Herman Miller Earnings Call NUGGETS: End Markets, Growth Rates
On Thursday, Herman Miller, Inc. (NASDAQ:MLHR) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.
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Josh Borstein – Longbow Research: This is (Josh Borstein) for David Macgregor. Greg you had mentioned that orders ex-government and healthcare were up 15% in the quarter. I was hoping you can break out what you were seeing on those stronger end markets and what’s performing particularly well?
Gregory J. Bylsma – EVP and CFO: Yeah. Sure. Josh. What performed particularly well, we saw nice increases on the tax side. We saw nice increases on the manufacturing side and also we had some nice business in fuel and gas as well.
Brian C. Walker – President and CEO: Financial services actually were pretty good too.
Josh Borstein – Longbow Research: Okay great thank you, and then could you give us a little more insight on what you are seeing in healthcare right now and just what you are projecting out for the next few months in that vertical?
Brian C. Walker – President and CEO: Healthcare continues to be softer than we would have predicted at this point I will say, we did see it start to turn like the rest of the business in the fourth quarter it came back a bit, and didn’t come back all the way. The forecast right now that are out there for construction are quite strong. So we think as we get to into calendar 2013, then we’ll start to see the volume levels pick back up now. Keep in mind that in our healthcare business, not only do we have government in the whole business, but government and particularly for us as a company is really heavy on the government side. Particularly we’ve had a lot of business over the last few years from some of the BRAC realignment so that business has gotten quite, because some of the BRAC work is done, but we think the more non-governmental health systems have a fair amount of construction to do. Right now there has been a little bit of rotation in capital goods spending away from facilities and fixtures and those kind of things toward IT and more medical implement kind of things were they believe that can drive cost savings much quicker to get ready for some of the impending changes in healthcare legislation. But as we get to the balance of this year we think we’ll start to see a bump up in the construction side.
Josh Borstein – Longbow Research: Great thanks for that, and then lastly can you talk a little bit about raw material cost inflation expectations for the quarter if you’d stay material to be higher or lower both sequentially and from a year-over-year standpoint?
Gregory J. Bylsma – EVP and CFO: You mean look out or you mean in fourth quarter?
Josh Borstein – Longbow Research: In the current, in 1Q here?
Gregory J. Bylsma – EVP and CFO: Right now the trend on our major input steel is downward. You got to be a little careful with that on how that impacts the results because at the beginning of the quarter, we saw the pressure being up relative to Q3, so we saw this up. We pay a higher price for about a 3 month period of time, so we would think that by the time we get to the end of the first quarter, we would start to see commodities start to come down somewhat based on current pricing.
Budd Bugatch – Raymond James: Brian, you gave us a little bit of your crystal ball, I mean, go to the longer term at $2.2 billion by 2015, fiscal year 2015, can you maybe parse that a little bit for us, by segment, maybe by acquisition versus internal growth to get to that 8% compounded annual growth?
Brian C. Walker – President and CEO: Well, I don’t know if I can give it you by segment sitting here right now, but we absolutely do have that, but I don’t have it in front of me. I would tell you that acquisitions, the only acquisition we got built into there really is what we’ve already completed with POSH and things we’ve done in the past. That’s much more I would say organic growth after you get through next year. Next year of course we got a fair amount in there related to POSH because you had them for one quarter, actually part of a quarter this year, so there is some next year. After that we didn’t really plan in acquisitions specifically in that number, because it’s just so hard to predict. So, we think, acquisitions are what can push us sort of over the top.
Budd Bugatch – Raymond James: So, as you look at the growth rates of North American furniture solutions, non-North American solutions, and the other, the consumer and specialty, how are various growth rates, so breakout between those three?
Brian C. Walker – President and CEO: Certainly going to be higher in emerging markets, Asia, Latin America we think those will be – that will be the fastest growing part of the business.
Budd Bugatch – Raymond James: (Is that not right).
Brian C. Walker – President and CEO: But I don’t have those right in front of me. We are willing to give it to give you, but I don’t have them right in front of me. Sorry.
Budd Bugatch – Raymond James: The consumer and specialty didn’t grow very much in this quarter with some of the new stuff – new initiatives you have got going on. How do you see that growing over the long-term?
Brian C. Walker – President and CEO: We actually think that can be a good growth. The thing you got to remember in this fourth quarter, Greg hinted at this in his comments. Actually the consumer side of both the retail and as well as the contract piece of the collection actually grew quite well this past quarter. It was really offset by a lighter period in case goods, particularly Geiger that was really a big project that just didn’t repeat year-over-year. So the base of the stuff that we have invested in this year that’s grown quite well and we think that’s going to be real opportunity for us to both expand in terms of products, but expand in terms of channel reach. I think the other place that that is going to be a key for the growth in the sort of the core North American businesses. You heard me talk in my comments about some of the investments we are making to reach small to midsized businesses. Next year we think we can grow that business that segment, my guess is we won’t see a big move in terms of the revenue line until we get probably out to fiscal 2014 as we get some of those capabilities flowing in place. So we will start next year. We are having to front end load some of the investment really getting ready for 2014.
Budd Bugatch – Raymond James: I got a few more questions on the longer term issue. So let me kind of go there because I think that’s more strategic. You said on operating margin in excess of 10% by 2015. You care to give us an idea of the composition of that gross margin versus OpEx or operating ratios.
Gregory J. Bylsma – EVP and CFO: We don’t have it now. But we would expect outside of POSH we would tend to see our gross margin move the way it typically moves with volume increases. That being said a lot of what we have in the queue is new products. So new products obviously are going to lever the way existing products lever. So as always we shoot for gross margins on new products that are at or above our current margins. So new products margins obviously won’t lever the same way as existing products. But you can count on the gross margin that’s improving from the current levels to get to that 10%.
Brian C. Walker – President and CEO: But net of it is though, you are going to have a get a lot of growth that is going to come probably not by ramping up gross margin percentages but it’s going to come from leveraging operating expenses. That’s why this year, this next year ends up being a little bit less leverage at the operating lines and as we move out through that three year cycle. It’s going to be probably some push in gross margins but a lot of its going to come through, getting growth and leveraging on the operating expense lines.
Budd Bugatch – Raymond James: As Greg said gross margin was a highlight of this quarter. I think it was the highest gross margin since just before the turn decade if I am not mistaken.
Brian C. Walker – President and CEO: Lot of that’s going to have to do with what mix look like. We had a really good mix this past quarter. And if we can obviously some of the investments we have made particularly around the ergonomic portfolio step we did to thrive, where we had some seating products as well as the collection products. Those kind of things tend to run a little bit higher gross margin. So if the mix tends towards that and as you know a lot of our mix in international particularly in Asia and Latin America tends towards higher profit mix because of the product lines that are in there. So if we skew towards that, that could help.
Budd Bugatch – Raymond James: I’m sorry.
Brian C. Walker – President and CEO: As we skew towards those being the growth engines that will help.
Budd Bugatch – Raymond James: Just couple of other things; one, the cash to shareholders that was the third point I think you made. How are you thinking about that dividend versus share repurchase? I know dividends obviously more important, but recently – I think I know Greg’s feeling about some of the share repurchase that have been done over the long past. How do you think about that now?
Gregory J. Bylsma – EVP and CFO: Well I think we’re still in sort of the same mode. I think what you are getting right now is a good signal from the Board and from management that we believe that we had ample of cash left in flexibility to do, we need to do strategically and we can start to ramp up the cash return to shareholders and the Board will continue to look at it. We look at it a couple of two-three times a year and ask where we’re at in that curve. We certainly want to know that we got the money that we need to be able to do the strategic things we want to do first. We got to the point that we saw but, the stock didn’t look like it was responding the way – we may come back and look at that, but right now we believe a better plan for us is to make sure that we got a good solid return for shareholders through the dividend and continue to grow the business on the other side.
Budd Bugatch – Raymond James: If the tax rate on dividends increases, does that change your thought process?
Gregory J. Bylsma – EVP and CFO: I think you know it’s well enough to say, we’ll look at all factors and we’ll decide what’s the best thing to do in the environment we are in at that time.
Budd Bugatch – Raymond James: Final question, is on that 15% contribution margin, for this year you talked about the additional investments. Can you quantify for us those investments was that and how that would play out over the year and finally is that 15% contribution margin just pertain to fiscal 2013 or does that bleed into fiscal 2014?
Gregory J. Bylsma – EVP and CFO: Well first let me say, primarily we were talking about 2013. Obviously what we’re talking about is a little bit of a step up in both marketing R&D and some of the others, including – by the way I mentioned, whenever we go into some of these construction particularly showrooms in that, you end up with a fairly heavy expense load around doing some of those things. So I don’t know if I can break it up by piece. But I would tell you I don’t think that leverage would be the same in ’14 and ’15 because we couldn’t get to the 10% goal if we did that. So we’ll be down a little bit next year, we think but after that we’ll get the growth from some of those initiatives and those initiatives won’t need another step up after 2013, particularly things like the small business where we are front loading it. My gut is we are going to see that, the expenses will be higher as we get to the kind of second quarter and beyond I think you can see that in the pattern that Greg gave for the operating expense forecast for the first quarter. It doesn’t take a big step up. It will be more probably as we get into the second and third quarters.