2 million.

With year-over-year operating margin expansion of 450 basis points in Q4 to 8.4% of net sales, our fourth quarter consumer results highlight that this initiative is beginning to gain traction. Ultimately, we believe this initiative is a critical element in our drive to achieve sustained operating margins in this segment of 8% to 10%.

With full year operating margins of approximately 4% this year, we still have work to do, but the trend line for this is positive and our recent performance adds to our confidence that we are on track towards achieving this goal. The action plans for this work have been fully developed and are varying stages of implementation.

So the benefits will feather in over the next few quarter. Finally, as we discussed during the Q3 investor call, in April, we formally kicked off a third optimization project. This one focused on our North American Contract business.

We've engaged the same third-party consulting firm to help assist in this effort, which consists of distinct work streams focused on a range of aspects, including pricing strategy, supply chain, logistics and reducing complexity.

While still in the opportunity confirmation stage, we have growing confidence that we can drive significant improvement in the operating performance of this business and our working target is to achieve between $20 million and $40 million of annual benefit. Of course, it will take some time before we begin to generate benefits from this initiative.

Our best estimate is we will see some benefits in the fourth quarter of fiscal 2019 with the majority to come in fiscal 2020. Of course, we'll be looking for quick wins and we'll keep you updated each quarter on our progress.

In summary, we are aggressively pursuing profit optimization to offset inflationary pressures and drive our profitability goals. Our best estimate at this point is additional inflationary cost pressures, primarily related to steel, will impact our annual results by $15 million to $20 million when fully absorbed.

Jeff will provide further perspective on the impact over the next two quarters when he discusses our Q1 outlook. In addition to these profit optimization actions, we plan to implement an additional price increase in January 2019.

We explored accelerating the price increase to earlier in the fiscal year, included [ph] this would delay the implementation of the more structural actions contained in our profit optimization plans. Having said that, we will be implementing tactical pricing actions that don't require a list price change and recognition of the higher input costs.

And we'll continue to train our sales professionals and dealers in how to best position our ever broadening range of price points and solutions to maximize our collective competitiveness and profitability. Let me now provide some context on the current macroeconomic backdrop, which remains generally positive in support of our future growth.

In the North American contract space, macroeconomic indicators, including GDP growth, low unemployment, confidence measures, service sector employment and architectural billings, continue to be supportive. The new U.S.

federal tax regulations have the potential to be an industry tailwind through higher employment levels and increased investment spending. The ability to immediately deduct capital expenditures for furnishings over the next five years is a meaningful benefit to our customers as well.

On the consumer front in North America, support of consumer sentiment, low unemployment, relatively low interest rates and limited unsold home inventory make for a generally positive backdrop. In the LA regions, while stable overall, there are still pockets of political uncertainty, and we continue watching the recent U.S.

actions related to tariffs and the responses from other nations. As a result, we've proactively developed and continue to refine contingency plans. Before I turn things over to Jeff, let me provide a brief update regarding my upcoming retirement.

Over the past few months, the board has been working with an executive search firm to identify and evaluate potential external candidates. In addition, it has been working with a firm we use for internal leadership development to evaluate potential internal candidates.

At this point, we are still anticipating a final decision around the first part of August. Whoever the new CEO is, he or she will step into a healthy and focused organization with strong business momentum that is intent on leveraging our global multi-channel business platform for sustainable profitable growth.

With that overview, 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. So before we take a closer look at our consolidated results for the quarter, let me take a few moments to provide some additional information on the Maars and HAY transactions.

On June 6th, we announced our intent to acquire an ownership position in Maars Living Walls, a global designer and manufacturer of modular wall systems. The transaction, which we expect will close later this month, will give us a 48% equity interest in Maars for a cash investment of approximately $6 million.

Revenue from Maars in the most recently completed fiscal year totaled approximately $65 million. We expect to reflect our share of Maars operating results with an equity earnings from non-consolidated affiliates going forward. On a GAAP basis, this transaction is expected to be approximately $0.01 dilutive to earnings per share in fiscal 2019.

On an adjusted basis, which excludes the estimated impact of certain purchase accounting adjustments, the transaction is expected to be approximately breakeven to earnings per share in fiscal 2019.

As we look forward, we estimate this Maars investment will be $0.03 to $0.06 accretive to earnings per share in year 5 and that's based on our initial ownership percentage. Closely on the heels of the Maars announcement on June 7, we acquired a 33% equity interest in HAY through a cash investment of approximately $66 million.

Revenue for HAY in the most recently completed fiscal year totaled approximately $155 million and the business has grown at a rate of 14% per year over the past four years. HAY's existing business reflects a revenue mix of approximately 60% consumer, 40% contract.

We expect to reflect our share of HAY operating results with an equity earnings from non-consolidated affiliates going forward. On a GAAP basis, this equity investment is expected to be approximately $0.02 to $0.04 accretive to earnings per share in fiscal '19.

On an adjusted basis, excluding the estimated impact of purchase accounting adjustments, the transaction is expected to be accretive by $0.04 to $0.06 per share in fiscal '19. In addition to the equity investment in HAY, we also acquired the North American licensing rights for a cash investment of approximately $5 million.

This grants us access to the full HAY design catalog for our consumer and contract channels in North America. The earnings per share contribution from the North America licensing rights is expected to be breakeven in the first year as we focus on building out the HAY footprint in North America.

Looking ahead, we expect that the HAY North America business can grow to $75 million to $100 million of revenue at 12% to 14% EBITDA margins. This would be accretive to earnings per share in year five by between $0.11 and $0.14 per share.

And in total, the combined equity investment and North America licensing rights are expected to be accretive to earnings per share by between $0.24 and $0.29 in year five.

We're energized by the addition of Maars and HAY to the Herman Miller group of brands and the strategic fit they provide as we scale our consumer business and leverage our dealer ecosystem. So with that, now moving on to our consolidated results for the quarter.

Consolidated net sales in the fourth quarter of $618 million were 7% above the same quarter last year. Orders in the period of $621 million represented year-over-year growth of approximately 9%.

Within the North American segment, sales were $309 million in the fourth quarter, representing a decrease of 4% from the same quarter a year ago on a reported basis and a 3% decline on an organic basis. New orders in this segment were $324 million for the quarter, reflecting an increase of about 4%.

The order growth in North America this quarter was broad based across small, medium and large project sizes with the strongest sectors being energy, computer equipment and financial services. This was partially offset by lower demand levels in wholesale, retail and communications.

Our ELA segment reported sales of $125 million in the fourth quarter, an increase of 35% compared to last year on a GAAP basis and up 30% organically. New orders totaled $111 million, which is 23% higher than last year on a reported basis and 20% up on an organic basis.

The strong year-over-year order growth was broad based across all regions with notable strength in the U.K., Continental Europe, Mexico, Australia, India and the Middle East. Sales in the fourth quarter within our Specialty segment were $83 million, an increase of 13% from the same quarter last year.

New orders for the quarter of $85 million were 12% higher than the year-ago period. Encouragingly, the increase in orders this quarter was driven by higher demand levels in all 4 component businesses comprising the Specialty segment.

The consumer business reported sales in the quarter of $100 million, an increase of 11% to last year, driven by strong growth across our studio, catalog, outlet, e-commerce and contract channels. New orders in the quarter of $102 million were 12% above the same quarter a year ago.

Design Within Reach comparable brand sales for the quarter were also 12% higher than last year.

As Brian mentioned, the consumer team has done an excellent job implementing its strategy around scaling the consumer business this year and its profit optimization work began gaining traction this quarter as evidenced by operating margins of 8.4% for the quarter.

Related to the impact of foreign exchange rates on our top line, we continue to experience a tailwind from the weakening of the U.S. dollar. We estimate the translation impact from year-over-year changes in currency rates had a favorable impact in consolidated net sales of $7 million for the quarter.

Consolidated gross margin in the fourth quarter was 36.9%, which is 140 basis points below the same quarter last year.

Included in cost of sales for the quarter were special charges totaling approximately $1.5 million related to increased freight and distribution expenses directly associated with the consolidation of our manufacturing operations in China. Exclusive of these costs, adjusted gross margin was 37.2% for the quarter.

As discussed earlier, we continue to experience a competitive pricing environment and increased commodity cost in areas such as steel, packaging and plastics. And Brian provided an overview of the range of actions that we are pursuing to mitigate these pressures.

We also experienced a less production leverage in our North American manufacturing operations during the quarter when compared to last year. Operating expenses for the quarter were $184 million compared to $162 million in the same quarter a year ago.

This amount includes approximately $6 million in special charges during the quarter, primarily associated with the planned CEO transition that we announced in February, transition cost related to the China facility consolidation and consulting fees supporting our profit enhancement initiatives.

Excluding these special charges, the increase of $16 million was driven primarily by higher variable selling costs and incentive compensation levels as well as higher occupancy and staffing costs related to new DWR studios put in place this year.

Restructuring actions involving certain workforce reductions that were announced in the fourth quarter related to the consolidation of facilities in China and the U.K. These costs, which totaled approximately $4 million, primarily related to recognition of moving costs, severance and outplacement expenses.

On a GAAP basis, we reported operating earnings of $40 million this quarter compared to operating earnings of $50 million in the same quarter a year ago. Excluding restructuring and other special charges, adjusted operating earnings this quarter were $52 million or 8.4% of sales.

By comparison, we reported adjusted operating income of $59 million or 10.2% of sales in the fourth quarter of last year. The effective tax rate in the fourth quarter was 18.3%. This rate included both ongoing and one-time impact of the Tax Cuts and Jobs Act on our U.S. tax rate.

Excluding a 150 basis point impact this quarter from adjusting the initial estimates recorded in the third quarter related to one-time elements of the new tax law, the effective tax rate was around 19.8%. This normalized rate reflects the impact of a lower ongoing U.S.

tax rate, federal and state tax provision to return adjustments, a better-than-expected mix of income from low tax jurisdictions and benefits from R&D credit planning. Finally, net earnings in the fourth quarter totaled $31 million or $0.53 per share on a diluted basis compared to $33 million or $0.55 per share in the same quarter last year.

Excluding the impact of restructuring and other special charges, adjusted diluted earnings per share this quarter totaled $0.66 compared to adjusted earnings of $0.64 in the fourth quarter of last year. With that brief overview, I'll now turn the call over to Kevin to provide an update on our cash flow and balance sheet..

Thanks, Jeff. We ended the quarter with total cash and cash equivalents of $204 million, which reflected an increase of $11 million from last quarter. I would note that we will use $77 million of this cash in the first quarter of fiscal 2019 for the HAY and Maars equity investments that Brian and Jeff discussed earlier.

Cash flows from operations in the fourth quarter of $56 million compared to $80 million generated in the same quarter of last year. The amount was lower primarily driven by changes in working capital from higher accounts receivable and prepaid expense levels compared to last year.

For the full fiscal year, cash flows from operations were $167 million compared to $202 million in the prior fiscal year. Capital expenditures were $20 million in the quarter and $71 million for the full year. Looking ahead to fiscal 2019, we anticipate capital expenditures of $90 million to $100 million for the full fiscal year.

This includes an estimated $5 million to $7 million related to the build-out of the HAY North American footprint next year. Cash dividends paid in the quarter were $11 million and $42 million for the full year. The dividend increase that we announced yesterday increases our expected annual payout level to approximately $47 million.

We also returned cash to shareholders through the repurchase of $16 million of shares during the quarter and $46 million for the full year. We remain in compliance with all debt covenants and as of quarter-end, our gross debt-to-EBITDA ratio was approximately 1:1.

The available capacity on our bank credit facility stood at $167 million at the end of the quarter. Given our current cash balances, ongoing cash flows from operations and our total borrowing capacity, we remain 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 first quarter of 2019..

Okay. So with respect to the forecast, we anticipate sales in the first quarter of fiscal 2019 to range between $610 million and $630 million. Now this forecast includes the impact of adopting the new accounting standard for revenue recognition.

Upon adoption at the start of fiscal 2019, we will begin recording certain dealer payments as expense within cost of goods sold that were previously classified as a reduction in net sales. This change will effectively increase our reported net sales going forward.

Now it's important to note that while this classification change will have zero impact on reported gross profit dollars, the change in net sales will result in a roughly 60 basis point reduction in gross margin percentage at the consolidated level.

This is an important point of emphasis for your modeling going forward, given the impact on year-over-year comparability of gross margin percentages. The data supplement included with last night's earnings release provides a comparative breakdown of the fiscal 2018 amounts impacted by this change in accounting standard.

This will assist you in adjusting last year's reported numbers to a comparable basis with the new method that will be applied going forward. You should also note that we will include the impact of this change in determining organic sales and order calculations in future periods.

With that in mind, our midpoint revenue forecast for the upcoming first quarter implies an organic increase of 6% compared to the same quarter last fiscal year. We expect consolidated gross margin in the first quarter to range between 36.25% and 37.25%.

Considering the impact of the accounting classification that I just described, the midpoint of this gross margin forecast is roughly in line with our performance in the first quarter of last fiscal year.

This estimate reflects our latest view on commodities, the impact of our profit optimization work to help these -- to help offset these pressures and the seasonality that we see in the summer from the consumer business.

To provide more contact -- context on the magnitude of the inflationary pressures, we estimate that the first quarter of fiscal 2019 will have sequential pressure of approximately $2 million to $3 million.

We estimate that the second quarter will have an additional $1 million impact of sequential pressure from our steel pricing from supplier, which lagged market pricing. The near-term pricing actions and our profit optimization work that Brian laid out is helping mitigate these pressures.

By the second half of the fiscal year, we expect to more than offset these precious and potentially see additive benefits as we work toward our fiscal 2020 target for consolidated operating margins at or above 10%. Operating expenses in the fourth quarter are expected to range between $175 million and $179 million.

And we anticipate earnings per share to be between $0.63 and $0.67 for the period. And this assumes an effective tax rate in the quarter of 21% to 23%. Now with that, I'll turn the call back over to the operator and we'll take your questions..

Thank you. [Operator Instructions] Thank you. Our first question will come from Matt McCall with Seaport Global. Your line is open..

Thank you. Good morning everybody..

Hey, Matt..

Great quarter. Great reaction here. So maybe I'll start with the profit enhancement initiatives, appreciate the detail, I wasn't able to maybe understand it completely.

Can you maybe look at it this way, what was the net impact of the profit enhancements? Because I think you said in addition to what you're doing to help profitability, you're seeing small set of deflation -- or inflation. You're investing and obviously, you're working toward that goal.

But can you talk about the net impact in '18, and then what you expect from these initiatives, net of those offsets in '19 and '20?.

So Matt, this is Jeff. Let me start - maybe take these in reverse order and kind of look forward.

I think Brian in his opening comments laid out the expectation that - I mean based on everything we can see today, which is [indiscernible] as you know, but we -- based on current steel pricing, the price we paid on average in the fourth quarter and our expectation for other commodity input costs inflation, we expect somewhere between $15 million to $20 million of annualized inflation impact going forward.

So roughly speaking, somewhere on that order -- maybe towards the lower end of that range in fiscal '19, because some of that will ramp in.

Now we expect that by the time we get the remaining profit optimization efforts put in place, we'll be somewhere net between - which, by the way, is $30 million to $60 million was the range that we give of incremental benefit yet from the various initiatives we have in place, that gives you something on the order of $15 million to $40 million of net benefit after the impact of inflation.

That's just on an annualized basis based on everything we can see right now. And admittedly, that's a pretty wide range, but you can understand the most recent project optimization effort within North America has just recently kicked off, but we're gaining line of sight to the benefits there. So that's kind of a go-forward basis.

If you take a look at -- now FY '18 impact, really we've -- I think, Brian said in his opening comments, the $30 million of run rate savings that we have implemented thus far or to date comes mainly from two areas. We -- 18 months ago, we announced this cost reduction program.

That goal was to achieve $25 million to $30 million of grossed annual savings. We estimate we're at a run rate of about $23 million today. And then the second project related specifically to our consumer business, and we estimate that, that's at about an $8 million annualized run rate today. So we think we've captured about $30 million to date.

Unfortunately, all of that to date has really gone toward offsetting the impact of discounting pressure and commodity. So we haven't been able to net any net benefit to the bottom line as yet, which is why we're continuing to consider this a corporate priority. Let me pause and....

Jeff, just a point of clarity, Matt. So we didn't get a full 30 in fiscal '18 either. That was a run rate in the fourth quarter. So just to be clear, I don't know, Jeff, you know the number of the top of your head. I'm going to guess, it's probably more like 15 million to 20 in the year..

It was incremental, I could tell....

If you took the total year, but you know what's happened with commodities and pricing, and you can see it if you just look at the operating margin line, despite the fact that we went out and did that work and operating margins haven't moved. So that would tell you that, that's where you're seeing the offset.

Does that makes sense?.

Yes, it does.

So the 15 to 20 that ends up being what was offset by the inflation that you saw this year -- the discount that you saw this year?.

Yes, hold on, because I know this - I know this can get confusing. So let's just try to make this really simple.

The total program of the three elements that we talked about, what we originally kicked off, what we did with the work around the consumer business and what we expect from this new tranche of work, we think the total of all of those things is $60 million to $90 million, okay, when fully implemented.

Is that clear?.

Yes..

Okay. So if you look at the first $30 million of that, what we said is hey, look that's gone largely already to offset inflation in pricing on an annualized run rate, right? So we kind of go, hey, we have $30 million to $60 million from this point forward to go get, that will be - could be net positive.

However, as Jeff mentioned, we're still seeing inflation run up, which we think is another 15 to 20. So if you look at it, if you get out a year-ish, what you ought to be able to do is say, hey, I started with 60 to 90, $30 million of that $60 million to $90 million that's been eaten up by inflation already, right? This gives us 30 to 60.

We think we have 15 to 20 of additional inflationary pressure. So when you get all done, what you're going to see drop through it is 15 to 40 million net benefit.

Does that make sense?.

It does. So is the timing of that 12 months? Or does it stretch out into next year? I know you said at one point you're going to see some benefit in Q4, but I wasn't sure -- I don't remember what that was about..

Yes, so Matt, let me try to clarify that, as we -- our guide for Q1, obviously, contemplates this, but we expect that, that inflationary pressure, the $15 million to $20 million of incremental impact, will layer itself in such that we start to feel 2 to 3 of it in Q1, somewhere between 3 and 4 in the second quarter and then by the time we get to second half, we should be at kind of a run rate of that 15 to 20 incremental impact.

Of the three optimization projects that we have in place though, we think even beginning in Q1, we can largely offset the initial impact of this inflation.

So we think we've got that covered, but it won't be till the second half of fiscal 2019 that we start to really feel the positive - incremental positive impacts of these programs that, we think, will more than offset the inflationary pressures.

By the time we get to the end of FY '19 and this is where it gets cloudy because it's early days on the latest program, but we have growing confidence that we will be able to drive a net positive benefit based on the inflationary exposure that we see today..

And to be clear, that does have an assumption, in the way Jeff just laid that out, it will continue to gain some benefit from the price increase we announced in February and, of course, we're going to do other pricing in January, Matt. So there's a lot of moving parts to all this.

I think, the net think you guys should walk away is, we think, we feel really good that we've been on this journey on profit optimization for 12 to 18 months and we're a bit ahead of the curve. Unfortunately, the first round of things we did have not net turned in as much benefit as we have hoped.

On the other hand, we feel really good about the work we're seeing in the consumer business, and you could see it in the fourth quarter, and the work that we begun in April is really gaining good traction enough for us to feel confident that we don't need to pull forward a price increase today as much as continue down the path on these things and let the price increase -- additional price increase fall in and what I would describe a more normalized period.

To be frank, some of our smaller business units, such as Geiger, will do some price increases sooner than January, but in the big scheme -- the larger business, that won't be till January. So what we're feeling is, yes, we're -- you never know where this cost inflation is going to end with all the discussions going on.

We feel like we got the plans in place to handle it and enable us to still achieve the goals that we set out for you folks 12 months ago, 18 months ago. So we don't think we need to back off from our profit goals.

We feel good that the impact that's happening both in the consumer business is real, and we think we have some good work in front of us in North American business. I think the way this will play out as much like it has the consumer business where we announced it, we said, hey, we're working on this, we'll come back and give you some numbers.

We then refined it a quarter later in terms of timing. I think that's exactly how this will be when we get to the end of the first quarter. I think we're going to have a much better understanding of way the timing is.

I think the gross number we're feeling good about and as we get into the first quarter, we'll have a better plan for implementation, that will help us know how that's going to feather into the results..

Okay, very helpful. I want to ask about the Consumer segment.

You did a -- I think an 8.4% margin, it sounds like there was some benefit from some of these initiatives and if I heard you correctly, I think you said that the targeted margin there was 8% to 10% and I'm working off my memory here, but I thought we had talked about a 10% number in the past.

Is that -- has something shifted? Or am I remembering incorrectly?.

No, Matt, we -- the 10% or greater goal right now is for the consolidated group, we've been pretty consistent with an 8% to 10% targeted for the Consumer segment, partly because again, we kicked off this profit optimization work within the Consumer segment about a year ago, August.

And as we were in the early -- kind of like we are right now with the North American project, because we were in the early phases of that. We had growing confidence, but there was enough uncertainty that we were wanting to make sure we give a range. Obviously, we achieved that level of profitability in the fourth quarter.

That target is really intended to be a sustainable level of profitability within the business, albeit there's always going to be quarters where you have seasonality.

So we achieved it one quarter here, we're not done, we've got more work to do, but 8% to 10% we'd still say is a reasonable range and we're hoping to hit the upper end of that obviously..

Matt, the other thing you may remember on the consumer business, we talked getting to double-digit EBITDA margins, if we get to 8% to 10% operating, we will get to that kind of 10% EBITDA margin..

It will be more like 11% to 13%..

The issue is you got a fair amount of DNA in that business from the acquisition. So I think that may be where some of your confusion comes out. I would say -- I would just echo Jeff's comments that we have, based on what we saw in the fourth quarter, growing conference at that kind of level of an annual rate is doable.

We have more work that the plans are in place, they just have to get through their implementation phase. We have seen a lot of improvement in the maturity of stores, meaning before we talk about a lot of drag from immature stores, I would say we're feeling way more confident about that than we were a year ago.

We've seen virtually all of our stores maybe [ph] one getting to the point that we're seeing four wall EBITDA profitability. So we're feeling good. You will see the operating profit in that segment likely be lower in the first quarter than the fourth.

That is the typical seasonality, because that is a lower quarter for sales of Herman Miller products, because there isn't a Herman Miller sale in that quarter. It's a little bit less in promotional activity. So if you remember, the big quarters in that business tend to be Q2 and Q4. So just keep that in mind as you think about it..

Okay. I'm going to -- I apologize, I must take one more Andy.

The ELA segment, very strong, and I know you talked about some of the macro outlook, Brian, but I'm just curious to have more detail as to what's driving that strength? And what the growth rate that you're assuming as we move out into Q1 and then beyond looks like? I just - the strength was very surprising to me.

So I'm just curious as to what's driving it..

First, and I don't think we can do anything here, but congratulate Andy Lock and his team for a really great quarter and year. I mean, they've really did a great job. I would say to you, Matt, certainly it's been stronger than we would have even forecasted ourselves. I think there are three drivers. A, I think we're in the right markets.

We're in markets that have stronger secular growth patterns, whether that's Asia, Latin America, even parts of Europe that we're in, that have been good, and it's been broad based. There is no one region, although clearly Latin America probably led the way for the quarter if not the year.

So - but it's been pretty broad and in fact from - not from an orders perspective as much as on the revenue side, we had a little bit of negative impact this year - this quarter in Asia because of the plant relocation. So number one, we're in the right kind of markets.

Number two, Andy and his team have done a terrific job of making sure we have the right people and the right products and the right distribution partners to win in those markets.

And then I'd say three, I think we did a good job over about a 10 year horizon of putting operational places close enough to the customer that we can meet the requirements of the customers for service and delivery. So I think, it's a combination of those three things. I don't think it's any one thing.

I do think it's a good mix of global products and locally designed products that are tailored to that market that have helped. So I think you got a good economy in those places, you got a good setup for where we're at and then you have good folks.

I would say there is more work - from a - what do we see going forward? Certainly, we think the work that we have underway in China to consolidate manufacturing as well as in the U.K.

is going to continue to give us some upside in that basis from a profitability standpoint, and I would also -- having just gotten back from China a few weeks ago would say, it is going to give us a great position in Asia and in China for servicing customers when we get that new factory fully implemented at the end of this year.

Well, there's no way you would forecast growth rates for continuing at the rate we had this past quarter.

But I would say, right now, while we are nervous about all of the political things going on around the globe and tariffs and the elections last night in Mexico, all those things certainly make you cautious, if you will, about where this is going to go.

On the other hand, I'd also say we have no signs that the business is backing up at all in the face of those things. Again, would we expect those kind of growth rates? Probably not. On the other hand, I'd also say the business continues to look quite strong today..

Matt, this is Jeff, I might just add a little more color. Our Q1 guide for revenue implied -- we're still implying a double-digit percentage growth for the ELA segment.

But as you get into Q2, I think we're up against tougher comps, right? I think, we did 16% growth in the year-ago quarter for Q2 and then as you get into Q3 and Q4, 20-plus percent growth rates.

So certainly the comps will get much tougher, and to Brian's point, really probably too much to expect to continue those percentage growth levels, but structurally, that business is -- seems very well positioned to move forward with some good momentum..

Okay. Thank you, all..

Thank you. Your next question comes from Budd Bugatch with Raymond James. Your line is open..

Hi. This is Kathryn [indiscernible] in for Budd. I just wanted to talk about the Consumer segment more. Obviously, a lot of improvement there.

Can you talk about what exactly gained traction to drive profitability in this segment? And where you feel you have room to run?.

Well, first of all, the work that we did around profit optimization in that business was -- covered a lot of different things. Pricing, the team's done a really good job on the pricing side of getting some of those things put in place. That is looking at pricing across the assortment. I think they've done a nice job of getting those things in place.

It's been a fair amount of work on the supply chain, and we've started to see some of those benefits, although those have room to run around them and certainly by looking at some of our promotional activities, frequency of promotions where they play out, is another area. So there are like two or three, four work streams that the team is working on.

If you look at Q4, again, we would estimate that we were $2 million of benefit from that work, that's about an $8 million run rate. We think in the end, that work is going to be $10 million to $20 million on an - or $15 million to $20 million on an annual basis. So we have a fair amount of runway on that.

I'd also say, the profitability is not coming just from that work. It's good top line growth, which we continue to see momentum on. Stores maturing, which we still have work to do there, and growth in e-commerce and some of those areas.

The other thing that will start to help us more longer-term rather than the short run, the acquisition of HAY will give us new price points, it should broaden the market we can get to at, we think, attractive price points and margins for us, as well as the ability to get further leverage out of the investments we've made in things like e-commerce infrastructure and some of those things that will play strongly for us in the long run..

Yes. Kathryn, this is Jeff, two other things come to mind that I think are worth noting.

You'll recall from some of our past commentary, one of the profit or value drivers we saw in the acquisition of DWR was our long-term objective of shifting the mix of products in that business to what we call the higher content of exclusive designs, included in that is Herman Miller branded product.

So in total, we've actually continued to move the needle there and the overall mix of that business has shifted closer to our overall goal. We talked about moving from around 60% exclusive product mix to 70%. So we're moving the needle in the right direction on that front.

And then we often don't talk about leverage in this business, but you'll appreciate that over the course of the last 12 to 18 months, the team has put in place some infrastructure to support growth in the contract business within - the contract channel within the consumer segment and some of the other infrastructure investments around website and so forth.

And now we're starting to see some version of leverage against those fixed investments as well. So benefit from that..

And - a follow-up question, are you expecting to open any more studios throughout the year? Or what's your plan there?.

We are. We've got - we ended the fiscal year at 32. If our plans hold throughout the course of FY '19, we should end the year somewhere closer to 30 - 37 stores in total. Two of which will be in place at the end of Q1..

Kathryn, this is Kevin. That would be about 50,000 of incremental selling square footage for next year..

Okay. A follow up question, but I'm changing gears.

So you mentioned being able to change pricing without giving the list price, does that just mean less discounting to kind of come back from the cost inflation?.

Kathryn, it's Brian. For sure, there is - much of the business, as you know, is driven by projects. So you can adjust, sort of, I would call it your situational or tactical pricing as you go along, that's one lever. The second lever that we can do is we have been on a very deliberate effort around building a good, better, best portfolio of products.

So we can do a better job of managing how the offer gets taken to both our dealers and our customers to make sure when a customer needs a value price solution and we can actually work them down the value curve of the product without just giving up discounting. So there are a number of levers like that, that we believe we can pull on the interim.

They don't have quite the same impact as a price increase or the broad based. But we think that is just part of the things we need to do as we manage our way through that process..

Thank you..

Thank you. Our next question comes from Kathryn Thompson with Thompson Research Group. Your line is open..

Good morning, guys. This is Steven Ramsey, on for Kathryn. Looking at the Specialty segment, nice return to sales growth there, the second straight quarter of growth, which is good to see.

What about margins in that segment based on the growth? And how do you look at this in 2019? And are the consultants helping with this segment at all?.

Steve, it's Brian. We do not have the consultants focused on the Specialty segment. I think if you looked underneath the Specialty segment, you really have 4 components to it. You have Maharam, Geiger, the Collection and Nemschoff. Three of those four nents, the margins are, in our view, in pretty darn good shape.

Maharam's above the corporate average, Geiger is slightly below the corporate average but very healthy, and the Collection is at or above the corporate average. The place that we have work to do, to be frank, in that business from a margin perspective is in Nemschoff. The margins are significantly lower there.

I think that, that is a project that to get that business where we need to be is going to take us at least another 12 months. Steve Gane, who runs the Specialty group who was responsible for the turnaround of Geiger and the creation of the Collection business, is on task with this.

That's why we moved Nemschoff, so that we can leverage the great resources including people that he had developed as part of the Geiger turnaround.

We're quite confident that Steve has done a really good job of, A, picking the right people, we have an entire new team at Nemschoff; B, he is done a good with the team of outlining the lever that they need to pull. One of them was getting new products that have structurally better margins.

We are very happy at NeoCon that they did one of the largest product - new product launches they've ever done at least in a singular family of products. And we're very hopeful that those products are going to carry structurally higher margins. I'd also say it's been a bit of a struggle operationally there.

We have a new ops lead who I think has done a terrific job. And so in some ways, you have to look at Nemschoff behind the scenes and say, "What things are pointing in the right directions? We're starting to see order growth.

We're seeing quality measures get significantly better, dealers' satisfaction is increasing greatly and we're beginning to get the new product engine going. So I think we got a lot of the underneath things pointed in the right direction.

But it will be probably another 12 months before we see a full turnaround maybe even 18 months before we're there and feeling really confident about that.

The second element I would say for the Specialty segment profitability in the long run, while Maharam has had very good profitability, it's not had as much growth as we would like to see in that business. With its very strong structural margins, we'd like to have faster growth.

The team there has done a really nice job of putting in place a number of things, new product categories, such as rugs and leather; new price points, give them a bigger spread; a revitalization in the wallcoverings segment, which they had really atrophied in a bit, and a significant investment in new selling resource.

We think those things are going to begin to get the growth engine at Maharam moving. With this margin structure, if we get growth in that business that will also help out the overall Specialty segment margins. And I will say we saw the early signs of that in the fourth quarter from an orders perspective.

It just has yet to come through into the revenue book, but we'd expect to see that as we get into next fiscal year. So I think, Nemschoff, Maharam growth are two keys. Certainly, once we get the work done in the North American business, it's likely we will learn things there that we will apply as well to the Specialty segment.

So I would expect we'll see some bleed over. What has been really important on this profit optimization work though is letting the business unit owners own the work, the goals and to let it be contained by their teams so they can own that, not the consultants, but for them to own it.

And doing it one segment at a time, to be frank, and not disrupting the entire business is proving to be, I think, the right formula.

So we won't be applying it to the Specialty business, although trust we have a fair amount of work going on particularly within Nemschoff and Maharam are some things that, I think, are going to help in that segment as well..

Excellent.

So for 2019, just kind of broadly thinking on a full year basis, is it fair to think that there is still improved maybe top line growth rates relative to 2018? And then maybe modest margin expansion?.

Steven, you're talking to the Specialty segment specifically?.

Yes, sir..

Absolutely, that's our - our intention is to -- that's going to be one of drivers to hopefully achieving our stated profit goals in FY '20, and we need to make traction in '19 to get there. So, yes, that's the intention..

Great. That’s all for me. Thanks..

Thank you. Our next question comes from Greg Burns with Sidoti & Company. Your line is open/.

Good morning.

When you talk about turning the HAY North America business to $75 million to $100 million business, what kind of time frame are we looking at to achieve that type of level? And when we look at the revenue split for HAY about 60-40 consumer contract, is that the type of revenue split that you're looking for that business to do in North America? Or is your focus going to be primarily in one market like retail initially and then maybe grow the contract? Or is it going to grow in tandem? Thank you..

Greg, that's a five year growth horizon that we felt pretty confident in, given where we've seen HAY in other markets. I think that revenue split is going to be fairly consistent, our gut would be in North America. We will see that the early investments and ramp will be on the consumer side.

To be frank, that's partially because we already have an infrastructure on the consumer side where we have been selling some HAY products already. So we have a way to go about that.

Also on the Consumer business, we can work primarily from a inventory position to serve customers, so we can -- we know -- we got to meter that in on the contract side to get where we need to be. And we will launch HAY contract in the DWR side, meaning selling what we do in hospitality and those kind of things.

The real question on the contract side of HAY North America will be getting a source of supply initiated so that we can make the more fast requirements for lead times as well as customization. And that's going to take a little bit of time to get in place and that'll be the driver of why you'll see one ramp slightly faster than the other..

Okay. Thanks.

And then in terms of the store count, the openings you mentioned before the -- you're getting to 37, does that include the - is that DWR brand HAY? Or is that just DWR and then you're - there's some additional HAY stores that you'll be opening on top of that?.

That is just DWR. One of the things we have an advantage in a couple of locations with HAY, we will be able to put HAY stores inside of what are already existing DWR locations, where we have more space than was needed. So we'll be able to open an additional door there. We also are looking at a couple of locations where we'll do a shop-in-shop.

So that will be a combination of things on the HAY side on those first four, and I don't know if we'll get all four of those done next fiscal year but certainly we're trying to ramp those in as quickly as possible..

All right. Thank you..

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Brian Walker for closing remarks..

Thank you all for joining us today. I know we had a lot to throw at you. I hope it was helpful to you as you continue to think about Herman Miller and the progress we're making. We're really thankful for the great work of our employee owners across the globe both in the quarter and for the fiscal year. And we wish you all a great 4th of July Holiday.

Talk to you soon..

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